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McCarthy, LaMalfa Lead Letter to Newsom Urging Deduction Cap Removal for PPP

Apr 15, 2021
Press Release


Congressman Kevin McCarthy and Congressman Doug LaMalfa (CA-01) led California House Republicans in a letter to Governor Newsom urging the State to pass tax relief that would allow business owners in California to deduct all business-related expenses paid for with forgiven Paycheck Protection Program (PPP) loan funding on their state taxes, with no deduction cap. This would conform to the provisions established in Public Law 116-260 with regard to federal taxes.
 
As it currently stands, California business owners may not deduct any business expenses paid for with forgiven PPP loan funding on their state taxes. California is one of less than ten states that has not enacted legislation to provide small business owners with the ability to deduct this PPP loan funding when appropriately spent on covered business expenses – such as employee paychecks and other overhead costs – and subsequently forgiven, on their California state taxes.
 
This follows a letter that the California House GOP delegation sent to Speaker Pelosi less than a month ago urging her to immediately take up legislation that would repeal a burdensome provision (Section 9901) of the so-called “American Rescue Plan” (P.L. 117-2) which imposes a ban on tax-reducing actions by states as a condition of receiving coronavirus relief funding provided by P.L. 117-2. California’s inaction and inability to provide state tax deductibility relief prior to the enactment of P.L. 117-2 has created an unfair disadvantage for California’s hardest-hit small businesses.
 
Washington Democrats failed small business owners in California when they refused to work with their Republican colleagues to develop better, bipartisan coronavirus relief legislation that did not include a constitutionally-questionable tax cut ban. Sacramento Democrats failed small business owners in California when they refused to quickly come to an agreement on state tax deductibility for business expenses covered by forgiven PPP loan funding prior to the enactment of P.L. 117-2. This must change.
 
Highlights of the letter are below or you can read it in its entirety here:
 
“Congress has made it clear that its intent in creating the PPP was to provide hard-hit small businesses with the relief that they needed to weather the coronavirus pandemic. This included allowing PPP loans to be forgiven, provided loan recipients meet certain requirements. Recognizing that small businesses must utilize PPP loan funding for standard business expenses – such as payroll and other overhead costs – in order to meet such forgiveness requirements, Congress enacted the Consolidated Appropriations Act of 2021 (Public Law 116-260), which included, among other things, a provision making business expenses paid for with forgiven PPP loan funding deductible for Federal tax purposes...
 
“Upon Public Law 116-260 being signed into law, many states acted quickly to come into conformity with Federal tax treatment of business expenses paid for with forgiven PPP loan funding – allowing small business owners to deduct such expenses from their state taxes as they would have prior to the coronavirus pandemic and the subsequent creation of the Paycheck Protection Program. Unfortunately, California was not among these states, leaving small businesses – our constituents – wondering how to handle the impending tax season and quarterly payments of certain state taxes. Given that nearly every other state had enacted legislation to allow small business owners to deduct expenses paid with forgiven PPP loan funding prior to the enactment of the American Rescue Plan Act (Public Law 117-2), it is clear that California had ample time to reach an agreement on state tax treatment of expenses covered with PPP funding for businesses in our state, prior to enactment of this law.
 
“Both Sacramento Democrats and Washington Democrats failed small business owners in our state. Squabbling by Sacramento Democrats over proposals allowing business owners to deduct up to a certain amount in business-related expenses paid for with forgiven PPP loan funding on their state taxes delayed swift passage of this vital state tax change prior to enactment of Public Law 117-2. Congressional Democrats, led by Speaker Pelosi, a fellow Californian, rammed the partisan America Rescue Plan Act (Public Law 117-2) through the House and Senate with a state tax cut ban (Section 9901). We are disappointed Congressional Democrats refused to work with their Republican colleagues to develop better, bipartisan coronavirus relief legislation that did not include this constitutionally-questionable tax cut ban, and could have entirely avoided this entire situation...
 
“California small business owners and entrepreneurs need state tax relief urgently, and it is our hope that you will oppose partial relief, and instead act swiftly toward enactment of comprehensive relief legislation that would provide full state tax deductibility for business owners that used PPP loan funding to pay for covered business expenses...”