California Partially Conforms to Federal PPP Loan Forgiveness, Expense Deductions

California Governor Gavin Newsom signed Assembly Bill 80 (AB 80) into law on April 29, 2021. The law provides partial conformity to the Small Business Administration’s (SBA) federal Paycheck Protection Program (PPP) as it relates to loan forgiveness and expense deductibility, with some exceptions.

AB 80 is widely seen as a significant improvement over prior versions of the legislation. It makes PPP-related COVID-19 relief tax free for many California businesses and, in large part, lets them conform with federal provisions.

California Conformity with Federal Laws

AB 80 expands California’s September 9, 2020, law change under AB 1577. AB 1577 excluded from gross income, for state income tax purposes, any forgiven loan amount that’s related to PPP for taxable years beginning on or after January 1, 2020. However, after AB 1577 was passed, Congress passed the Consolidated Appropriations Act, 2021 on December 27, 2020.

The Consolidated Appropriations Act, 2021 reversed prior federal law by allowing taxpayers to deduct expenses paid with forgiven funds. These federal changes pulled California out of conformity with a major portion of the federal law.

With AB 80’s passage, California allows taxpayers to deduct otherwise nondeductible business expenses, such as wages, even if those expenses were paid with forgiven funds from PPP, with certain exceptions.

Exceptions Under AB 80

AB 80 excludes forgiven PPP loans from gross income for state purposes, in conformity with federal law. It also allows deductions for expenses paid using forgiven PPP loan funds, but it excludes two types of entities from deducting expenses paid with forgiven PPP loans:

  1. Entities that are publicly traded companies
  2. Taxpayers that didn’t experience at least a 25% reduction in gross receipts, which is generally measured on a quarterly or yearly basis—comparing 2019 to 2020—and is specified by federal law

Retroactive Application

AB 80 states that the benefits of PPP loan forgiveness exclusion and expense deductibility can be applied to tax years beginning on or after January 1, 2019. This retroactive legislation is intended to ensure that all fiscal-year filers will be subject to the legislative changes.

We’re Here to Help

While AB 80 provides important financial opportunities to many California taxpayers, it’s important to make sure your business is correctly applying the changes. To learn more about this legislation and how it may impact you or your business, contact your Moss Adams professional.

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