Newsom signs tax break on some pandemic loans

Many California businesses won’t have to pay state taxes on their federal pandemic loans under a bill Gov. Gavin Newsom signed into law Thursday.

The measure, Assembly Bill 80, aims to help businesses that received loans through the Paycheck Protection Program, which the federal government established to help businesses survive the COVID-19 pandemic shutdown.

Newsom’s office described the law as “providing a $6.2 billion tax cut” for small businesses hurt by the coronavirus pandemic.

“This state is poised for a major comeback,” Newsom said just before signing the bill into law at a sushi restaurant in San Fernando. “We’re experiencing that comeback because of the small business leaders that persevered.”

Under the program, businesses can have their loans forgiven, meaning they don’t have to pay the money back, if they use the money on qualifying expenses like employee wages, rent and utilities.

Under AB 80, businesses whose loans are forgiven won’t have to pay taxes on that money and can deduct qualifying expenses if they can show at least a 25% reduction in profits for at least one quarter as a result of the pandemic. The bill also applies to Economic Injury Disaster Loan advance grants, another federal aid program that targeted business in low-income communities.

Publicly traded companies are excluded from the bill.

Newsom and lawmakers had tried to pass this policy earlier this year alongside other pandemic aid bills, but needed to wait for assurance from the federal government that it would not violate any provisions of the most recent federal stimulus package.

Once the Biden administration gave the green light, lawmakers stressed the need to pass the measure quickly to give clarity to businesses waiting to pay their 2020 taxes.

“At a time when California businesses are struggling, it is imperative that state leaders do everything within our power to help,” Assemblywoman Autumn Burke, the Marina Del Rey Democrat who authored the bill, said Monday during a committee hearing. “AB 80 provides critical, timely and significant tax relief to those businesses that need it most.”

The measure cleared both chambers of the Legislature unanimously, although some lawmakers and industry groups raised concern that the 25% loss requirement will exclude some businesses still reeling from the pandemic.

Anthony Samson, who represents the California New Car Dealers Association, noted that the federal government only introduced the 25% loss rule for its second round of grants, so some recipients of the first round won’t meet that standard.