California Tax Treatment of Ppp Loan Forgiveness

An “ineligible corporation” is a corporation that is publicly traded or does not meet the criterion of a 25% reduction in gross sales. If the loan was obtained under one of these programs and the taxpayer cannot prove a reduction in gross income of 25% or more, the taxpayer is considered an “ineligible entity” and cannot deduct expenses paid with the loan. If your loan is for an EIDL grant or a targeted EIDL advance, you do not need to meet these requirements to deduct expenses. A.B. 80 applies retroactively to fiscal years beginning on or after January 1, 2019, so that tax filers for the year can benefit from the invoice. Amended tax returns should be considered for taxpayers who have already filed California tax returns that do not allow the deduction, but are eligible to deduct expenses paid with the proceeds of issued PPP loans. States differ in their compliance with the federal exclusion of the proceeds of PPP loans granted and/or the deduction of expenses paid with this product. Taxpayers who have questions about California`s or a state`s position should contact our state and local tax professionals at RubinBrown. We are available to provide a detailed explanation of the PPP credit remittance processing in each state. The treatment of tax deductions, base, and attributes for income tax purposes in California may differ from the federal tax treatment.

For federal qualifications related to income tax processing, see Coronavirus Tax Reduction for Tax-Exempt Businesses and Entities. AB 80 states that the benefits of the ppp loan forgiveness exclusion and expense deductibility can be applied to taxation years beginning on or after January 1, 2019. This retroactive legislation is intended to ensure that all candidates for the fiscal year are subject to legislative changes. Therefore, to the extent that loans were granted during California`s non-compliance period, they would be processed in accordance with the general rules of Section 108 of the Internal Revenue Code (IRC) (i.e. Non-PPP specific). That is, income is generally not excluded unless the requirements of section 108 of the IRC are met; and deductions are generally permitted, provided other conditions are met. (California generally complies with the amendment to Section 108 of the IRC under Sections 17131, 17134, 17144, 17144.5, 17144.6, 17144.7, 17144.8, 24301, and 24307.) In response to questions from taxpayers, the FTB also clarified that income from issued PPP loans should be excluded from California LLC`s fee calculation. The fee is calculated on the basis of total revenue from all sources plus the cost of goods sold.

Income from PPP loans granted is excluded from gross income and therefore also excluded from total income from all sources. For California`s purposes, PPP loans granted are excluded from gross income. However, this does not apply to PPP loans granted under the PPPEA. Yes, for taxation years starting with 1. As of January 2019, gross revenue does not include amounts of covered loans under the CARES Act, the Paycheque Protection Program and the Healthcare Improvement Act, the Paycheque Protection Program Flexibility Act, 2020 and the Consolidated Appropriation Act (CAA), 2021. Under the bill, PPP loans granted by businesses received from the federal government during the pandemic will not be counted as taxable income, and these businesses can also deduct the cost of expenses for which these loans were paid. Assembly member Autumn Burke (D-Inglewood) introduced AB 80 in February to offer tax breaks to California businesses by allowing entrepreneurs whose PPP loans are issued to deduct eligible expenses paid with the loan funds from their state income taxes if they can demonstrate a reduction in gross revenue of at least 25% for at least one quarter due to the pandemic. The Law on the Extension of the Pay Cheque Protection Program (PPPEA) (Public Law 117-6) came into force on March 30, 2021, extending the period covered by the PPP from March 31, 2021 to June 30, 2021. California law does not comply with this extension and does not allow income exclusion for PPP loans granted after March 31, 2021. If either of these two requirements is not met, certain deductions must be reduced when filing California tax or franchise returns. Guidelines on the California Franchise Tax Board (“FTB”) website state that taxpayers must base the amount of the discount on records indicating what expenses were paid with the funds granted.

In general, the information provided to lenders to obtain a loan waiver would be sufficient to document the exact amount of the reduced deduction, but the FTB asks taxpayers to use the most accurate information available in this provision. Practice owners can find details about PPP loan forgiveness on the Small Business Administration website. AB 80 extends California`s September 9, 2020 amendment under AB 1577. Ab 1577 excludes from gross income for government income tax purposes any loan amount granted that relates to PPPs for taxation years beginning on or after January 1, 2020. However, following the passage of AB 1577, Congress passed the Consolidated Appropriations Act 2021 on December 27, 2020. This article contains information about California Assembly Bill 80 (the “Bill”), which aligns California tax law with the federal PPP Loan Tax Act. No, not at the moment. AB 1577 and AB 80 only offer a gross income exclusion for covered loan amounts granted under the CARES Act, the Paycheque Protection Program and the Healthcare Improvement Act, the Paycheque Protection Program Flexibility Act, 2020, CAA, EIDL grants under the CARES Act or targeted EIDL advances under the CAA. No. Since EIDL grants and EIDL targeted advances do not include a ban on “ineligible businesses”, taxpayers do not have to meet the 25% reduction in gross revenue criterion to deduct expenses paid through these specific loans or advances.

On April 29, 2021, AB 80 (Consolidated Appropriations Act (CAA) Conformity) was enacted, which allowed the exclusion of additional income for second-draw PPP loans and economic disaster loan (EidL) advances and the deduction of expenses, base adjustments and tax allowance adjustments for eligible taxpayers for taxation years beginning on or after January 1. 2019. On September 9, 2020, The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act Accordancey was enacted, which allowed income exclusion for taxation years beginning January 1, 2020 for PPP loans issued. The bill amends the definition of “gross income” in the California Income Tax Act and the California Corporate Tax Act to comply with federal tax law. Specifically, the Bill excludes from “gross income” any PPP loan amount granted under the Federal CARES Act, as well as all funds received from an Economic Disaster Loan (“LMIA”), each for taxation years beginning on or after January 1, 2019. The Bill also allows eligible taxpayers to deduct expenses paid with issued PPP loans and LTSI funds for taxation years beginning On or after January 1, 2019. AB 80 generally prohibits “ineligible businesses” from deducting expenses paid with loans from loans from the Initial Paycheck Protection Program, loans from the Subsequent Paycheck Protection Program, and loans from the U.S. Treasury Program Management Authority. Originally, the bill would have capped tax deductions at $150,000, excluding many businesses in sectors such as the restaurant industry, fitness and recreation, and health services, which in some cases received millions of dollars in loans. California`s final position excludes from the gross income of issued PPP loans and allows the full deduction of expenses paid with funds from issued PPP loans if the following conditions are met: If you choose a choice under Rev. Proc. 2021-2020 for federal purposes, we will follow federal processing for California tax purposes.

AB 80 excludes from gross income PPP loans granted for government purposes in accordance with federal law. It also allows deductions for expenses paid with issued PPP loan funds, but it excludes two types of businesses from deducting expenses paid with PPP loans: With permission to proceed with the bill, the legislature amended it to extend the tax relief to more businesses that received PPP loans. California Governor Gavin Newsom signed Assembly Bill 80 (AB 80) on April 29, 2021. The law provides for partial compliance with the Small Business Administration`s (SBA) Federal Payroll Cheque Protection Program (PPP) in terms of credit remittance and expense deductibility, with a few exceptions. However, certain provisions of the bill, including deductions for expenses paid with PPP loans granted, do not apply to “ineligible businesses”. A taxpayer is an “ineligible entity” if (i) it is a publicly traded corporation or (ii) does not meet the requirements of federal law for the reduction of gross revenues (i.e., A 25% reduction in gross revenues in a calendar quarter in 2020 compared to the same calendar quarter in 2019). The requirement to reduce gross income does not apply to EIDL beneficiaries for income exclusions or deductions. Follow our normal modified return procedures to claim a deduction or adjustment related to PPP loans. Federal and state laws do not impose taxes on companies on PPP loans that were issued after the funds were properly used to prevent layoffs and pay for other eligible expenses. The Ministry of Finance announced on the 7th. April announced that adjusting state taxes to federal PPP deductions is allowed under the American Rescue Plan Act.

With the passage of AB 80, California allows taxpayers to deduct otherwise non-deductible business expenses such as salaries, even if those expenses were paid with allocated PPP funds, with a few exceptions. .