Last year was monumental to say the least. Life as we once knew it became a thing of the past, for individuals and businesses alike. As countless businesses struggled to adjust to the unforeseen challenges presented by the pandemic, the Paycheck Protection Program (PPP), part of the CARES Act, was a lifeline for many.

The PPP loan program was intended to help small businesses, although numerous large businesses also benefited. According to the Small Business Administration, over five million PPP loans were approved, the majority of which went to small businesses. Ninety-two percent of the loans given out were $250,000 or less and 87% were under $150,000. The average loan size was $100,729. 

Many businesses needed the money to keep employees working and to pay for everyday expenses to keep the business open. Business owners were told that the loan would also be “forgiven” as long as the money was spent on payroll (60% requirement), mortgage interest, utilities and rent during the eight or 24-week period after disbursement. While the rules for how to use the PPP loan funds were fairly straightforward, the tax effects remained murky.  For months the IRS has taken the position that the expenses paid with PPP loans which were forgiven would not be deductible on the business’s tax return. With bated breath, the nation awaited Congressional relief with respect to COVID-19. Relief came through at the last minute, including a provision that expenses paid with PPP will be deductible. Congress also reiterated that any forgiven PPP loans will not be includible in the business’s income.

Here are six things you should know about PPP loans and your taxes:

You Can Deduct Expenses Paid for with the Loan Proceeds Payroll, mortgage interest, rent and utility expenses are all forgivable uses of the loan and Congress has superseded the IRS’s guidance in Notice 2020-32 disallowing such expenses. Not only are these expenses deductible, but Congress has broadened the categories of expenses that may be paid for with PPP funds to include: software, cloud services, accounting, human resources, property damage due to civil unrest, personal protective equipment, and supplier costs ordered or contracted for prior to loan approval.

You Do Not Have to Include Forgiven PPP Funds in Income While loan proceeds forgiven by the lender are generally includible in income, PPP loan forgiveness is an exception to the general rule. Businesses do not have to include the debt forgiveness in their income.

You Can Take Advantage of the Families First Coronavirus Response Act (FFCRA) The FFCRA requires some employers to provide employees with paid leave for reasons related to COVID-19. However, businesses can still take advantage of the FFCRA tax credits in addition to utilizing the PPP loan.

You Can Defer Payroll Taxes Under the CARES Act, employers may elect to defer payroll taxes from March 27 through December 31, 2020. Fifty percent of the deferred taxes accumulated in 2020 must be paid by December 31, 2021 and the remainder must be paid by December 31, 2022. 

You Cannot Use PPP Money to Pay for Business Taxes As mentioned above, the PPP loan may only be used for certain identified categories of expenses. You cannot use the loan proceeds to pay income, sales, or other tax liabilities.

You Can File an Amended Tax Return If you applied for forgiveness but have not received a decision from the IRS at the time of tax return filing and you later learn that you will not receive full or partial forgiveness, you may make the related adjustments by filing an amended return.

Taxes are daunting even without COVID-19 and PPP loans to worry about. Add in conflicting guidance by multiple government agencies and it is understandable that a small business owner may feel overwhelmed. Fortunately, Congress enacted favorable provisions applicable to PPP funds and provided certainty to small businesses awaiting answers before year’s end. If you need further guidance, the tax lawyers at The Cavanagh Law Firm are always available to answer any questions. 

Giselle Alexander is an Arizona Certified Tax Law Specialist, a CPA, and holds a Masters in Law in Taxation. Giselle represents clients at all states of the tax controversy process and is one of only a few tax attorneys in the U.S. with experience in trying 831(b) micro captive insurance cases before the U.S. Tax Court.

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It’s a wrap. Arizona voters have spoken. Despite some major disappointments, business and industry saw some major wins, too. 

First the new president. President-elect Joe Biden’s victory could prove favorable for Arizona when it comes to trade, immigration and border policies, said Glenn Hamer, president and CEO of the Arizona �鶹��ýӳ�� of Commerce & Industry, which represents some of the largest employers statewide.

Business and industry now hope to see an end to the punishing trade wars and tariffs of the past four years.  

“I don’t think we’re going to see tariff threats on our allies like Mexico and Canada, and for a state like Arizona that relies heavily on trade, that’s a positive going forward,” Hamer said.

Border issues should improve

He predicts improved relations for trade and cross-border tourism, major financial drivers for Arizona. There’s also hope that restrictive visa policies that have made it difficult to hire workers and attract top students from other countries will improve. 

“COVID-19 precautions must be at the front of the line in moving forward, but we need to get our borders up and running with our friends and allies and North American neighbors,” Hamer said. “Snowbirds from Canada need a haven from their brutal winters. In terms of Mexico, many of our border communities are integrated and border closures have been devastating.”

Keeping new tariff-free trade pact secure   

Hamer is also confident that the new administration will keep the new United States- Mexico-Canada Agreement (USMCA) secure. The is bringing cross border commerce into the modern age with new provisions that include guidelines and protection for e-commerce and intellectual property that will benefit Arizona. 

“I’m very bullish that the next administration will expand on this tremendous agreement and further cement our trade ties,” he said.

Tax and regulatory agenda cause for concern

Hamer’s organization was a vocal supporter of the 2017 Tax Cuts and Jobs Act, which he argues was essential to the country’s pre-pandemic economic expansion.

“We won’t support a rollback of the tax reductions that unlocked one of the most vibrant economies the country’s ever known,” Hamer said. “We’re counting on job creators to help us recover from the current downturn. Saddling them with higher taxes and more regulatory red tape won’t grow the economy.”

Hamer says the outcome of two U.S. Senate runoff races in Georgia in January will be pivotal.

“These races will determine not only which party controls the Senate, but also the extent to which policies that help create jobs will either be retained or rejected,” he said.

A much needed healing message 

Biden hit all the right chords in his victory , said Hamer, who immediately sent out a tweet congratulating the president-elect: 

“It was uplifting and unifying. We are a good people and the greatest country in the history of the world. We are the UNITED STATES of America. It’s time to heal,” Hamer wrote.

Voters retain pro-business, pro-tech, pro-education stewards

At both the national and state level, Arizona voters retained a majority of candidates endorsed by business and trade groups who have worked to build the state’s economy and future.  

At the state Legislature, the GOP held onto majority control. While the chamber endorses candidates from both parties, keeping the provides needed certainty right now, said Garrick Taylor, executive vice president for the �鶹��ýӳ��. 

Under the state’s leadership, Arizona has watched its economic strength grow exponentially, and it’s experiencing a faster recovery from the pandemic than many other states.

“We’re less concerned with partisan affiliation than we are with making sure the Legislature is committed to strengthening the state’s competitiveness,” Taylor said. “Ensuring that there is a strong majority of pro-jobs, pro-growth legislators is more essential than ever.”

Proven record for moving mountains

Among those re-elected to their respective state houses are dozens of lawmakers who have successfully led Arizona to increase teacher salaries and funding for education to the tune of $1 billion more per year, promote policies to attract a wide range of industries and high paying jobs, and take on a major battle with Mother Nature. 

Last year, Senate President Karen Fann, House Speaker Rusty Bowers and other legislators helped smooth a sometimes contentious process to update the seven-state to protect one of Arizona’s most important water resources, the Colorado River.  

A new U.S. senator

One person who was essential in moving the historic water pact forward was Arizona’s U.S. Senator Martha McSally, who lost her bid to retain her Senate seat against  astronaut and fellow military pilot Capt. Mark Kelly (D).  

McSally, lauded as one of the hardest working public servants in Congress, received strong support from business groups including chambers of commerce, trade associations and small business groups. Earlier this year, McSally received the U.S. �鶹��ýӳ��’s Abraham Lincoln Leadership for America for her record of bipartisan pro-job, pro-free enterprise work. 

Arizona business leaders are now eager to forge a similar relationship with Senator-elect Kelly.  

“Arizona’s job creators congratulate Capt. Mark Kelly on becoming the state’s next U.S. senator. We look forward to working with him on policies that will strengthen the country and state’s economies,” Hamer said. “Many Arizona businesses are struggling during this pandemic-induced downturn, so there is much work to be done. Sen.-elect Kelly can count on us as willing partners.”

Two serious blows to small business, industry

Two state ballot propositions that were widely opposed by business and trade groups statewide also received voter approval. Both were heavily funded by out-of-state groups.

Most daunting was the narrow passage of Proposition 208, the “Invest in Ed” measure. The new law imposes a high personal income tax on the state’s top earning individuals to fund education. Forgotten in the frenzy to help educators, voters did not realize it would impact tens of thousands of small businesses as well.

“This is a job-killing tax that threatens to destroy Arizona’s reputation as a pro-business, pro-job creation state,” Hamer said. 

The could stifle Arizona’s ability to compete with other states. Neighboring states such as Nevada, New Mexico and Utah have lower or zero income tax rates. Other states are rejecting similar measures. Colorado voters elected to lower that state’s income tax.

Passage of Proposition 207 was another blow. The new law makes recreational marijuana legal in Arizona. Business groups fought its passage for a , including a fear of more workplace injuries and accidents and less productivity on the job. 

Moving forward 

Despite some major disappointments, voters resoundingly cast their ballots for dozens of public servants who have made Arizona a business-friendly state. 

“Arizona is now counting on their leadership to develop the policies necessary to emerge from the pandemic just as we entered it—with one of the nation’s strongest economies,” Hamer said. 

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Voters across the country served up a mixed bag of results on fiscal policy issues in early election results.  

In Arizona, Proposition 208, which nearly doubles the state income tax rate, held a slight edge on Wednesday.  

Proponents of the tax increase, which was endorsed by Sen. Bernie Sanders, I-Vermont, led opponents by more than 135,000 votes.  

In Colorado, voters there adopted Proposition 116, which reduces the state income tax rate from 4.63 percent to 4.55.  

If the results hold, Arizona will have the highest income tax rate in the four-corner region at 8% and Colorado will have the most competitive rate. Arizona’s income tax rate will also be among the highest nationally.  

“There are hundreds of thousands of ballots left to be counted, so it’s premature to make any definitive declarations about the results,” Arizona �鶹��ýӳ�� of Commerce & Industry President and CEO Glenn Hamer said. “If the result holds, however, Arizona will have some of the highest income tax rates in the country, and states with high income tax rates typically struggle economically, so attracting jobs here will become more difficult. Regardless of what happens, we’ll continue to work to support policies that keep the economy healthy so teachers can be paid fairly and so we can attract more Arizonans to the teaching field.”  

Illinois voters rejected a tax increase that would have replaced the state’s flat income tax rate with a progressive tax system. Had the measure passed, a new tax bracket of 7.85% would apply to single-filer income above $350,000 and below $750,000, and couples’ income above $500,000 to $1 million annually.  

The Illinois amendment would also institute a new 7.99% rate that would apply to all taxable income for single filers who earn more than $750,000 and joint filers who earn more than $1 million annually.  

Voters in California, a high-tax state with a top income tax rate of more than 13%, the nation’s highest, appear to have rejected Proposition 15, albeit narrowly based on early returns.  

The measure would have established a so-called “split-roll” property tax system that would have made it easier to raise property taxes on business property.  

In Florida, a state won by President Donald Trump, voters elected to phase-in a minimum wage increase. The mandated hourly wage will increase annually beginning next year until it reaches $15 per hour in 2026.  

Florida voters also rejected a measure that would have required constitutional amendments to be approved by voters in two consecutive general elections.  

Florida already requires ballot measures to reach a 60% vote threshold in order to pass.

On the issue of worker mobility, California voters elected to overturn a law that made it more difficult for workers to become independent contractors for technology platforms like Uber and Lyft.

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A recurring theme of the campaign in favor of Proposition 208 is to change the definitions of key terms of the debate in order to fit the proponents’ narrative. The problem? Arizonans won’t fall for it.  

This week you may have seen evidence of the evolving strategy from the Prop. 208 proponents, which is to tell small business owners that they’re really not small businesses. This isn’t new. Last week proponents tried to weave the narrative that no small business owners would be subject to the initiative’s 77.7% tax increase, .  

Why are the proponents trying so hard to change the definition of small business? My guess – passing the largest tax increase in Arizona history during a global pandemic is likely to be rejected by voters, and we already know it does not sit well with our small business owners.  

It’s why the ’s leading small business associations and dozens of other business organizations representing everyone from farmers to Realtors oppose Proposition 208. And telling these small business owners they are not in fact small business is just insulting, especially considering all that these job creators do for our state’s economy. 

Arizona small businesses employ 1.1 million Arizonans across all industries, amounting to 44% of our private workforce. In 2019 alone small businesses created over 44,000 net new jobs. They are the backbone of our economy and it is imperative that they succeed. Raising taxes on small businesses and subjecting them to tax rates higher than large corporations is no way to help.   

But this isn’t the first time the proponents have changed the definitions to fit their narrative, and small businesses aren’t their only target; they have their sights set on educators, as well. K-12 advocates have long asked for sustainable revenue sources to provide base funding for the classroom and for our teachers. . 208 does not deliver.  

The proponents will tell you that 50% will go into base teacher pay. The problem? They have once again altered and diluted the definition of teacher to include swaths of non-administrative support personnel, meaning less money for our traditional classroom teachers.  

The other omission? They are nearly doubling the tax rate on the most volatile segment of tax revenues, leaving no guarantees for funding from year to year. That’s no guarantee for our teachers, for the classroom, and most importantly for our students.  

Changing definitions to fit their narrative is a neat trick, but this bait and switch definition strategy won’t fool Arizona voters and definitely not small businesses. They are well aware that regardless of what the proponents say, Proposition 208 wallops small business and would cause incredible damage at the most vulnerable time.  

Courtney Coolidge is vice president of government affairs for the Arizona �鶹��ýӳ�� of Commerce & Industry

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Two statesmen with deep roots in Arizona are calling on voters to say “no” to Proposition 208, saying it would place �鶹��ýӳ��p there with New York and New Jersey as one of the highest income tax states in the nation.

That would kill many small businesses, cause job losses and shrink tax revenues that support schools and government services, said former Vice President Dan Quayle and former Arizona U.S. Senator Jon Kyl at a virtual event hosted by the Arizona �鶹��ýӳ�� of Commerce and Industry. The event was sponsored by Total Spectrum, HSL Properties and the Keating Companies.

“Let me be very clear: We are now recovering from a 100-year pandemic and this initiative wants to raise taxes 77.7 percent on individuals and small business? That should be the end of the discussion,” said former Vice President Dan Quayle, a longtime Arizona resident who grew up here.

The initiative, which seeks to tax certain earners to help fund education, would raise Arizona’s top income tax rate from 4.5 percent to 8 percent — a 77.7 percent increase — for individuals who earn over $250,000 and households that earn over $500,000. 

Small businesses would shoulder much of the costs

What most voters do not realize is that a majority of small businesses in Arizona file under the individual tax code, not as corporate filers, said Kyl, who served as a U.S. senator from Arizona 1995 to 2013 and again in 2018.  

If the initiative is passed, those companies could nearly double the 4.9 percent tax rate that big corporations pay.

“More than half of all small businesses pay their taxes as individual income taxes,” Kyl said. “The people who are going to suffer are all of those small business owners and their employees. We’re talking about the dry cleaners, the plumber, the electrician, the pesticide control.”

Prop. 208 is wrong path for education funding 

At the event, Quayle and Kyl urged about 100 community and business leaders in attendance to educate their constituents on why this initiative is the wrong path for education funding.

They listed a number of reasons why, including: 

1. Arizona could lose its competitive edge to surrounding states

A sharp tax increase on individuals and small businesses would put Arizona at a disadvantage when competing with nearby states with similar or no income taxes like Colorado, Nevada, New Mexico and Utah. 

“We’ve had a great opportunity for people moving here because other states have messed up. They’ve raised taxes. They’ve made it very unfavorable for businesses and we’ve benefited from that,” Kyl said. 

2. Local, state tax revenues would drop 

If residents and businesses start to fail or flee the state, there are that Arizona could lose a minimum of $2.4 billion in revenue over the next decade as a result of a reduction in business recruitment, job growth, and wages.

3. Sends wealthy taxpayers and businesses packing 

Under the weight of this proposed tax increase, about 90,000 wealthy residents would be impacted. Many may be motivated to leave the state. Others would be less likely to move here. The same goes for new investment.  

Not only would local and state coffers suffer, so would charities and nonprofits that rely on donations from benefactors and local companies. 

4. Voter initiatives are nearly impossible to fix

If Proposition 208 passes, it will be nearly impossible to alter, even in the case of some unintended negative consequence. Once passed by voters, it takes a three-fourths vote by the state Legislature to change a voter initiative. Then, any changes made to the act must further its purpose. 

“This is permanent. It’s almost impossible to change,” Quayle said. “A small business may not earn $250,000 today, but five years from now, they’d like to.”

5. Proposition 208 does not adjust for inflation

Unlike current state and federal tax rules, the proposition fails to adjust for inflation. That could sweep more small businesses into higher tax brackets year after year. 

6. Most of the funding comes from an out-of-state group

Most of the funding for the initiative’s campaign comes from the Portland, Oregon-based Stand for Children, Inc. with over totaling more than $4 million coming from the group.  

Don’t turn Arizona into a “fly-over” state

Arizona has been able to increase its funding for education over the past four years because of its fast growth and healthy economy before the pandemic, both speakers said. 

Today, Arizona has a reputation as friendly and open to business with a relatively low tax base, Quayle said. That could change overnight if the initiative passes. 

“If we go from 4.5 percent to 8 percent, Arizona is going to be known as a fly-over state. Pure  and simple.” 

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Arizona’s top tax bracket will increase 77.7% according to a summary adopted last Thursday by a legislative panel assessing the effects of the so-called “Invest in Ed” ballot initiative.

The summary approved by Legislative Council, which is comprised of state representatives and senators from each party, explains that the initiative seeks to assess a 3.5 percentage point increase on the current 4.5% tax rate on individual income exceeding $250,000 annually and married couple income exceeding $500,000 annually, resulting in an 8% tax rate on that income, a 77.7% increase over the current rate.

The summary also says that the tax increase will apply to income from small businesses that are organized as pass-through entities, like sole proprietorships and limited liability companies. Such small businesses pay their income taxes on the individual portion of the tax code, not the corporate tax code.

The Legislative Council summary will appear in a pamphlet that is prepared by the Office of the Secretary of State and mailed to voters before the fall election.

“The Legislative Council summary does a good job of explaining for voters just how dramatic a tax increase is being proposed by the tax advocates,” said Jaime Molera, the former state superintendent of public instruction who is chairing the opposition campaign committee Arizonans for Great Schools and a Strong Economy. “If this initiative makes the ballot and passes, Arizona’s top tax rate would be one of the top-10 highest in the nation. That would suppress our ability to grow our economy and would make it more difficult to continue to invest in our schools and teacher salaries. A healthy economy is what made possible the tremendous investments in our schools over the past several years, including the average statewide teacher pay increase of 20% that kicks in this school year.”

Chad Heinrich, the Arizona state director for the National Federation of Independent Business, said his organization was pleased that the Council summary makes clear that small businesses will be impacted by the tax increase.

“Voters deserve to know that Arizona small businesses are facing a huge tax increase if this measure were to pass,” Heinrich said. “The proponents do not discuss their plan’s impact on small business, but thankfully the Legislative Council summary shines a light on the 77.7% jump in the top income tax rate. A tax increase of this size is a bad idea even in a good economy, but in the middle of a pandemic when many small businesses have already closed or are hanging on by a thread, it’s incredibly irresponsible and destructive.”

In addition to the tax increase measure, the Legislative Council considered and adopted summaries of initiatives regarding the legalization of the recreational use of marijuana, criminal justice, and new regulatory mandates on the health care sector.

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Arizonans for Great Schools and a Strong Economy today filed a lawsuit in Maricopa County Superior Court arguing that proponents of an initiative to increase income taxes by 78% misled voters by failing to disclose the full size and scope of the plan’s tax increase.

“Just as they did in 2018, the tax increase proponents have failed to shoot straight with Arizona voters,” Arizonans for Great Schools and a Strong Economy Chairman Jaime Molera said. “Marketing their plan as a ‘surcharge’ attempts to withhold from voters the real impact of their scheme. If the proponents got their way, the top marginal tax rate would jump to 8%, nearly double the current top rate. The Supreme Court in 2018 and in previous cases has been unequivocal: a petition’s 100-word summary cannot confuse voters and a measure’s principal provisions must be clearly explained. Instead, the tax proponents have again attempted to hide the facts.

The argument also lays out the proponents’ failure to inform petition signers who would bear the brunt of the tax increase.

“It should have been disclosed to voters that this tax increase wallops small business,” Molera said. “Small businesses pay their taxes on the individual portion of the tax code. If signers would have known that the backbone of the Arizona economy gets clobbered by this proposal, then they might have thought twice before signing.”

The lawsuit also cites advertisements for petition circulators indicating the circulators would be paid based on the number of signatures they collect, a violation of Arizona law.

“The Arizona Legislature in 2017 passed a law that clearly banned the practice of paying petition circulators based on the number of signatures they collect, yet based on their own help-wanted ads, that’s exactly the payment model the proponents used in 2020,” Molera said. “Not only is their 100-word summary fatally flawed, but they’ve clearly violated state law when it comes to paying for signatures.”

Molera says he anticipates that the income tax hike measure will not appear on the November ballot.

“From early childhood to post-secondary, it is vitally important that our state’s policies and funding framework reflect education’s importance to the future of Arizona,” Molera said. “But this proposal the tax supporters are attempting to send to voters is not only poorly conceived and sloppily assembled, but it ignores the law. Arizona deserves better. As was the case two years ago, I anticipate that this year’s initiative won’t survive this legal challenge.”

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Arizonans for Great Schools and a Strong Economy showing voter support for the ballot initiative to double the income tax rate (known as Invest in Ed) drops significantly when told about the level of the tax increase.

The survey asked respondents if they would support signing a petition for a 3 percent income tax increase versus a 76 percent tax increase on individuals earning more than $250,000 annually. According to the poll, 59 percent of respondents indicated they would sign a petition for a 3 percent increase, but that number falls to 29 percent when the tax is described as a 76 percent increase.

The initiative seeks to increase the income tax rate from 4.54 percent to 8 percent for individuals who have a taxable income between $250,000 and $500,00 and for families who generate between $500,000 and $1 million. For individuals and families that make more than $500,000 and $1 million, respectively, the tax rate would soar to 9 percent. This jump results in tax rate increases of 76.21 percent and 98.24 percent respectively.

Because most small businesses in Arizona file as a Limited Liability Company (LLC) or some other structure known as a pass through, they do not pay corporate taxes and instead pay the standard individual income tax rate, so the proposal impacts them as well.

“When Arizona voters get the real story, support for a major increase in the individual income tax completely falls apart,” Arizonans for Great Schools and a Strong Economy Chairman Jaime Molera said.

The description of the tax increase is the subject of a lawsuit filed last month.

According to the filing, the initiative description fails to disclose the repeal of an existing law that annually adjusts each income tax bracket for inflation and states that the description of the income tax increase on the petition is misleading. The petition description alleges that income taxes will increase by 3.46 percent and by 4.46 percent — a reference to the percentage point increase, not the overall tax increase percentage.

“I am confident that the judicial system will find the proponents’ work sloppy and misleading and will remove the initiative from the ballot,” Molera said. “But, if for some reason we must continue this campaign through the fall, this poll confirms that public opinion is on our side and that a near doubling of the income tax rate will be rejected by voters.”

OH Predictive Insights conducted the live caller survey of 400 registered Arizona voters August 2^nd -3^rd, with a +/- 4.9 percent margin of error.

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