Calif. Lawmakers OK Excluding COVID-19 Loans From Tax

The California Legislature passed a bill that would allow state taxpayers to exclude federal coronavirus relief business loans from state taxes and would deny business expense deductions that were paid by using those forgiven loans.

A.B. 1577,  written by Assemblywoman Autumn Burke, D-South Bay, passed the California Assembly by a 74-0 vote Sunday. The measure passed the state Senate on Friday by a 39-0 vote. The bill goes to Democratic Gov. Gavin Newsom for consideration.

The bill would conform 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.

--Editing by Neil Cohen.

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