Small-business owners may have to pay hundreds of millions of dollars in unexpected taxes next year if they receive relief from the federal Paycheck Protection Program, according to Republican leaders in the Minnesota House of Representatives.

House Minority Leader Kurt Daudt and other Republicans are calling on state lawmakers to act next week on the issue, but Democrats don't see the urgency and some business executives are skeptical about the possible impact to their bottom lines.

The debate centers on the most attractive feature of the emergency loan program: the federal government will forgive any loans for companies that rehire all of their furloughed employees by June 30 and meet other obligations under the program. Congress specifically exempted the relief from federal taxes, but under Minnesota's tax code, a forgiven debt is treated as taxable income.

"Minnesota businesses are fighting just to survive right now," said Daudt, R-Crown. "These loans are a lifeline meant to cover the basics — payroll for employees, rent and utilities. There's no reason forgiven loans should trigger a tax hike at a time when businesses can least afford it."

Under the program, companies with 500 or fewer employees can get up to $10 million to help them survive the downturn caused by the coronavirus.

So far, 46,383 Minnesota companies have obtained $9 billion in forgivable loans through the program, according to the U.S. Small Business Administration, which oversees the program. If all of that money were subjected to a corporate tax rate of 7%, the average in Minnesota, those companies would have to pay more than $600 million in taxes, according to House Republicans. Those numbers are likely to climb higher now that Congress has added another $310 billion to the program.

However, business owners said that math overlooks an obvious accounting issue. To qualify for forgiveness, companies must spend the funds on payroll, utilities or real estate costs — all of which are legitimate business expenses that can be written off on a company's taxes.

"It might be a nonevent," said Mactech CEO Joel Wittenbraker, who obtained more than $500,000 through the PPP for his Red Wing manufacturing company. "If you give me $100, and I spend that $100 on my employees, I should be able to deduct it."

Still, Wittenbraker said, he would like to have the issue clarified.

"We've had a lot of conversations about PPP with our accountants and other people, and I never heard a peep about this," Wittenbraker said. "Anytime you don't know what the rules are, you are concerned."

Jay Abdo, senior partner of the Edina accounting firm Abdo, Eick & Meyers, said he thinks the tax consequences for most firms would be minimal.

"This is a federal program that entices you to spend the money to keep your people employed and pay your rent, and if you do that, it's a wash," Abdo said.

Daudt said he has spoken to Gov. Tim Walz, and he said Walz agreed that businesses should not be required to pay taxes on any relief they obtained through the PPP.

"The governor understands the difficulty small businesses are facing and wants to make sure they are able to weather the current crisis," said Teddy Tschann, the governor's press secretary. "He's reviewing options on the best way to do this and is looking forward to working with the Legislature in the coming weeks on this issue."

Daudt said he is concerned that some small businesses will reserve a portion of their funds for future taxes instead of spending the money on things that will help the economy. He noted that the Legislature previously took action to make sure people who received forgiveness on a portion of their home mortgages did not pay taxes. That measure cost the state about $7 million, according to the House Republican Caucus.

Rep. Paul Marquart, chairman of the House Taxes Committee, said he thinks the Legislature should address the PPP issue at the same time it deals with other tax issues related to coronavirus relief.

"Do we want to help small businesses as much as we can? Yes," said Marquart, D-Dilworth. " But I think we need to make sure we have a full picture before we act."