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During the last year, California businesses have received billions of dollars in COVID-19 relief, so they could keep their doors open amid multiple state shutdowns and a swift economic downturn. However, now Gov. Gavin Newsom is concerned California businesses may have to pay state taxes on the federal relief funds they received.
The U.S. government made legal changes so businesses won’t pay federal taxes on the COVID-19 relief they received. However, California has delayed offering state tax relief on these funds. The reason for the delay is a provision in the latest U.S. coronavirus relief bill. It states that California can’t use relief money to cut taxes. Newsom is concerned that the U.S. Treasury will view California not taxing businesses on federal relief funds as a tax cut. If that’s the case, Newsom is worried that the federal government could withhold additional federal relief money. As of now, California is expecting $26 billion more in federal COVID-19 relief funds.
Last fall, California lawmakers passed a law that the first round of federal aid for businesses was exempt from state taxes. Then, in December, the U.S. Congress passed a law to send businesses more aid. Before California lawmakers could give businesses a state tax break on those funds, Congress passed another $1.9 trillion in aid, this time banning states from using relief money to pay for tax cuts.
Now California is seeking guidance from federal officials. Will they consider not requiring businesses to pay state taxes on relief funds a tax cut? Some states, like Ohio, have sued the federal government over this state tax cut limitation.
In the meantime, some California business owners are frustrated by the delay. Some have already paid their taxes to meet a March deadline. The initial hope from California lawmakers was that businesses that received grants from the Paycheck Protection Program could deduct up to $150,000 of those funds from their state taxes.
Now, that additional tax relief is in limbo, making it more difficult for businesses that planned on using those funds to ramp up their operations or pay delinquent bills.