California Law Now Conforms to Federal Income Tax Treatment of PPP Loan Forgiveness

Last month, Governor Gavin Newsom signed Assembly Bill 1577 into law, which amends California’s tax code as it relates to loan forgiveness under the Paycheck Protection Program.

As Michelman & Robinson has reported time and again, PPP loans are subject to forgiveness when borrowers use proceeds to pay for payroll costs, interest on mortgage obligations, rent, and utilities. More good news for borrowers is that for purposes of federal income taxation, existing federal law excludes from gross income any amounts of PPP loans that are forgiven.

For its part, California tax law does not fully conform to the Internal Revenue Code. In fact, before the passage of AB 1577, PPP loan amounts forgiven would have resulted in taxable income for purposes of California state income and franchise taxes. AB 1577 changes that with the addition of sections 17131.9 and 24308.6 to the California Revenue and Taxation Code.

Pursuant to these new sections, for taxable years on and after January 1, 2020, gross income is not to include any covered loan amount forgiven pursuant to the CARES Act, the PPP and Health Care Enhancement Act, or the PPP Flexibility Act of 2020. However, AB 1577 provides that any credit or deduction allowed for any amount paid or incurred by a taxpayer upon which the state income and franchise tax exclusions are based shall be reduced by the amount of the exclusion allowed under the new law. Translation: consistent with federal law, AB 1577 denies business expense deductions for expenses paid using forgiven PPP loan funds.

As always, M&R is prepared to provide advice and counsel concerning any of your COVID-19-related legal needs, including PPP loan forgiveness and related tax implications. Do not hesitate to contact us to learn more about our COVID-19 Practice Group.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.