California PPP Loan Partial Conformity
By Stephen Cho, Supervisor, Tax & Business Services
On April 29, 2021, California Governor Gavin Newsom signed Assembly Bill 80 (“AB 80”) into law. AB 80 generally conforms California law to federal law regarding the exclusions from taxable income for forgiven Paycheck Protection Program (“PPP”) loans and Economic Injury Disaster Loan (“EIDL”) advance grants and the allowance of deductions for expenses paid with forgiven PPP loan funds and EIDL advance grants.
One major exception to federal conformity is that taxpayers who did not experience at least a 25% reduction in gross receipts will be excluded from deducting expenses paid with forgiven PPP loans. Generally, in order to meet the 25% reduction in gross receipts test, taxpayers may compare annual gross receipts in 2020 with annual gross receipts in 2019 or gross receipts in any calendar quarter of 2020 with the same quarter of 2019. This requirement is the same for the Second Draw PPP Loan eligibility. This does not apply to EIDL advance grants, so taxpayers may fully deduct expenses paid with those funds without meeting the 25% reduction in gross receipts test.
Public companies are also ineligible to deduct expenses paid with forgiven PPP loan proceeds.
AB 80 retroactively applies to taxable years beginning on or after January 1, 2019, so that fiscal year filers may benefit from the bill. Conformity only applies to PPP loans and EIDL advance grants. SBA subsidies, Shuttered Venue Operator Grants, and Restaurant Revitalization Grants are still subject to California tax, but the expenses paid with those funds are fully deductible for California purposes.
For more information regarding how state tax requirements may affect your business, please contact your Marcum State and Local Tax professional.
