California's Partial PPP Conformity Bill
On April 29, 2021, Governor Newsom signed into law Assembly Bill No. 80 (“AB 80”), providing partial conformity to the Federal tax treatment for deducting expenses paid with Paycheck Protection Program (“PPP”) loans, EIDL advance, and targeted grants. Below are some of the key highlights of the bill’s provisions:
- For taxable years beginning on or after January 1, 2019, California will exclude from taxable income forgiven PPP loans, EIDL advance, and targeted grants
- Expenses (paid with PPP proceeds) are deductible only if the business had a 25% gross receipt reduction in 2020 in comparison to 2019 (similar to the 2nd round of PPP application requirements)
- The 25% gross receipts reduction test can be applied by comparing calendar quarters for tax years 2019 to 2020, or can also be for the entire calendar year, if the business operated all of 2019
- Funds received from EIDL advance are not subject to the 25% gross receipts reduction test
As with most new laws that are enacted, an overview guidance is provided, but it also lacks practical direction which leads to many questions such as
- What will be the procedure for taxpayers who have already filed returns?
- How can a taxpayer attest that there is a 25% reduction in gross receipts on a specific quarter?
- What documentation or disclosures are required to be filed with the tax return related to this?
- Is there an additional tax form that taxpayers need to file related to this matter?
What this means to you?
Our team will continue to monitor as California provides more guidelines on how to proceed with your tax filings. Unfortunately, the tax deadline to file individual income tax returns is approaching very soon and is due May 17th 2021. We understand how much you are wanting to get your returns done and finally have some closure with your 2020 tax filing. But with the lack of direction from California and further, the timing constraints, we would like for you to be open to filing an extension of your individual tax returns, if we have not done so already, and the possibility that your business returns may continue to be on hold beyond May 17th. We certainly would like to file your returns correctly and accurately, and we believe that waiting for proper guidelines to comply with the Franchise Tax Board would be the best approach.