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California Governor Signs Pandemic Aid Tax Relief Bill

Posted on May 3, 2021

California’s governor has signed legislation exempting pandemic aid provided through loans and grants from state taxes for most businesses.

Gov. Gavin Newsom (D) signed A.B. 80 April 29. The bill conforms the state to federal rules excluding from income forgiven Paycheck Protection Program loans and advance grants provided through the Economic Injury Disaster Loan (EIDL) program. The loans and grants were authorized by Congress to help businesses during the pandemic and lockdowns. Also, the legislation largely conforms to federal rules allowing businesses to deduct eligible expenses paid for using forgiven PPP loans and EIDL advance grants. 

“California’s small businesses have been hampered and hammered by this pandemic, and we are using every tool at our disposal to help them stay afloat,” Newsom said in an April 29 release. “This small business tax relief is exactly what is needed to keep businesses open so they can continue paying their employees.”

The legislation was approved by lawmakers in the State Assembly April 19 and in the State Senate April 26, and is projected to cost the state approximately $6.2 billion over the next six years. The bill’s provisions differ from federal rules adopted via the Consolidated Appropriations Act, 2021 (P.L. 116-260) in that they bar publicly traded companies, and businesses that didn’t experience at least a 25 percent reduction in gross receipts in 2020 compared with 2019, from deducting expenses paid for using forgiven PPP loans and EIDL grants.

The conformity “will provide support, not to large publicly traded companies, but to the mom-and-pop businesses — the beauty salons, restaurants and dental offices — which have been resilient during this difficult time,” Newsom said. 

Legislation signed into law last year, A.B. 1577, excluded forgiven PPP loans authorized under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) from being taxed by the state as income. But without A.B. 80, California didn’t conform to the later approved Consolidated Appropriations Act, which authorized additional tax-exempt loans and allowed deductions for loan-funded expenses.

A.B. 80 was part of a larger stimulus package backed by the Newsom administration earlier in 2021, but A.B. 80 was delayed and then put on hold for several weeks after the passage of the American Rescue Plan Act of 2021 (P.L. 117-2). Lawmakers and the Newsom administration sought to confirm that the tax break that would be created by A.B. 80’s conformity to federal rules wouldn’t indirectly violate a provision of the American Rescue Plan Act that prohibits states from using federal aid dollars provided by the act to fund state tax cuts. After the federal government clarified that conformity legislation wouldn’t break that rule, A.B. 80 proceeded.

The legislative approval of A.B. 80 was bipartisan, and Newsom’s signing of the bill was praised by the state’s chamber of commerce, a supporter of the legislation.

“We commend the leadership of the Governor and the Legislature in providing federal tax conformity for many of the 750,000 businesses in California that received Paycheck Protection Program loans to survive the pandemic,” Allan Zaremberg, president and CEO of the chamber, said in an April 29 release.

“While the bill exempts publicly traded companies and businesses that didn’t suffer a 25 percent loss in revenues, it will help those most impacted by devastating financial losses associated with COVID-19 shutdowns to stay afloat as we emerge from the pandemic.”

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