California complies with state income tax treatment of PPP lending | Sheppard Mullin Richter & Hampton LLP

As reported in our previous blog post The CARES ACT – tax breaks, Federal CARES Act provides debt relief for eligible recipients of Paycheck Protection Program (“PPP”) loans equal to the sum of the recipient’s labor costs, interest on mortgage obligations, rental obligations, and benefits (subject to certain conditions and restrictions ). Under federal law, any amount of covered loans that was enacted under the CARES Act is excluded from gross income for federal income tax purposes.

Because California only complies with the Internal Revenue Code selectively and from a certain date on the date the CARES Act came into effect, the issuance of PPP loans for California income and franchise tax purposes would have been taxable. However, California now has Assembly Bill No. Adopted in 1577 that complies with PPP loan waiver rules. AB 1577 added

Sections 17131.8 and 24308.6 of the California Revenue and Taxation Code, which provide that gross income does not include a funded loan amount under Section 1106 of the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act, or the Paycheck Protection Program Flexibility Act of 2020 AB 1577 also denies deduction of business expenses for expenses paid with waived loan funds, as provided by federal law. The provisions apply to tax years beginning on or after January 1, 2020.

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