Business · California

Treasury clears air on PPP tax status. Now will Calif. make COVID-19 loans tax-free?

With nearly one month until state and Federal income taxes are due to be filed, the U.S. Treasury Department clarified states’ ability to deem forgivable Paycheck Protection Programs loans issued to small businesses as being tax-free.

For Californians, the announcement has considerable consequences.

Upon passage of the CARES Act last spring, Congress and the Internal Revenue Service deemed the forgivable Paycheck Protection Program loans as not being subject to income tax.

States, however, were left in a lurch upon the passage of the American Rescue Plan of 2021.

The Biden-led coronavirus relief plan included a provision stating that funding (including Paycheck Protection funds) could “not be used to offset a reduction in net tax revenue resulting from certain changes in law.”

Or, in plain English, states could not utilize the extensive coronavirus relief funds to cover the cost of a new tax cut.

This left states – such as California – unclear as to whether they could adjust their own tax codes to mirror the Federal government regarding the tax-free status of PPP loans, as it could be perceived as a tax cut of sorts.

Thursday, the Treasury Department confirmed that states can adjust their tax codes to conform with Federal income tax law.

For Californians, the announcement from Federal fiscal policymakers paves the way for California Senate Bill 265 – led by Sen. Andreas Borgeas (R–Fresno) – to make its way through the legislature and onto Gov. Gavin Newsom’s desk to be enacted.

Borgeas and Senate Republican Leader Scott Wilk (R–Santa Clarita) celebrated the news and pushed legislators to act to deem PPP loans tax-free.

Alex Tavlian
Alex Tavlian is the Executive Editor of The San Joaquin Valley Sun and Executive Director of Valley Future Foundation. You can reach Alex at alex.tavlian@sjvsun.com.