The state Senate approved S.B. 263 by a bipartisan 55-12 vote Thursday. The bill would conform to the federal code by excluding forgiven Paycheck Protection Program loans granted by the Coronavirus Aid, Relief and Economic Security Act
from gross income. The bill would also provide that unemployment payments that Minnesotans received under the CARES Act would be excluded.Sen. Thomas Bakk, I-Cook, a sponsor of the bill, said the bill's passage was an urgent priority because the filing deadline for businesses in Minnesota is Monday, March 15, and absent legislative action, businesses would be paying $375 million to the state Department of Revenue that day.
"Why would we take $375 million out of our business economy on Monday, only to have it be sent to the Department of Revenue's building until we get around to appropriating it?" Bakk said in the Thursday session. "That is going to slow down our economic recovery."
The CARES Act provided for $600 weekly unemployment payments for workers who were unemployed between April 5, 2020, and July 31, 2020; the payments were later extended but halved to $300. The bill as passed by the Senate would provide that 18% of the amount of unemployment compensation received by an individual under the CARES Act could be subtracted from income.
The subtraction would be reduced by $1 for every $4 of adjusted gross income exceeding $75,000 for individuals and $150,000 for joint filers. A previous version of the bill would have capped the subtraction at $3,000 for joint filers or heads of household and $1,500 for individual filers.
The bill would also allow qualifying entities — partnerships, limited liability companies and S corporations — to elect to be taxed as a C-option corporation, where tax liabilities would be calculated by applying a 9.85% tax rate to the qualifying entity's taxable income. The election would be a workaround for businesses for the $10,000 federal state and local tax deduction cap, Bakk said in the session.
Qualifying entities would be able to take their deductions as a business expense, Bakk said, although he noted that the corporate tax rate might be higher than what the entities would pay if they filed as individuals.
The election would be binding for four taxable years unless revoked by a stakeholder who holds more than 50% ownership interest in the qualifying entity. Under the bill, income of partners, members or shareholders of an entity that makes the C-option corporation election would be a subtraction, but could not exceed their portion of the qualifying entity's net income.
The bill, while broadly supported, did not pass without criticism.
Sen. Jen McEwen, DFL-Duluth, said in the session that in practice, large corporations and other entities that were not the intended target recipients of PPP loans had received them while smaller businesses had not, saying that the bill would essentially be a "double tax break" for such businesses.
McEwen added that the bill did not go far enough in providing tax relief for Minnesotans who had received CARES Act unemployment benefits. McEwen offered an amendment that would have exempted up to $10,200 of unemployment payments from taxation, but the amendment was not adopted.
"If we're going to do this economic stimulus for businesses, then what we also need to do is provide fairness for workers," McEwen said. "We need to stand up for average Minnesotans, for the workers in Minnesota."
Bakk did not respond to requests for additional comment, but said in a statement that he hoped the state House of Representatives and Democratic Gov. Tim Walz would approve the legislation quickly.
Rep. Paul Marquart, DFL-Dilworth, chair of the House Taxes Committee, did not respond to requests for comment on S.B. 263, but previously told Law360 he would like to see the full amount of unemployment payments exempted.
Marquart sponsored S.B. 263's House companion bill, H.B. 501. A separate bill, H.B. 1658, sponsored by Rep. Zack Stephenson, DFL-Coon Rapids, would fully exempt unemployment payments received under the CARES Act. That bill has been laid over for possible inclusion in the tax omnibus bill, according to House communications staff.
According to the House website, the chamber will next meet on Monday.
--Editing by Neil Cohen.
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