As reported in our earlier blog post The CARES ACT – Tax Relief, the federal CARES Act provides for forgiveness of indebtedness for eligible recipients of Paycheck Protection Program ("PPP") loans in an amount equal to the sum of the recipient's payroll costs, interest on mortgage obligations, rent obligations and utility payments (subject to certain conditions and limitations). Under federal law, any amount of covered loans forgiven under the CARES Act is excluded from gross income for federal income tax purposes.
Because California only selectively conforms to the Internal Revenue Code, and as of a specific date, at the time the CARES Act was enacted the forgiveness of PPP loans would have generated taxable for California income and franchise tax purposes. However, California has now passed Assembly Bill No. 1577, conforming to the PPP loan forgiveness rules. A.B. 1577 added Sections 17131.8 and 24308.6 to the California Revenue and Taxation Code, which provide that gross income does not include any covered loan amount forgiven pursuant to Section 1106 of the CARES Act, pursuant to the Paycheck Protection Program and Health Care Enhancement Act, or pursuant to the Paycheck Protection Program Flexibility Act of 2020. A.B. 1577 also denies business expense deductions for those expenses that were paid for using forgiven loan funds, as does federal law. The provisions are applicable to taxable years beginning on or after January 1, 2020.
If you have any questions regarding this information, please contact Justin Hepworth at (714) 424-8293, Amy Tranckino at (858) 720-8960, or Ryan Brenner at (213) 617-5576.
This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, solicitation, or legal advice, and does not form an attorney-client relationship. Further, this update is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. As you are aware, the COVID-19 crisis situation is dynamic and rapidly evolving, as are the laws, regulations, guidance and interpretations thereof. The information provided herein does not constitute tax advice and may not be relied upon for avoidance of tax penalties or for any other purpose. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.