FILE - Illinois State Capitol

The Illinois State Capitol in Springfield, Illinois.

(The Center Square) — Illinois businesses can accept their forgiven pandemic loans without worrying about paying federal taxes, but it's not yet clear if they'll owe the state.

In Illinois, 225,409 forgivable Paycheck Protection Program loans valued at approximately $22.85 billion were approved, according to the Small Business Administration. After the IRS decided that the forgiven loans were taxable as with other forgiven loans, Congress passed legislation in December making the change explicitly tax exempt. 

Whether states, who also impose a tax on forgiven loans, will agree is a different matter. 

“The question now becomes whether states are going to ensure that these aren’t taxed or is the allure of ‘free revenue’ going to be too much for states to resist,” said Morgan Scarboro, Manager of Tax Policy & Economist with Virginia-based government relations firm Multistate.

Illinois conforms to federal tax law on a rolling basis. That means the state’s corporate and personal income tax wouldn’t apply to a forgiven PPP loan. But, lawmakers seeking to fill the state’s $4 billion budget gap could pass legislation to split from the federal tax code and require businesses to pay taxes on their PPP loans as though it’s income.

“Businesses and taxpayers in general really just need an answer on how the state is going to treat these things,” Scarboro said. 

Illinois lawmakers attempted to break from another federal tax provision allowing businesses tax relief during the pandemic but the measure failed to pass before the end of the previous session. Many businesses have until Mar. 15 to file their taxes or request an extension. The rest generally have until Apr. 15.

The tax would hit businesses trying to claw their way out of pandemic-induced closures initiated by the same governors who would benefit from the additional tax revenue, said Mark Grant, president of the National Federation for Independent Business’ Illinois chapter.

“I know they’re looking for revenue but this is not the way to do it,” he said. 

NFIB released a poll on Jan. 21 saying 91.5% of members believe Illinois tax laws should be brought into alignment with federal law to stop the state from taxing forgiven Paycheck Protection Program (PPP) loans.

In New Jersey, the Legislature is currently moving on a bill that would align their tax laws with the federal change. This would not only allow businesses there to write off the forgiven loan but also exempt loan-related expenses. 

Virginia lawmakers are working on the same. 

Elsewhere, governors are catching heat for attempting to tax the loans to shore up budget deficits. Wisconsin Gov. Tony Evers is facing criticism over wanting to subject the loans to the state’s tax even though Wisconsin has an estimated $1 billion budget surplus. Maine Gov. Janet Mills backed away from her push to tax the forgiven loans after facing backlash from the business community. 

Staff Reporter

Cole Lauterbach reports on Illinois and Arizona government and statewide issues for The Center Square. He has produced radio shows for stations in Central Illinois and created award-winning programs for Comcast SportsNet Chicago.