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Tax: Conforms State Law Debt Forgiveness Exemption for PPP Loans
Eective on September 9, 2020
Conforms California tax law to federal law by allowing a borrower to exempt any forgiveness of a PPP loan from the calculation of gross income for state tax purposes.
Background: When a lender cancels a borrower's debt, federal and state law generally treat the amount of debt cancelled as income. The CARES Act explicitly exempts the amount of PPP loan that is forgiven from income for federal purposes. California does not conform to this provision. Additionally, current federal and state laws generally allow taxpayers to deduct ordinary and necessary business expenses. However, because forgiven PPP loans are not taxable, the Internal Revenue Services has issued a notice preventing the deduction of expenses that are paid for by forgiven PPP loans.
State law does not automatically conform to changes in federal tax law, except for specic retirement provisions. Instead, the Legislature must armatively conform to federal changes.
What this law does:
This law conforms state law to federal law to allow the amount of PPP loan provided to California small businesses under the CARES act to be excluded from gross income for state tax purposes. This bill also denies the business expense deduction for those expenses that were paid for using forgiven loan funds.
Assembly Bill 1577 is codied as Tax and Revenue Sections 17131.8 and 24308.6. This takes eect immediately on September 9, 2020, as a tax levy.
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