On Wednesday, September 9th California Governor Gavin Newsom signed three bills, two of which are intended to bolster small businesses throughout the COVID-19 pandemic.
Small businesses in California are essential to economic growth, employing almost half of the private sector workers in the state. These bills will provide much-needed support to struggling west-coast companies.
Here’s how the two small business bills break down—and what they mean:
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Bill authorizes forgiven PPP proceeds as tax-free in California
Bill AB 1577 addresses forgiven PPP loans; this law allows small businesses to exclude forgiven PPP proceeds from state taxable income. This means any PPP loan dollars (that have been forgiven) will not be taxed by the federal government or by the state of California, making this money totally tax-exempt for California business owners. This bill will go into effect on the first of January.
The possible downside: Expenses paid with PPP funds cannot be used as tax deductions.
California business who hire may receive tax credits
Known as the Main Street Hiring Credit, Bill AB 1447 authorizes a $100 million hiring tax credit program for small businesses. This incentivizes small businesses to restore jobs by offering a tax credit to certain Cali companies.
Businesses that had under 101 employees at the end of 2019 but then saw a 50% (or larger) decrease in gross sales in the second quarter of 2020 (compared to the same period in 2019) will get a tax credit of $1000 for each qualified employee, or full time equivalent employee, paid between July 1, 2020 and November 30, 2020 (up to $100,000). Businesses can use this credit for certain taxes within five years—the bill goes into effect on January 1st and the tax credit will expire on June 1, 2026.
The possible downside: Critics are concerned this benefit won’t reach businesses that need it most; beyond the requirement that eligible businesses have lost at least 50% of gross revenues, there is no other way to assess need.
Also, many are concerned that capping the credit at $100 million—while allowing a single business to receive up to $100,000 in credits—will benefit far too few businesses.
Once these bills go into effect on the first of the year, their effects will be clearer.