California Conforms to Federal PPP Loan Forgiveness Rules

April 29, 2021

Governor Gavin Newsom has signed Assembly Bill 80, to amend the law. This will bring conformity to the federal treatment of PPP loan forgiveness and EIDL grants, with one important exception relating to reduction in gross receipts in the 2019-2020 taxable year. Taxpayers must have a 25% reduction in gross receipts in any 2020 calendar quarter as compared to the comparable 2019 calendar quarter in order to deduct expenses paid with PPP loan forgiven amounts. If this reduction threshold is not met, the expenses cannot be deducted on the California tax return. AB 80 uses the same 25% gross reduction threshold qualification that was used for second draw PPP loans. 

Points to note:

  • The 25% gross receipts limitation does not apply to the EIDL advance grants, so taxpayers may exclude the EIDL grants and may fully deduct these expenses even if they don’t meet the threshold reduction.
  • AB 80 conformity only applies to the exclusion from income for PPP loan forgiveness and EIDL advance grants. It does not apply to SBA subsidies paid on SBA loans, Shuttered Venue Operator Grants, or Restaurant Revitalization Grants. These subsidies/grants are subject to California tax, but expenses are fully deductible on the California return.
  • AB 80 applies retroactively to taxable years beginning on or after January 1, 2019.

This measure is part of California’s effort to recover now that the pandemic is easing, state restrictions are lifting, and businesses are moving back towards full operations. We are excited to finally have clarity on California’s PPP loan forgiveness stance. You can count on us to prioritize and complete work to the best of our ability based on these changes. If you have additional questions about this article or your business’ qualification status, contact your GC accountant or email us at contactus@gccpas.net.

 

 

Credit: Spidell Tax, Analysis, and Education

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