California Cos. Can Exclude Virus Relief Loans From State Taxes

California will allow state taxpayers to exclude federal coronavirus relief business loans from state taxes and will deny deductions for business expenses paid with those forgiven loans under a bill signed by the governor Wednesday.

A.B. 1577, signed by Democratic Gov. Gavin Newsom, conforms California law to federal law by allowing businesses that accepted federal Paycheck Protection Program loans under the Coronavirus Aid, Relief and Economic Security Act to exclude the loan amount for state tax purposes, according to a bill analysis. In addition, the measure would deny businesses the ability to deduct expenses paid for from those forgiven loans, the analysis said.

The CARES Act established a new category of U.S. Small Business Administration guaranteed loans for qualified small businesses. Under that section, PPP loans to businesses are generally forgiven, and forgiven debt under the program that would otherwise be part of taxable income is excluded.

The Internal Revenue Service issued guidance in April saying expenses that are paid from those forgiven loans don't qualify for deductions, to avoid a double tax benefit.

Newsom also signed into law S.B. 1447, which gives struggling small businesses $1,000 for every employee hired by the end of November. To be eligible for the credit, businesses must have had fewer than 100 employees before the pandemic and must be able to demonstrate that their gross receipts in the second quarter of 2020 had fallen 50% below gross receipts in the second quarter of 2019.

The maximum credit for each business is $100,000. Under the new law, businesses can claim it for 2020, but could also carry it forward through 2025.

--Additional reporting by James Nani. Editing by Joyce Laskowski.

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