Vermont businesses slam plan to tax federal Covid loans

When Congress established the Paycheck Protection Program last year, the aim was to provide tax-free, forgivable loans to businesses to help them make payroll and stay afloat during the coronavirus pandemic.  

But now, the Vermont Legislature is looking to tax some of those emergency payouts.

The state House and Senate came to an agreement late last week on a relief package designed to pump federal aid into Vermont’s education system, as well as workforce and economic development initiatives. The legislation — formally known as H.315 but generally referred to as the “mini-Covid bill” — arrived on Gov. Phil Scott’s desk Monday.

Tucked inside the measure is a little-noticed provision allowing the state to tax PPP loans forgiven by the federal government in 2021 as if it was ordinary income. (Loans forgiven in 2020 would not be subject to the state tax.)

Lawmakers claim the provision is a placeholder that is subject to change as they debate in the coming weeks whether to actually tax the loans. But businesses are still slamming the proposal.  

Leo O’Reilly, an accountant who works with many Vermont restaurants, said his clients have made key budgeting decisions assuming that PPP rules had been finalized. 

“And we’re in a situation where that money will be necessary to maintain operations,” said O’Reilly, a member of the Vermont Independent Restaurant Coalition, which advocates for the food service industry. “So it’s not like these businesses are going to come out of the pandemic flush with anything.”

O’Reilly said the federal government had made clear that PPP loans weren’t taxable “because the purpose of the program was to help businesses get through the pandemic, not collect additional tax revenues.” 

In December 2020, the federal government revived the PPP program with the Consolidated Appropriations Act, which specified that expenses from the loans could be deducted from tax liabilities. Since then, 14 states have opted to tax forgiven PPP loans or are considering doing so, according to the Tax Foundation, a center-right, pro-business think tank. 

Sen. Ann Cummings, D-Washington, who chairs the Senate Committee on Finance, said lawmakers have yet to make a final decision on whether to tax PPP loans and need more time to deliberate. She said some of her colleagues are concerned that exempting the loans could result in a “loss of revenue to the state” and want to keep businesses from “double dipping.” 

Normally, businesses pay taxes on their income and then deduct expenses from their tax liability. But unless the state made policy changes, businesses that received PPP loans would not pay taxes on those funds — and could still deduct expenses the loan covered. 

Lawmakers say the PPP language in H.315 is just temporary — even though they already sent the bill to the governor — and they plan to return to the issue later this session. 

“We may well do this. There’s arguments to be made on both sides, but I think we just needed time,” Cummings said, calling H.315 a “very fast-track bill.” She said she hadn’t heard enough testimony on taxing PPP loans to be “leaning either way” on the issue.

“We need to hear from the business community and what this means to them. We need to hear from the CPAs, and we need to hear from the tax department and the Joint Fiscal [Committee],” Cummings said. 

The governor’s position on the matter is clear. 

“We would not be supportive of that and would hope that it would be subsequently considered and removed, and that it would be nontaxable just like tax year [2020],” Scott spokesperson Jason Maulucci said.

He would not, however, say whether the provision would prompt the governor to veto the bill. 

Taxing PPP loans forgiven in…