Like the rest of our nation, many small businesses in San Diego County have struggled to pay bills, keep their workers employed, and provide for their customers during the COVID-19 pandemic. Because of the government-mandated shutdown, Congress created the Paycheck Protection Program last year to offer forgivable loans to businesses.
PPP provides a direct incentive for small businesses to keep their workers on payroll. These loans can be used to pay wages, benefits, rent, utilities, worker protection costs related to COVID-19, and more.
I supported the PPP and urged our federal representatives to increase funding when the initial money quickly ran out due to high demand. The PPP saved many jobs and helped blunt some of the economic destruction that the COVID-19 shutdown caused.
A report issued by Yelp found that the economic crisis caused by COVID-19 has caused more than 19,000 businesses to permanently close in California. If it had not been for the bipartisan CARES Act passed in 2020, or the Consolidated Appropriations Act passed late last year that allowed for the PPP loans, many more businesses and jobs would have been lost.
While the federal government has decided that the PPP funds and related expenses would be exempt from federal taxes, current California law continues to treat them as taxable income. Without a legislative fix, small businesses will have to pay taxes on federal assistance that was meant to help them.
That is why I support Senate Bill 265 by Senator Andreas Borgeas that would make COVID-19 state and federal grants or loans fully tax deductible. SB 265 was introduced in January, but due to Congress’ enactment of another COVID-19 “stimulus” bill, the prospect of acting quickly was thrown into question. This is because the latest federal stimulus bill contains a provision that prevents states from cutting taxes, which could have prohibited the state tax deductibility of PPP loans.
Thankfully, with the May 17 tax filing deadline fast approaching, the Treasury Department has finally clarified that states like California can make PPP loan expenses tax deductible.
The proverbial ball is now back in the court of the Legislature and Gov. Gavin Newsom. They can quickly pass SB 265 if they choose to do so and I am committed to doing everything I can to put the bill up for a vote. I have no doubt that if it were voted on today, SB 265 would receive strong bipartisan support.
Unfortunately, there are discussions in Sacramento to make COVID-19 relief only partially tax deductible. The Governor and legislative Democrats previously agreed to a $150,000 cap on deductibility that would severely limit any assistance to California’s small businesses.
With California supposedly enjoying a budget “surplus,” it makes no sense to penalize small businesses for accepting federal assistance — especially since the feds have made such assistance fully tax deductible.
With legislative Republicans and small businesses sounding the alarm on the flawed cap proposal and supporting Senator Borgeas’ SB 265, there is movement towards a more favorable proposal coming from legislative Democrats and the Governor. Let us hope that is the case, or better yet, let us hope they support SB 265.
I will continue to do what I can to help San Diego County’s small businesses. For example, I led a bipartisan effort last December asking the Governor to reclassify restaurants as essential businesses and adopt the industry’s protocols that would allow them to operate safely.
Working with my colleagues, we authored bipartisan legislation to provide more than $2 billion in state grants to small businesses and nonprofits affected by COVID-19, which the Governor signed into law. This effort began last December when I co-authored Senate Bill 74, the Keep California Working Act, which ultimately led to legislative leaders agreeing to include most of the act in a budget bill.
Small businesses are the backbone of our economy. Instead of sticking them with a costly tax bill, the Legislature and Governor should approve SB 265 now.
Sen. Patricia Bates, a Republican, represents the 36th Senate District in the California Legislature, covering northern San Diego and southern Orange counties.