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California Bills Seek CARES Act Conformity on NOL Carrybacks, Loan Forgiveness

Posted on May 8, 2020

Recently amended California bills would conform state law to provisions of the federal coronavirus relief package, including its allowance of some net operating loss carrybacks and its exemption of forgiven Paycheck Protection Program (PPP) loans from taxation.

A.B. 2166 as amended May 4 by Assembly member Kevin Kiley (R) would conform the state’s tax code to the portion of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that allows taxpayers’ NOLs incurred in 2018, 2019, and 2020 to be carried back five years. The bill as filed would have created an income tax credit for fire insurance premiums.

As amended, the bill “would essentially allow a business to carry back their losses” for five years for state tax purposes, and “they would essentially get a [state] tax refund,” Kiley’s office director Joshua Hoover told Tax Notes May 6. California used to allow NOL carrybacks, but in 2019 it conformed to the Tax Cuts and Jobs Act provisions eliminating previous federal rules allowing a two-year carryback period.

“The main goal is to conform to the federal changes in the CARES Act, and really just provide this relief for businesses that we think will need this money to recover” from the economic effects of the pandemic and lockdown, Hoover said.

Notably, the legislation would depart from the federal rules by giving “businesses the opportunity to file midyear for the first half of this year’s losses . . . to get some immediate relief,” Hoover said. However, he said that language needed to be clarified.

Hoover said Kiley’s office had received initially supportive feedback from business groups in the state regarding the proposal, including from the California Chamber of Commerce. “We’re definitely getting a lot of support from the business community. We’re still waiting to hear back from our colleagues in the legislature,” he said.

Kiley is also sponsoring A.B. 3208, along with Assembly member Jay Obernolte (R). The bill was amended May 5 to insert new language ensuring that the federal PPP loans received by businesses that are later forgiven are not treated as taxable income under state law.

The PPP loans are intended to help businesses stay afloat and maintain employment during the pandemic, and businesses that spend them on approved expenses, including payroll, mortgage interest, rent, and utilities, can get all or a portion of the loan forgiven. The CARES Act states that the forgiven loans aren’t taxable as federal income, but tax experts have said it’s unclear whether some states would try to tax them.

According to Hoover, the California Franchise Tax Board has confirmed that forgiven PPP loan debt would be treated as taxable under current state law. He said taxing forgiven PPP loans would be improper since the purpose of the program is to keep businesses alive and workers employed. Kiley sent an April 29 letter to Assembly Budget Committee Chair Phil Ting (D), urging that legislation be considered to exempt forgiven PPP loan debt from state taxes.

Hoover said he believes lawmakers on both sides of the aisle will back the proposal. “I’ve heard anonymously from legislators on the other side of the aisle that there’s an appetite for this," he said.

Nikki Dobay with the Council On State Taxation told Tax Notes in a May 6 email that her organization would support both bills.

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