California PPP Loan Conformity (sort of...)
After months of anticipation from our state legislature in Sacramento, Governor Newsom officially signed Assembly Bill No. 80 (AB 80) into law on April 29, 2021. This law answers the questions on every business taxpayer’s mind who took a Payroll Protection Program (PPP) Loan under the CARES Act in March 2020, or with the Consolidated Appropriations Act (CAA) this past December. As we reported in a previous blog, the US Congress passed with the CAA that the expenses that are paid with any PPP Loan funds would still be deductible even after the loan has been forgiven. With AB 80, California is coming into conformity with this…sort of. Why sort of? Well because they are not completely coming into conformity. Let me explain.
What does the bill say? In general, the bill conforms California’s tax treatment for expenses paid with forgiven loans under the CARES Act or the CAA for tax years beginning after January 1, 2019. The exceptions are for publicly traded companies and “ineligible entities.”
Ineligible Entity Defined. An entity is ineligible to deduct expenses from PPP and PPP2 funds if it does not have a 25% or greater reduction in gross receipts in any calendar quarter in 2020, compared to the same calendar quarter in 2019.
EIDL Fund Guideline. Funds received from Economic Injury Disaster Loans (EIDL) and the grants of $1,000 per employee up to $10,000 that were part of these loans are not taxable income, and are not subject to the 25% reduction test.
With this information now, many small businesses can complete their 2020 tax filings. However, if they have yet to have their PPP Loan forgiven, they may want to consider the ramifications of being labeled an “Ineligible Entity” as defined above.
What this means is that their entire PPP Loan, or at least the expenses they used it for, will not be deductible (or another way to look at it is, will be considered income). When their PPP Loan is forgiven, they may see quite an increase in California taxes in 2021. With this increase, they may have greater quarterly estimates that they need to pay.
Trying to figure out if you are an ineligible entity may be confusing to some taxpayers, thankfully we have a dedicated staff to assist you with this type of consulting if necessary. We can also assist you with a tax planning meeting to ensure that you are paying the proper estimates to California if necessary.
Call us for a planning or consulting meeting, but after May 17 as we have a lot of corporate and personal returns to complete now, so we better get to work! :)