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New Bill Aims for Federal Tax Conformity

AB 708 would prohibit any reduction in tax deductions, denials of basis adjustments, and reductions in tax attributes

By Chris Micheli, February 17, 2021 2:15 pm

On February 16, Assemblyman Eduardo Garcia (D-Coachella) introduced Assembly Bill 708 related to federal tax conformity. The bill would amend Sections 17131.8 and 24308.6 of the Revenue and Taxation Code. As an urgency measure, it would take effect immediately once enacted. Existing state law provides partial conformity to the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and its subsequent amendments in the Paycheck Protection Program and Health Care Enhancement Act and the Paycheck Protection Program Flexibility Act of 2020.

In addition, the federal Consolidated Appropriations Act, 2021 prohibits reductions in tax deductions, denials of basis adjustments, and reductions in tax attributes for federal income tax purposes based on the exclusion from gross income provided in the federal CARES Act and its subsequent amendments.

Section One of the bill would amend Revenue and Taxation Code Section 17131.8, which is in the Personal Income Tax Law, dealing with gross income not including any covered loan amounts forgiven pursuant to federal law. The bill would repeal (shown in strike-out) the existing subdivision (b) and replacing it (shown in italics) with the following language:

(b)Any credit or deduction otherwise allowed under this part for any amount paid or incurred by the taxpayer upon which this exclusion is based shall be reduced by the amount of the exclusion allowed under this section.

(b) For purposes of this part, the provisions of Section 276 of the federal Consolidated Appropriations Act, 2021 (Public Law 116-260), clarifying the tax treatment of forgiveness of covered loans, shall apply.

Section Two of the bill would make the same change to Revenue and Taxation Code Section 24308.6, which is in the Corporation Tax Law. Section Three of the bill provides a legislative finding and declaration to comply with Revenue and Taxation Code Section 41. This provision reads as follows: The purposes, goals, and objectives of the new tax expenditure created by this bill are to conform with federal tax law for state tax purposes in order to support small businesses who suffered economic harm due to the COVID-19 pandemic.

Section Four of the bill provides a legislative finding and declaration that provides: The deductions and other tax benefits authorized by the amendments to Sections 17131.8 and 24308.6 of the Revenue and Taxation Code made by this bill serve the public purpose of conforming with federal tax law for state tax purposes in order to support small and essential businesses who suffered economic harm due to the COVID-19 pandemic, and do not constitute a gift of public funds within the meaning of Section 6 of Article XVI of the California Constitution.

Section Five of the bill provides the urgency clause and explains that the bill should take effect immediately “in order to immediately support small and essential businesses who suffered economic harm due to the COVID-19 pandemic by maximizing the benefit of the Paycheck Protections Program loans as soon as possible, it is necessary that this measure take effect immediately.” The bill, which would require a 2/3 vote in both houses for passage, is expected to receive its first policy committee hearing in late March.

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