States mind their own affairs
By Jackson Brainerd and Emily Maher | March 31, 2021 | NCSL tax files
Over the past year, the pandemic has left small businesses struggling to survive. Government restrictions and public health fears have led to strong decline in income and cash balances. Many businesses have had to close doors or lay off employees. Serious uncertainty has made businesses and the economies they support vulnerable. Lawmakers at all levels of government have prioritized helping businesses to keep main street and state economies from irrevocable damage. Evidence suggests that corporate relief is working. Yet additional support is still needed. Without a continued focus on small businesses, the recovery could be halted too soon.
At the onset of the pandemic, states took immediate action to help small businesses by funding capital programs that provide direct financial assistance or provide tax breaks. The enactment of the Coronavirus Aid, Relief and Economic Security Act (CARES) has bolstered the state’s efforts. Under the CARES Act, support for small businesses has taken many forms, including:
- State and local aid through the Coronavirus Relief Fund (CRF).
- Direct loans like the Paycheck Protection Program (PPP).
- Tax relief.
Layered measurements have provided multiple pathways to meet business needs.
Targeted loans and grants
States have designed assistance programs for small businesses in a variety of ways, often prioritizing sectors of the economy that have endured the most financial hardship. Most relief efforts have taken the form of loans and grants targeted by size, loss of income, industry, or ownership. Some programs gave priority to businesses that were not eligible for direct federal loans.
While direct grant programs were common, some states took advantage of relationships with financial institutions to provide assistance. At least two states, Montana and Pennsylvania, used the CRF to partner with banks, credit unions and lending institutions on new loan deferral programs.
Other loan programs build on existing development networks. Kansas adopted Senate Bill 15 during its 2021 legislative session, which created an economic stimulus loan deposit program. The program encourages financial institutions to offer low-interest loans to businesses. The program is linked to two deposit programs related to agriculture and housing.
A different approach was taken by Illinois, which created a Small Business Emergency Loan Fund that allows eligible businesses to convert low-interest loans into grants as part of a larger business interruption grant program.
The pandemic has caused major disruption in some industries. According to McKinsey & Company, small businesses across multiple industries were particularly threatened by the implications of COVID-19, whether through public health mandates or financial volatility. States used state and federal dollars to provide direct subsidy relief throughout the reign of the pandemic.
New Hampshire, for example, spent $ 10 million on dairy and non-dairy farms; Missouri designed a personal protective equipment retooling grant for production retooling manufacturers; and Alabama included nonprofit and faith-based organizations in its Relive More grant program. states like New Mexico and Pennsylvania efforts focused on catering programs for restaurants, bars and hotels.
Minority and women owned businesses
Minority and women-owned businesses have been disproportionately affected by the economic crisis of the pandemic. Minority-owned businesses are more likely struggling to get loans, which left many ineligible for federal assistance. Compared to non-minority companies owned by men, less Minority and women-owned business owners said they expected higher incomes in 2021.
The FRC’s small business grant programs targeted minority and / or women-owned businesses in at least nine states: Colorado, Louisiana, Massachusetts, new York, Ohio, Oregon, Rhode Island, Tennessee, and Vermont.
Along with federal stimulus packages, a handful of states have designed their own stimulus packages to accelerate economic recovery. The California, Colorado, and Maryland packages included immediate direct relief to small businesses through low-interest loans, direct grant aid, and tax credits.
In addition to grants and loans, states have given businesses greater financial flexibility through various forms of tax relief.
Inability to pay check protection loan
Over $ 600 billion has been awarded to small businesses through the Federal Paycheck Protection Program (PPP). The federal government has exempted these loans from taxable income and also clarified that the expenses of businesses funded by PPP loans are deductible. Most state tax codes follow the federal tax code in terms of the definition of income. This means that if something is taxable at the federal level, it is taxable at the state level. Some states automatically comply with the latest version of the federal tax code (continuous compliance), while others must vote to adopt them as they happen (static compliance). A significant issue that states face is the extent to which they will comply with the federal treatment of PPP loans, which would represent tens or hundreds of millions of tax breaks in most states.
As is currently stands, the majority of states will comply with the double benefit at the federal level, although many of these states have not issued guidelines confirming their treatment of PPP-funded expenditures or currently have pending legislation that could change their status. At least 20 states have reviewed PPP tax legislation in 2021, and it has been passed in at least eight states: Arkansas, Georgia, Iowa, Kentucky, Maine, Virginia, West Virginia and Wisconsin.
In 2020, the federal government extended the deadlines for filing and paying income taxes, which provided a moment of financial relief for a minority of taxpayers by allowing those who owed on their returns and did not yet scheduled April 15 payment with their banks to hold on to their cash for an additional three months. It has also given businesses and tax preparation services time to adjust to the logistical challenges of closing physical workspaces across the country as some aspects of tax filing cannot be done. from a distance. The 45 states that levy income tax have significantly delayed their filing dates. Forty one accurately reflected the federal government and chose July 15 as the new “tax day”.
With the recent announcement from the IRS that Tax Day in 2021 has been postponed to May 15, it is likely that most if not all states will follow suit and many have already done it.
Workarounds for the national and local tax deduction cap
States continue to adopt new entity-level taxes that will allow intermediary businesses to take advantage of federal deductions for state and local taxes. As part of the Tax Cuts and Jobs Act of 2017, Congress put a cap of $ 10,000 on deductions for income taxes, sales, and local and local property taxes. . The pandemic has led a growing number of states to implement or consider adopting new entity-level taxes (most of which are voluntary), which are fully deductible at the federal level, and to create offset credits for avoid double taxation.
Nine states created pass-through entity taxes, including Arkansas and Alabama in 2021. Other states are currently considering legislating: Arizona (HB 2838), California (SB 104), Maryland (H 1087), Minnesota (HF 1958), New York (SB 3186) and South Carolina (H 3978)
Safe Harbor for non-residents
One of the main fiscal impacts of the coronavirus comes from the transfer of a large number of workers to remote situations. Workers who may have lived in one state and moved to another to work (as is often the case in populated border areas like the tri-state area of New York, New Jersey, and Connecticut) suddenly worked from home. This has important implications when it comes to determining personal and corporate income tax liability and could lead states to fight for the right to tax certain businesses and individuals, creating a large uncertainty for taxpayers.
According to American Institute of Chartered Accountants, 18 states have provided some assurance to businesses by providing that the presence of an employee working in a state due to shelter-in-place restrictions will not create a link for tax purposes in that state and 15 states provide a sphere temporary security or waiver for state withholdings and tax liability for remote work in different states during the pandemic.
Other notable business relief efforts
- New Mexico has passed Senate Bill 1, which allows many restaurants, bars, breweries and similar businesses a gross revenue tax deduction for sales of ready meals and beverages made after March 1, 2021 and before July 1, 2021.
- Guam temporarily reduced the commercial lien tax rate on the first $ 250,000 for small businesses.
- Delaware, Kentucky, and Maryland have adopted measures to ensure that employers’ unemployment insurance contributions do not increase.
- Maine has created a Subsidy program for economic recovery which included start-ups or businesses created at the very beginning of the pandemic. Losses in business income have been assessed on a prospective basis.
- states like, Massachusetts, Nevada, Rhode Island, Washington supported small businesses with technical assistance.
More recently, federal and state tax relief efforts, coupled with state economic stimulus plans and the US federal bailout law of 2021, aim to maintain financial support for businesses until the end of the fiscal year. pandemic.