Senator Nelson and Senate Tax Committee approve a plan to spare unemployed and small businesses from taxes on Covid assistance

The Minnesota Senate Tax Committee on Tuesday approved a bill to provide substantial tax relief to Minnesota businesses and individuals for federal assistance they received during the Covid-19 pandemic.

“It is unconscionable that we would ask folks to pay taxes on their emergency assistance,” said Sen. Carla Nelson (R-Rochester), chairwoman of the committee. “Businesses received these loans to help them survive the worst of the pandemic, and many of them are still struggling. Individuals were forced off the job through no fault of their own, and they depended on the extra unemployment to help make ends meet. We must make it a priority to provide tax relief to struggling Minnesotans.”

Notable provisions:

  • Unemployment insurance subtraction: The bill allows Minnesotans who collected pandemic unemployment benefits from the federal government to subtract a portion of those benefits on their income taxes this year. Many laid-off individuals have been surprised with hefty tax bills related to these bonus pandemic unemployment payments, which were distributed through the federal CARES Act. 
  • PPP loan tax exemption: The bill protects businesses by exempting federal Paycheck Protection Program (PPP) Loans from state taxes. These emergency loans, issued by the federal government last year to help businesses struggling during the Covid-19 pandemic, are not subject to federal taxes; the Senate bill would conform Minnesota tax laws to federal rules.
  • Deductions for expenses paid by PPP loans: The bill allows businesses to deduct expenses paid using PPP loans.
  • State and Local Tax parity for S-corps and partnerships: The bill creates an option that allows pass-through businesses like partnerships, S corporations, or limited liability companies to elect to file taxes as a corporation subject to the corporate franchise tax (also known as a C-option corporation). For C-corps, unlike the flow-through entities, all taxes are deductible as a business expense. Under current law, pass-through businesses do not pay state or federal income taxes directly. Their income is passed to shareholders, who report the income on their individual income tax returns. There is no election to allow a partnership, S corporation, or limited liability company to file and pay their tax liability as a C corporation.

WATCH: Senator Nelson participates in a press conference on March 1 highlighting the PPP tax exemption bill.