Our previous articles have summarized the Paycheck Protection Program (“PPP”) created under the Federal CARES Act: CARES Act: Paycheck Protection Program Loans, CARES Act: Loan Applications, CARES Act: Loan Forgiveness Applications and Consolidated Appropriations Act: Additional Paycheck Protection Program Loans.
This post provides information regarding California Assembly Bill No. 80 (the “Bill”), which conforms California tax law to Federal tax law on PPP loans.
The Bill received bi-partisan support, passing the California Assembly with a vote of 75-0 and passed the California Senate with a vote of 37-0. Governor Newsom signed the Bill on April 29, 2021. In a press release, the Governor’s office characterized the bill as a “$6.2 billion tax cut” for small businesses.
Under the Bill, the forgiven PPP loans that businesses received from the federal government during the pandemic will not be counted as taxable income, and these businesses can also deduct the costs of expenses that those loans paid for.
The Bill amends the definition of “gross income” in the California Personal Income Tax Law and California Corporation Tax Law to conform to Federal tax law. Specifically, the Bill excludes from “gross income” any PPP loan amount forgiven under the Federal CARES Act and any funds received from an Economic Injury Disaster Loan (“EIDL”), in each case for taxable years on or after January 1, 2019. The Bill also allows eligible taxpayers to deduct expenses paid with forgiven PPP loans and EIDL funds for taxable years on or after January 1, 2019.
However, certain provisions of the Bill, including the deductions for expenses paid with forgiven PPP loans, do not apply to “ineligible entities”. A taxpayer is an “ineligible entity” if it (i) is a publicly traded company or (ii) does not meet the reduction of gross receipts requirements of Federal law (i.e. a 25% reduction in gross receipts in any calendar quarter in 2020 relative to the same calendar quarter in 2019). The gross receipts reduction requirement does not apply to EIDL recipients for income exclusions or deductions.
Although there are still several unanswered questions regarding implementation, the Bill is expected to provide much-needed financial relief to small businesses impacted by the COVID-19 pandemic.