Wisconsin Republicans are drafting legislation that would cut business taxes by $450 million by allowing those that received federal Paycheck Protection Program loans to deduct related purchases on their 2020 state taxes.

The Paycheck Protection Program (PPP), formed under the CARES Act last year, awarded forgivable tax-free loans to businesses facing financial losses during the COVID-19 pandemic. Because that money was not taxed as income, the Internal Revenue Service determined expenditures paid with those funds are not tax deductible under current federal and state laws.

Congress last month passed a law on the federal level overriding the IRS' decision and allowing businesses to deduct payments made with PPP funds, but Wisconsin has not yet made that change at the state level. Because that legislation has not been passed in the state, the Department of Revenue is following the IRS determination that expenditures paid with PPP cannot be deducted.

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The state Department of Revenue can't change the policy unless the state Legislature makes a law allowing for deductions on tax-free income, Secretary Peter Barca said in an interview Thursday.

Rep. Dave Armstrong, R-Rice Lake, and Sen. Roger Roth, R-Appleton, are drafting an amendment to bills in the Assembly and Senate seeking to cleanup various parts of the state tax code, legislative assistant Matt Pulda said. The amendment would follow the federal lead, and let businesses that paid qualifying expenses with PPP money deduct those expenses from their 2020 taxes.

"It is important to treat PPP loans the same at the state level as the federal level so as not to impose an undue burden on already struggling Wisconsin businesses," Armstrong said in a statement.

The state is expecting to collect an estimated $450 million in taxes that otherwise could be deducted if the bill were to pass.

The Wisconsin Restaurant Association called on the Legislature to change the laws to allow businesses to deduct those expenses.

"The PPP was developed as a lifeline to keep employees off unemployment insurance and for basic bills to be paid to prevent defaults on mortgages and leases," CEO Kristine Hillmer said in a statement. "It was never meant to create a tax burden that would shutter businesses."

Wisconsin Manufacturers and Commerce and the Wisconsin Bankers Association also called for an amendment to allow businesses to deduct those expenses.

The measure would be an unprecedented "double benefit," Barca said, because taxes wouldn't be paid on the PPP funds as income and would be deducted from taxes paid.

Allowing businesses to deduct those expenses from their taxes wouldn't benefit many of the small businesses struggling during the pandemic, Barca said. Many small businesses did not make enough of an income or profit to pay any taxes.

About 75% of that $450 million would benefit only 14% of the businesses that received PPP, Barca said.

"If the goal, as it should be, is helping Wisconsin small businesses, there's other ways you could do that much more effectively with the same amount of money," Barca said. "These small businesses that are struggling, they're not going to pay a nickel in April if they truly did not make a profit."

The amendment hasn't been introduced yet, and Gov. Tony Evers has not made a final decision on whether he would support the legislation or not, Barca said.

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