We recently sent a communication regarding the current situation involving Wisconsin not allowing Paycheck Protection Program (PPP) loan expenses to be deductible, as the loans are for federal purposes at this time. We’d like to provide an update for businesses that are concerned with Wisconsin not following the federal tax treatment of the PPP loan expenses:
- You may recall, the recent federal legislation provides that PPP loan expenses will be deductible. This change is retroactive to the beginning of the CARES Act last March and will permit these federal tax deductions in 2020. This should provide a significant tax benefit for 2020 tax filing with Wisconsin businesses that are PPP loan borrowers.
- Although, for Wisconsin tax purposes, the state is not permitting this new federal deduction. There will, therefore, be a federal-state modification. The Wisconsin Department of Revenue (WDR) issued guidance on January 15, 2021 indicating that the WDR will not follow the recent federal changes that permits these PPP loan expense to be deductible. The WDR is relying on the IRS guidance issued after the CARES Act but not considering the federal changes made at the end of 2020. The Wisconsin tax treatment in which PPP loan expenses are not deductible could result in a significant tax hit for many Wisconsin businesses.
- As a result of the WDR’s position, there has been discussion about whether the Wisconsin legislature might address the matter. The initial response on possible legislation was that the budget impact of ~ $400 million (from the Wisconsin Legislative Fiscal Bureau) was too much to try to make a change. However, various business groups, taxpayers, and tax practitioners have reached out to legislators and are making some headway. They encourage others to contact their State Senator or State Assembly Representative and voice their concerns on this issue.
- Note for Wisconsin Manufacturers – being unable to deduct PPP loan expenses for state purposes may not present much of a tax burden for Wisconsin manufacturers. The disallowed expenses for Wisconsin will increase the Wisconsin tax liability, which in turn, will be offset by a larger Wisconsin Manufacturers’ Credit (MAC). The MAC credit will soften the blow from the disallowed PPP loan expenses, but again, is only applicable to manufacturers qualifying for the Wisconsin MAC credit.
- One other item we may want to look into for 2020 and/or 2021 is the Employee Retention Credit (ERC). Initially when the CARES bill was passed last March, any borrower who took a PPP loan was not able to also claim the ERC. It was one or the other. With the recent federal legislation that passed in December, however, a borrower can now claim the ERC even if they took a PPP loan. This change is retroactive for 2020 and also available for 2021. We have published several articles on this topic, and this flow chart provides an overview of the ERC. Please let us know if you would like to discuss this ERC further for 2020/2021.
Please contact your Sikich advisor if you have any questions on the Wisconsin tax treatment of these PPP loan expenses.