California enacted a law in late 2020 allowing businesses to exclude PPP loan amounts under the federal CARES Act for state tax purposes, but denying a deduction for expenses paid from the PPP loans. A pending bill, AB 80, that would allow businesses to deduct up to $150,000 of business expenses paid for by a forgiven PPP debt, has been amended.
Below is a summary of the changes in the bill:
- There is no longer a $150,000 limit on the amount of expenses that may be deducted.
- In order to qualify to take the deductions, a business must demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. If the entity was not in business during the entirety of 2019, then the business must show a 25% reduction in gross receipts during any quarter in 2020 from the 2019 calendar quarters it was in operation. If the PPP application was submitted on or after January 1, 2021, then the fourth quarter of 2020 may also be used. If they were in business for all of 2019, they can also compare calendar-year 2019 to calendar-year 2020.
AB 80 will also include deductibility for all Emergency Injury Disaster Loan (EIDL) forgivable loans due to the recently passed Consolidated Appropriations Act.
Much of this language duplicates the gross receipt reduction requirement for eligibility for second draw PPP loans. The bill does not include other restrictions from that provision, such as an employee limit.
AB 80 had been under negotiations for several months over the inclusion of several provisions from SB 265, a bill that would give full deductibility to all businesses that received PPP loans in favor of a $150,000 deductibility cap. Lawmakers eventually added some provisions from SB 265 into AB 80 and compromised on the 25% reduction in gross receipts minimum and non-publicly traded company eligibility requirements.
AB 80 is estimated to cost the state about $6 billion in tax revenue over six fiscal years. The majority of business owners are in favor of the bill, as it will help many businesses that have been hit hard by the pandemic.
AB 80 will go back to the Assembly for approval again due to significant amendments and changes from when it was passed previously. It’s anticipated that this bill should be passed in the next few weeks.
RJI CPAs Can Help
The team at RJI CPAs is available to help you navigate the complexities of AB 80. Reach out to us today for a consultation.