Proposed Federal Tax Conformity Excludes Loans Forgiven Under CARES Act From Gross Income

Assemblyman Phil Chen(R-Yorba Linda) introduced Assembly Bill 936 February 17. The bill would amend Sections 17131.8 and 24308.6 of the Revenue and Taxation Code. As an urgency measure, the bill would require a 2/3 vote in both houses of the Legislature and take effect immediately.

Both the California Personal Income Tax Law and its Corporation Tax Law partially conform to provisions of the federal Internal Revenue Code. Section One of the bill would amend Revenue and Taxation Code Section 17131.8. which is in the Personal Income Tax Law, that excludes from gross income any covered loan amounts forgiven under the federal tax laws. Instead, the law would provide that the provisions of Section 276 of the federal Consolidated Appropriations Act, 2021 (Public Law 116-260) that clarifies the tax treatment of forgiveness of covered loans applies.

Section Two of the bill would amend Revenue and Taxation Code Section 24308.6. which is in the Corporation Tax Law, that excludes from gross income any covered loan amounts forgiven under the federal tax laws. Instead, the law would provide that the provisions of Section 276 of the federal Consolidated Appropriations Act, 2021 (Public Law 116-260) that clarifies the tax treatment of forgiveness of covered loans applies.

Section Three of the bill provides legislative findings and declarations to comply with Revenue and Taxation Code Section 41. The goal of this new tax expenditure is to help Californians realize the maximum benefit of the Paycheck Protection Program loans and, without this change in statute, small businesses with forgiven Paycheck Protection Program loans are facing a likely tax, thereby undermining the purpose of the original loans.

Section Four of the bill provides legislative findings and declarations that these tax benefits made pursuant to this bill serve the public purpose of securing the financial condition of businesses that offer essential goods and services and do not constitute a gift of public funds.

Section Five of the bill provides the urgency clause and specifies that the bill should take effect immediately in order to prevent the closure of essential businesses by maximizing the benefit of the Paycheck Protections Program loans. The bill is expected to be heard in the first policy committee in March.