As reported in our earlier blog post The CARES ACT – Tax Relief, the federal CARES Act provides for forgiveness of indebtedness for eligible recipients of Paycheck Protection Program (“PPP”) loans in an amount equal to the sum of the recipient’s payroll costs, interest on mortgage obligations, rent obligations and utility payments (subject to certain conditions and limitations).  Under federal law, any amount of covered loans forgiven under the CARES Act is excluded from gross income for federal income tax purposes.

Because California only selectively conforms to the Internal Revenue Code, and as of a specific date, at the time the CARES Act was enacted the forgiveness of PPP loans would have generated taxable for California income and franchise tax purposes.  However, California has now passed Assembly Bill No. 1577, conforming to the PPP loan forgiveness rules.  A.B. 1577 added

Sections 17131.8 and 24308.6 to the California Revenue and Taxation Code, which provide that gross income does not include any covered loan amount forgiven pursuant to Section 1106 of the CARES Act, pursuant to the Paycheck Protection Program and Health Care Enhancement Act, or pursuant to the Paycheck Protection Program Flexibility Act of 2020.  A.B. 1577 also denies business expense deductions for those expenses that were paid for using forgiven loan funds, as does federal law.  The provisions are applicable to taxable years beginning on or after January 1, 2020.