The 2022-23 Budget: Federal Tax Conformity for Federal Business Assistance

The 2022-23 Budget: Federal Tax Conformity for Federal Business Assistance JANUARY 2022 Summary. This post provides background on • Shuttered Venue Operators Grant (SVOG). federal COVID-19 business assistance programs The SVOG program was created in December and describes the Governor’s proposal to modify 2020 to make grants to eligible theatres, state tax laws as they relate to some of these grant performing arts organizations, and many programs. This post also provides some comments other cultural institutions such as museums, to the Legislature on the Governor’s proposal. zoos, and aquariums. COVID-19 public health restrictions required many theatres and cultural Background institutions to close for extended periods during Federal Assistance for Businesses Affected by the pandemic. California venues received COVID-19. The federal government created several $2.1 billion in SVOG grants. financial assistance programs to mitigate some of • Economic Injury Disaster Loan (EIDL) the economic impacts of the COVID-19 pandemic Advance Grants. The SBA directly makes on small businesses. We describe the four most disaster loans to small businesses through its significant of these below. The programs are closed pre-existing EIDL program. Congress created to new applications as of January 2022. a new program in March 2020 to advance • Paycheck Protection Program (PPP). The $10,000 to qualified small business that applied PPP is a forgivable loan program created in for an EIDL related to the COVID-19 pandemic. March 2020. This program allowed eligible The advances are grants that do not have to be businesses to borrow funds from private repaid, regardless of whether the businesses lenders. If the businesses met certain were eventually approved for a loan. California conditions, such as maintaining specified businesses received just over $1 billion in employment and compensation levels, pandemic-related EIDL advance grants. they could then apply to the federal Small Federal Tax Laws Exempt Pandemic-Related Business Administration (SBA) through Financial Assistance. Federal personal income tax their lender to have the loans forgiven. The and corporation tax laws generally consider grants federal government fully covers the amount and forgiven loans as taxable business income. of these forgiven loans. In California, nearly However, the federal tax laws were changed to 700,000 businesses received $35.9 billion specifically exclude these pandemic-related financial in PPP loans. As of January 9, 2022, about assistance programs from taxable income. 85 percent of the PPP loans nationwide have State Conformed to Federal Treatment of been forgiven. Forgiven PPP Loans. Chapter 39 of 2020 (AB 1577, • Restaurant Revitalization Fund (RRF). The Burke) and Chapter 17 of 2021 (AB 80, Burke) RRF program was created in March 2021 to partially conformed state tax laws to the federal make grants to eligible restaurants, caterers, treatment of forgiven PPP loans and EIDL advance and bars that experienced a decline in revenue grants. Taxpayers that are publicly traded companies during the pandemic. The RRF grants replace or did not have at least a 25 percent reduction in up to $10 million in lost revenues. As of January gross receipts are excluded from this provision. 2022, California restaurants have received $5.7 billion from the RRF program. 2022-23 Budget Series 1 Current State Law Taxes RRF and SVOG Restaurants and Venues Among Most Grants. As described above, the federal government Impacted Industries. The taxpayers that would created the RRF and SVOG grant programs after benefit from the Governor’s proposal operate in it created the PPP and EIDL advance programs. parts of the economy that were among the most Current state tax laws include grants from these severely impacted by the pandemic. For example, programs as taxable income. while total consumer spending in California declined by 4 percent in 2020, spending at restaurants Governor’s Proposal declined by 18 percent and spending at theatres Conform to Federal Tax Treatment of Federal and museums declined by 60 percent. Economic Relief. The Governor’s budget proposes Fiscal Effects of Conformity Have Significant to exempt the RRF and SVOG grants from state Uncertainty. While we find the administration’s taxation by conforming the state tax laws to estimate of the cost of this proposal to be federal law. The administration estimates that this reasonable, there are a number of important change would reduce state tax revenues by about uncertainties. In general, data limitations prevent $500 million over several years. a precise estimate of the revenue losses from conformity. In addition, estimating in which years LAO Comments the revenue losses would occur is difficult. This is Proposal Consistent With Previous Legislative because most of the businesses that would benefit Action. Assembly Bill 80 partially conformed state from conforming to the federal tax treatment of law with federal tax treatment of other federal these grants have operating losses and will not owe pandemic-related economic relief programs. taxes this year, or perhaps for several years. Conforming to the federal tax treatment of the SVOG and RRF grants would be consistent with that previous action. 2022-23 Budget Series 2 2022-23 Budget Series 3 LAO PUBLICATIONS This post was prepared by Brian Weatherford, and reviewed by Brian Uhler and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2022-23 Budget Series 4