The Treasury clarifies the tax status of PPPs. Will California Now Make COVID-19 Loans Tax Free?


With nearly a month before state and federal income taxes were filed, the US Treasury Department has clarified the ability of states to consider loans forgivable from small paycheck protection programs. businesses as tax exempt.

For Californians, the announcement has far-reaching consequences.

When the CARES Act was passed last spring, Congress and the Internal Revenue Service ruled that paycheck protection program repayable loans were not subject to income tax.

States were left out, however, when the 2021 US bailout was adopted.

The Biden-led coronavirus relief plan included a provision stating that funding (including paycheck protection funds) could “not be used to offset a reduction in net tax revenue resulting from certain legislative changes.”

Or, in plain language, states couldn’t use the vast coronavirus relief funds to cover the cost of another tax cut.

This left states – like California – in doubt as to whether they could adjust their own tax codes to reflect the federal government regarding the tax-exempt status of PPP loans, as this could be seen as a kind of tax cut.

On Thursday, the Treasury Department confirmed that states can adjust their tax codes to comply with federal income tax law.

For Californians, announcement by federal tax makers paves the way for passage of California Senate Bill 265 – led by Sen. Andreas Borgeas (R – Fresno) – through the legislature and onto Governor Gavin’s office Newsom.

Borgeas and Republican Senate Leader Scott Wilk (R – Santa Clarita) celebrated the news and pushed lawmakers to act to make PPP loans tax-exempt.

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