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Business groups press Legislature to stop state income tax on federal stimulus aid

Tens of thousands of businesses could be affected in Massachusetts

Senator Eric Lesser is pushing a bill that would protect so-called pass-through entities from being hit with a tax on funds they kept from the Paycheck Protection Program.Photos by Steven G. Smith/Photo by Steven G. Smith

Add this to the to-do list that business groups want the Massachusetts Legislature to tackle ASAP: a tweak to state law that could protect thousands of small-business owners from getting hit with a tax for accepting federal stimulus funds.

The issue involves the Paycheck Protection Program, which provided more than $14 billion in loans to nearly 120,000 small businesses in Massachusetts last year to help them through the COVID-19 pandemic. Recipients can have some or all of those loans forgiven, essentially turning them into grants, if they meet certain criteria. Those grants wouldn’t be subject to federal taxes.

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It’s a different story for state taxes. Without a change in law, small businesses whose income passes through to individual owners — and are taxed at their personal income rate instead of the corporate rate — still will face a state tax on those PPP grants. That’s because of a mismatch in how the state tax code lines up with the federal one. For general corporate income, state tax rules automatically keep pace with federal changes. But state law needs to be tweaked to align it with shifts in federal personal income tax rules.

The Greater Boston Chamber of Commerce estimates that at least a third of the state’s PPP recipients, or nearly 40,000 businesses, are structured in a way that could subject them to state income taxes on forgiven PPP loan funds. The chamber sent a letter to state lawmakers on Thursday, urging quick passage of a bill filed by Senator Eric Lesser that would prevent these funds from being treated as taxable income for so-called pass-through entities.

“When you’re struggling to just stay in business and stay open, removing that uncertainty would be helpful,” said Jim Rooney, chief executive of the chamber. “It’s the right and fair thing to do.”

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The “fix” had been included in the Senate version of a wide-ranging economic development bill. But it did not survive House-Senate negotiations before the bill was sent to Governor Charlie Baker’s desk earlier this month, in the final moments of the previous two-year legislative session. Lesser, the lead negotiator for the Senate on that bill, thought it was important to quickly revive the issue in the new two-year session.

“I do hope it’s accelerated,” Lesser said. “Frankly it has to be, given that tax season is already upon us. ... This tax treatment would put our small businesses at a significant disadvantage and ... hold back our recovery from the COVID-19 recession.”

Lesser filed it as a stand-alone bill. But the Massachusetts Society of CPAs also suggested another route in a letter to legislative leaders last week: attaching it to a broader bill aimed at curbing an upcoming increase in unemployment insurance rates. This unemployment rate relief measure, filed by Baker, is seen as “fast-moving legislation,” in MSCPA president Amy Pitter’s words, because it is expected to pass within the next several weeks, before the next round of bills go out. In an e-mail, Pitter said she knows similar legislation is being considered in at least six states, and as many as 19 may need it to bring their tax codes into conformity with federal law.

Bob Luz, chief executive of the Massachusetts Restaurant Association, said the issue came up on a conference call that Mike Kennealy, Baker’s economic development secretary, held with various business groups on Friday. “He understood the urgency,” Luz said.

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The National Federation of Independent Business also sent a letter on Wednesday to all state lawmakers, asking for this relief, and the Association of Industries of Massachusetts is in the process of writing a similar request.

“It’s certainly going to be a surprise to a lot of small businesses [if it isn’t fixed],” said Jon Hurst, president of the Retailers Association of Massachusetts. “It sends the wrong message that these struggling small businesses are getting help from the feds and the state is taking advantage of that with tax dollars.”


Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.