AB 80 is now officially law in California, providing partial conformity to federal law allowing taxpayers to deduct expenses paid with PPP forgiven loan amounts, as well as EIDL targeted and advance grants. Governor’s major legislation updates reflect a growing trend towards economic support for small businesses. These changes aim to alleviate financial burdens while encouraging growth and recovery. As the state continues to adapt its policies, it remains committed to fostering a resilient economic environment. The PPP round 2 impact on small businesses is expected to provide additional resources for those struggling to recover from the pandemic. With increased funding opportunities, many enterprises are now looking at innovative ways to navigate their financial challenges. This initiative, coupled with ongoing support measures, could be crucial for sustaining local economies in the long term.
Effective retroactively to post-2018 taxable years, California excludes both forgiven PPP loans and EIDL advance and targeted grants from taxable income and allows eligible taxpayers to deduct expenses paid with these amounts. However, only PPP loan recipients who meet the 25% gross receipt reduction eligibility test applied to second draw PPP loan applicants are eligible to claim deductions for amounts paid with their forgiven PPP debt. (The 25% gross receipt threshold requirement does not apply to EIDL advance/targeted grant recipients for income exclusions or deductions.) Taxpayers should also consider the ppp loan forgiveness tax implications when planning their finances. Understanding these implications can help in making informed decisions about deductions and potential tax liabilities. It is essential for recipients to stay updated on any changes to regulations surrounding forgiven loans to avoid unexpected tax burdens.
Now that the law has been signed, practitioners will have many questions as to how the law will be applied. We have asked the FTB for additional guidance and anticipate a response next week. The questions include:
- What will the procedure be for taxpayers who have already filed returns?
- Will the FTB follow the SBA 25% gross reduction threshold guidelines allowing taxpayers to compare gross receipts in any 2020 calendar quarter to the comparable 2019 calendar quarter, or 2020 annual totals to 2019 totals?
- Can taxpayers merely certify a 25% reduction or will specific documentation be required?
- Will self-employed individuals who do not meet the 25% reduction threshold still be able to deduct owner compensation?
- Will businesses that changed entity forms in 2020 be able to use the former business entity’s 2019 gross receipts in the calculation?
