In a rare business-taxpayer-friendly move, California is going to allow a tax deduction that is beneficial to taxpayers. Wow! In a very interesting bill (AB 80) introduced in the California House, the state is going to allow the expenses that were paid with a Paycheck Protection Program (PPP) loan when forgiven. Governor Newsom fully supports the bill and has said he will sign it when it gets to his desk. The bill would take effect immediately after it is signed. The Assembly vote was unanimous and bipartisan.
As is widely known, the Internal Revenue Service (IRS) will allow a business to exclude the PPP loan forgiveness from income. It originally came with a caveat though, as the IRS also stated that the deductions related to the PPP expenses that the loans were used for cannot be deducted, if the forgiveness of indebtedness income is excluded from income. However, the Federal Government made changes to the program and the IRS changed its position and now allows eligible expenses to be deducted. Unexpectedly, California who normally would not follow the IRS on a business taxpayer friendly position is going allow some taxpayers to “have your cake and eat it too”.
PPP Loan Forgiveness Exclusion
The state of California, in what veers away from being “an unfriendly taxpayer state”, is going to allow companies to maintain the federal exclusion of the PPP loan forgiveness and will still allow the deductions. While this is news…. certain conditions will have to be met. The main conditions being, that the company is NOT publicly traded and that the business had a drop in gross receipts of 25% or greater. Even with these conditions, it will mean that many businesses with connections to the state of California will be affected and be able to take advantage of this law.
John Kabateck, California state director of the National Federation of Independent Business said “Small-business owners shouldn’t be penalized for taking federal support when businesses were adversely impacted by government shutdowns to deal with this terrible pandemic.”
State officials said the tax breaks will apply to up to 85% of the more than 1 million California businesses that received a combined $97 billion in federal loans, or an average of about $96,700 each. According to the California House, the bill could cost the state over $4 billion in the next six years.
“I appreciate that the state of California is trying to come across as supporting small businesses in the state of California. However, this bill will greatly benefit Texas businesses that meet the criteria outlined in the bill. Any Texas business with nexus in California will want to make sure they review their California returns and make sure they or their accountants are taking advantage of this opportunity,“ states Selene Ramos, Calvetti Ferguson, State and Local Tax Manager.
If you have questions about state and local taxes, contact us. It can be difficult to make sense of all the new legislation passed in the wake of COVID-19 but we are here to help. Check out our COVID-19 Resources page for more information.