Update- California PPP Tax Conformity
Although it is no secret that California has yet to release information on whether or not it will partially conform state tax code to the current federal tax rules regarding forgiven Paycheck Protection Program (PPP) loans, CalCPA has shared why the delay is taking place.
California’s governor and legislation were ready to legislatively conform to federal PPP rulings; however, this was deferred as additional amendments to expand relief were considered. As the amendments were being drafted, the American Rescue Plan Act (ARPA) of 2021 was signed into law. The ARPA has a provision that puts constraints on how states may use federal relief aid.
The main constraint prohibits state relief dollars being used to indirectly or directly offset a net tax reduction. This has a wide range of consequences for various state tax decisions beyond rate reductions, which includes federal tax conformity that results in a net tax reduction, like the PPP tax rules.
The California Dept. of Finance sent a letter to the U.S. Treasury on Friday, March 19, urging for guidance on the distribution of ARPA state relief funds and the interpretation for the provision that limits associated tax policies. California is unlikely to act on several tax related policies (including PPP conformity) until the Treasury provides guidance.
CalCPA has been pushing for immediate action regarding PPP conformity communicating to policy leaders that California small businesses that received a PPP loan could face significant and unexpected tax consequences without legislative action.
We are constantly on the watch for California’s move on many tax decisions, especially towards PPP loans. We will continue to provide updates as information is made available.