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PPP loans are not taxable income under CDA-supported bill signed by governor

Governor also signs bill authorizing a hiring tax credit program for California's qualified small businesses

September 15, 2020 4202

Quick Summary:

AB 1577 protects PPP loan recipients from potentially having to pay thousands of dollars in unexpected California state income tax on their forgiven PPP loans, and under SB 1447, qualified small-business employers who hire or rehire full-time-equivalent employees between July 1 and Nov. 30 are eligible for a $1,000 state income or sales tax credit for each hired employee to a maximum credit of $100,000. 

Two bills that will assist dental practice owners impacted by the pandemic became law last week with Gov. Gavin Newsom’s signature. 

AB 1577 by Assemblymember Autumn Burke (D-Inglewood) conforms state law to federal law by amending the Revenue and Taxation Code to exclude from gross income any Paycheck Protection Program loan funds that were forgiven through the federal Coronavirus Aid, Relief and Economic Security Act and subsequent amendments in the Paycheck Protection Program and Health Care Enhancement Act of 2020.

The CARES Act specified that PPP loans would not be considered taxable income for the purposes of federal income taxes, but the act does not dictate whether states would consider the loans income for state taxes. The new law will protect PPP loan recipients from having to pay potentially thousands of dollars in unexpected state income tax on their forgiven PPP loans. 

The gross income exclusion applies to taxable years beginning Jan. 1, 2020.

PPP loans may be forgiven, according to the CARES Act and its amendments, if the loan recipient spends the funds on qualifying expenses within 24 weeks of loan distribution or by Dec. 31, whichever is sooner. Qualifying expenses include payroll costs, interest on mortgage obligations, rent and utility payments ― but 60% of the loan must be spent on payroll costs.

If a business owner received a PPP loan but does not meet the criteria to have the loan forgiven, they may be able to deduct business expenses that were spent with the proceeds of the loans. CDA recommends practice owners consult their own accounting or tax advisor for specific guidance.

$100 million hiring tax credit program for small businesses

Qualified small-business employers who hire or rehire full-time-equivalent employees between July 1 and Nov. 30, 2020, will be eligible for up to $1,000 in tax credits during the current tax year only.

Under SB 1447 by Sens. Steven Bradford (D-Gardena) and Anna Caballero (D-Salinas) and Asm. Sabrina Cervantes (D-Corona), the employer may receive the $1,000 state income or sales tax credit for each hired employee to a maximum credit of $100,000. 

A qualifying small business has 100 or fewer employees and must demonstrate that it suffered a 50% decrease in gross receipts by comparing receipts between April 1 and June 30, 2020, with the gross receipts from April 1 to June 30, 2019. 

Read more about the bills. Learn more about economic relief options for dental practices and other small businesses at cda.org.