Rhode Island businesses are objecting to Gov. Gina Raimondo’s latest budget-plugging plan, which would increase some tax bills during the COVID-19 pandemic.
Raimondo wants to restore a limit on the amount of business losses that can be deducted from state income taxes, after the federal CARES Act coronavirus relief bill eliminated it for the last three years. The increase in deductions allowed by the CARES Act is estimated to cost the state $29 million over two years.
But trade groups, business advocates and accountants say small businesses need all the help they can get to survive losses from the pandemic, not retroactive tax payments.
“By disallowing this deduction at the state level, the state would be increasing the burden on small business when they can least afford the increase,” Greater Providence Chamber of Commerce lobbyist Elizabeth Suever wrote in a letter to the House Finance Committee.
The Raimondo administration’s budget proposal doesn’t eliminate the deductions entirely, but would delay them and spread them out from 2021 to 2025.
But if businesses fold this year, they’ll have no income to take deductions against five years from now, Suever pointed out.
The Raimondo budget proposal affects taxpayers with pass-through income from multiple business entities, such as S-corporations or LLCs.
The 2017 Tax Cut and Jobs Act capped how much taxpayers could reduce their taxable income with losses from separate entities before the CARES Act suspended those limits through this year.
The Department of Revenue estimates that around 700 taxpayers would be impacted by the change this year.
In addition to paying more in taxes during the pandemic, the proposed change could also turn into a bookkeeping nightmare for small businesses, according to accountants.
Many businesses that took advantage of the CARES Act deductions have already amended their 2018 taxes, and would likely have to amend them again.
And because Raimondo’s proposal would only become official when lawmakers pass a budget after the November election, many businesses might also have to amend their 2019 tax filings, Melissa Travis, president of the Rhode Island Society of CPAs, told the Finance Committee.
“They would be incurring increased tax preparation fees along with the increased tax burden,” Travis said.
While business groups opposed the tax plan, the liberal Economic Progress Institute supports it.
“Ostensibly, this provision was intended to keep cash in the hands of business owners struggling against the current economic downturn. However, the provision appears mostly to benefit those who need the relief least,” the Economic Progress Institute wrote to the Finance Committee.
“Some tax losses do not correspond to economic losses; businesses can deduct for rent payments and depreciating property having nothing to do with loss of income due to COVID-19.”
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