As California small businesses race to finalize their state and Federal tax returns for 2020, many face one unresolved issue on their California tax return: the status of Paycheck Protection Program loans.
However, sources tell The Sun that the issue may be soon resolved.
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Pandemic lifeline loans become tax headache
When authorized in the CARES Act, expenses paid through the forgivable PPP loans were deemed to be fully-deductible on business’ Federal tax returns for the 2020 tax year.
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.
Two weeks ago, the U.S. Treasury Department clarified that the American Rescue Plan provisions did not preclude states from deeming PPP loans as tax-free or deductible on state-level income taxes.
California readies action for PPP tax break
Now, it appears California’s legislature is ready to act ahead of Tax Day to give small business-owners a much-needed tax break.
Multiple Capitol sources told The Sun over the weekend that language from Senate Bill 265 – a bill led by Sen. Andreas Borgeas (R–Fresno) – deeming PPP loans as tax deductible will be incorporated into an emergency budget bill this week.
Borgeas introduced the bill in January and spent much of the intervening period raising alarm at the lack of action over the tax question.
The legislative maneuver enables Senate and Assembly leaders to expedite the bill through both houses of the California State Legislature and to Gov. Gavin Newsom’s desk before the May 15 tax deadline.
The move marks the second time Borgeas’ pandemic-related initiatives have made into a must-pass bill set for enactment.
In February, Borgeas’ “Keep California Working Act,” which provided direct relief to small businesses across the state, was incorporated into Newsom’s $9.5 billion coronavirus stimulus bill.
