California Gives Businesses
a Tax Break on
Forgiven PPP Loans
Governor Gavin Newsom has signed into law AB 80 which mostly conforms to the federal handling of PPP loans and EIDL advance grants under the CARES Act and the Consolidated Appropriations Act of 2021.
The exception to the federal treatment is that in order to deduct the expenses paid for with PPP loan funds that were or will be forgiven, businesses must demonstrate a 25% reduction in gross receipts in any 2020 calendar quarter as compared to the comparable 2019 calendar quarter.
If the business took a PPP loan after Jan. 1, 2021, the business may include the fourth quarter of 2020 to compare revenue loss.
The 25% gross receipts reduction threshold qualification is also applicable for the second draw PPP loans.
If the taxpayer does not meet this gross receipts reduction level, the expenses cannot be deducted on the California return even though the federal rules allow expenses to be deducted regardless of the where there was a reduction in gross receipts.
Other key points of measure AB 80 include:
- The conforming to federal rules apply retroactively to taxable years beginning on or after January 1, 2019
- The 25% gross receipts reduction does not apply to the EIDL advance grants which means taxpayers may exclude the EIDL grants and can fully deduct these expenses even if they do not meet the gross receipts reduction level
- AB 80 conformity is only applicable to the exclusion from income for PPP loan forgiveness and EIDL advance grants. AB 80 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
State officials said the tax breaks will apply to up to 85% of the more than 1 million California businesses that received a combined $97 billion in federal loans, or an average of about $96,700 each. The bill is estimated to cost in the range of $4.4 billion to $6.8 billion with the final cost dependent on the percentage of PPP loans that are forgiven.
The full text of AB 80 can be found here:
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