On April 29, 2021, California Governor Gavin Newsom signed California Assembly Bill 80 (“A.B. 80”), which largely conforms to federal rules regarding deductibility of expenses paid with funds from forgiven Paycheck Protection Program (“PPP”) loans.
California’s final position excludes forgiven PPP loan receipts from gross income and fully allows the deduction of expenses paid with funds from forgiven PPP loans if the following requirements are met:
- The taxpayer is not a publicly traded company, and
- The taxpayer reported a decrease of at least 25% in gross receipts in 2020 as compared with 2019. The comparison may be made based on annual gross receipts, or gross receipts in any calendar quarter of 2020 as compared with the same quarter of 2019. (This requirement is the same as that for the Second Draw PPP Loan eligibility.)
When either of these two requirements are not met, certain deductions must be reduced when filing California income or franchise tax returns. Guidance from the California Franchise Tax Board’s (“FTB’s”) website indicates taxpayers should base the reduction amount on records indicating which expenses were paid with the forgiven funds. Generally, the information submitted to lenders to obtain loan forgiveness would be sufficient to document the correct amount of the reduced deduction, but the FTB instructs taxpayers to use the most accurate information available in making this determination.
In response to taxpayer questions, the FTB has also clarified that forgiven PPP loan receipts should be excluded from the computation of California’s LLC fee. The fee is calculated based on total income from all sources, plus costs of goods sold. Forgiven PPP loan receipts are excluded from gross income, thus also excluded from the total income from all sources.
A.B. 80 retroactively applies to taxable years beginning on or after January 1, 2019, so that fiscal year filers may benefit from the bill. Amended returns should be considered for taxpayers who already filed California returns disallowing the deduction but are eligible to deduct expenses paid with proceeds from forgiven PPP loans.
States vary in their conformity to the Federal exclusion of forgiven PPP loan proceeds and/or deduction of expenses paid with those proceeds. Taxpayers with questions about California’s position or that of any state should reach out to our State and Local Tax professionals at RubinBrown. We are available to provide a detailed explanation of PPP loan forgiveness treatment in any state.
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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