Will Federal Paycheck Protection Program Tax Conformity Ever Happen in California?

On February 17, Assembly Bill 80 was gutted and amended to be a budget trailer bill as part of the proposed “early action” package and Assemblywoman Autumn Burke (D-Marina del Rey) was made the author of the bill. AB 80 would amend Sections 17131.8 and 24308.6 of the Revenue and Taxation Code. In addition, the bill is an urgency measure and would require a 2/3 vote of each house of the Legislature.

The bill is intended to conform state law to the federal tax code related to what constitutes gross income for the inclusion of the federal Consolidated Appropriations Act, 2021 for tax years on or after January 1, 2019 (note that existing law provides 2020). It would specify that gross income does not include any advance grant amount issued pursuant to Section 1110(e) of the Coronavirus Aid, Relief, and Economic Security Act (Public Law 116-136), or pursuant to Section 331 of the Consolidated Appropriations Act, 2021 (Public Law 116-260). The bill would also create several exceptions to conformity with the CAA, 2021. The bill would conform to federal law under both the Personal Income Tax and Corporation Tax Laws in California.

The purpose of AB 80 is to provide financial assistance to small businesses operating in the state that have been harmed economically by the COVID-19 pandemic and to conform to federal tax law for ease of administration and to preclude the taxation of federal grant monies and PPP loans. As part of the planned “early action” budget package, this bill has been expected to become law before the end of February.

Unfortunately, due to the recent enactment of the federal COVID bill, the prospects for enactment of AB 80 have been thrown into question. The federal law contains a provision that is intended to prevent states from cutting taxes. California lawmakers are awaiting guidance from the federal Treasury Department to determine whether they can proceed with AB 80.

The following is the language from the federal tax law that is holding up the passage of AB 80.

‘‘(A) IN GENERAL.—A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

Some observers believe this language will preclude enactment of AB 80. California officials hope that the federal government will provide written guidance that this PPP tax conformity bill would not fall within the language of the above provision. In the meantime, up to a dozen states’ attorneys general are planning to file a lawsuit against the federal government arguing that the above provision infringes on states’ rights. Taxpayers and practitioners will have to wait for final word from either the U.S. Treasury or the federal courts.