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May 18, 2021
Small business owners in California that took pandemic-related federal loans shared a collective sigh of relief April 29 after Gov. Gavin Newsom signed a bill that will help their bottom lines. Under the new law, the majority of forgiven loans provided to businesses from the Paycheck Protection Program will not be counted as taxable income by the state. The bill also lets California businesses deduct expenses that they paid for using the PPP loan funds.
Under the PPP initiative, businesses don’t have to pay their loans back if the funds were used on certain qualifying expenses such as rent, utilities and employee wages. Publicly traded companies are exempt from California’s measure.
The law will affect up to 85% of the over 1 million businesses registered in the state that jointly received close to $97 billion in federal PPP loans. California officials estimate the measure will cost the state from $4.4 billion to $6.8 billion over six years, much more than the $2 billion in tax breaks the governor initially promised. However, the final cost to be incurred by the state will depend on how many companies meet federal requirements.
Leaders in the small business sector argue that Congress’ intent in creating the PPP was to retain jobs and keep businesses from permanently going under. Businesses applied for the loans with the understanding that they would be forgiven if they met certain conditions. Had they known in advance that they would be subject to state tax, they could have planned their budgeting ahead.
The program’s goal of keeping workers on the payroll has boosted state revenue already by providing state income tax withholding, many small business owners say. This also kept many people off the unemployment insurance rolls. Congress also addressed what some called “double dipping,” meaning allowing expense deductions and not taxing forgiven PPP loans, by coming up with legislation to make sure the program retained these aspects as intentional features.
Congress deliberately exempted forgiven PPP loans from being taxed at the federal level. In late February, at least half of states planned to treat forgiven PPP loans as income, but legislators have moved fast to reverse that decision in many states since then. But a number of states still intend to treat forgiven PPP loans as taxable income and/or to prohibit deductions for expenses paid with forgiven loan funds.
Note: Wyoming and South Dakota have no state income tax.
Florida, Minnesota, Nevada, New Hampshire, Texas and Utah.
Hawaii, Nevada, North Carolina, Texas, Virginia (Va. will allow partial deduction of up to the first $100,000) and Washington.
Tasnim Ahmed is a content writer at Escalon Business Services who enjoys writing on a multitude of subjects that include finops, peopleops, risk management, entrepreneurship, VC and startup culture. Based in Delhi NCR, she previously contributed to ANI, Qatar Tribune, Marhaba, Havas Worldwide, and curated content for top-notch brands in the PR sphere. On weekends, she loves to explore the city on a motorcycle and binge watch new OTT releases with a plateful of piping hot dumplings!
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