In a taxpayer-friendly move, California will now allow certain businesses to deduct expenses that were paid for using forgiven PPP funds. On April 29, Governor Newsom signed Assembly Bill 80 (AB 80) into law. Effective retroactively for post-2018 tax years, California generally conforms to the federal tax treatment of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loan (EIDL) advance grants under the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Consolidated Appropriations Act (CAA) of 2021. However, for California purposes, PPP loan recipients must meet certain gross receipts requirements in order to claim deductions for amounts paid with their forgiven PPP debt.

WHAT DOES THIS BILL DO?

AB 80 will exclude forgiven PPP loans and EIDL advance grants [1] from gross income for state purposes, in conformity with federal law. This bill also conforms state law to federal law to allow deductions for the expenses incurred with the forgiven PPP loan funds and EIDL advance grants. As a result, a qualifying taxpayer may deduct the expenses (incurred with forgiven PPP funds) on their California income tax return. This changes previous California law that disallowed expenses that were paid for using forgiven PPP loan funds.

Exceptions and Exclusions:

• Certain entities are not eligible for tax favorable treatment enacted by AB 80, including:
  • Publicly-traded companies [2]
  • Entities that do not meet the 25 percent gross receipt reduction eligibility test[3]
    • The 25-percent gross receipts limitation does not apply to the EIDL advance grants, so the taxpayers may exclude the EIDL grants and may fully deduct these expenses even if they do not meet the threshold reduction
• AB 80 conformity does not apply to SBA subsidies paid on SBA loans, Shuttered Venue Operator Grants or Restaurant Revitalization Grants
  • These subsidies/grants are subject to California tax, but expenses are fully deductible on the California return

Therefore, in order to qualify to take the deduction for PPP expenses, taxpayers must have at least a 25-percent reduction in gross receipts in any calendar quarter of 2020 in comparison to the same quarter of 2019. For entities not in business during 2019 but in operation on Feb. 15, 2020, the taxpayer must demonstrate that gross receipts in the second, third or fourth quarter of 2020 were at least 25-percent lower than the first quarter of 2020.

WHEN WILL THIS BILL BE EFFECTIVE?

AB 80 takes effect immediately as an urgency statue. It applies retroactively for tax years beginning on or after Jan. 1, 2019.

GHJ’S OBSERVATION: Taxpayers with fiscal tax years should review their gross receipts and evaluate whether they meet AB 80 requirements. Certain taxpayers may be required to amend their tax returns if the income or expenses would change as a result of AB 80.

GHJ’S OBSERVATION: Taxpayers who have yet to file their ret urns or receive PPP loan forgiveness should review the 25-percent gross receipt reduction eligibility test in preparation of their California return and estimated tax liability. Notably, expenses determined to be deductible under AB 80 should be qualified expenses for other California purposes, such as wages used to calculate the California Research and Development credit.

GHJ’S OBSERVATION: GHJ expects further guidance from the California Franchise Tax Board in the coming weeks regarding implementation and documentation requirements to support PPP and EIDL expense deductions.

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If you need assistance in understanding the new rules and determining whether you are qualifying taxpayer that would benefit from AB 80, reach out to GHJ’s tax advisors in order to review your current tax position.
 

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[1] “Advance grant amount” means an emergency Economic Injury Disaster Loan grant pursuant to Section 1110(e) of the Coronavirus Aid, Relief, and Economic Security Act (Public Law 116-136), or a targeted Economic Injury Disaster Loan advance pursuant to Section 331 of Division N of the Consolidated Appropriations Act, 2021 (Public Law 116-260).

[2] “Publicly-traded company” means a publicly traded entity as described in Section 342 of Division N of the Consolidated Appropriations Act, 2021 (Public Law 116-260).

[3] Requirements specific in Section 636(a)(37)(A)(iv)(bb) of Title 15 of the United States Code, as added by Section 311 of Division N of the Consolidated Appropriations Act, 2021 (Public Law 116-260).