May 3, 2021
California conforms to federal income tax treatment of PPP loans and EIDL advance grants
On April 29, 2021, Governor Gavin Newsom signed a bill (AB 80) conforming the state corporate and individual income tax treatment of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loan (EIDL) advance grants under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated Appropriations Act, 2021 (CAA) to federal tax law (with some modifications). According to the governor's press release, AB 80 "will give small businesses hit hardest by [the COVID-19] pandemic a $6.2 billion tax cut over the next six years … "
Under AB 80, taxpayers may exclude forgiven PPP loans or EIDL advance grants from their gross income when computing California corporate and individual income tax for tax years beginning on or after January 1, 2019. Taxpayers may also deduct business expenses paid with the proceeds of forgiven PPP loans (except taxpayers that are "ineligible entities") or EIDL advance grants.
An "ineligible entity" is defined as a publicly traded company (as described in Section 342 of Division N of the CAA) or a taxpayer that did not experience at least a 25% reduction in gross receipts from the applicable quarter in 2019.
California taxpayers that have received PPP loans or EIDL advance grants will likely want to consider the new law when filing their 2020 California corporate and individual income tax returns. Taxpayers that have already filed their 2019 and 2020 returns should consider amending these returns to incorporate the adjustments allowed by AB 80.