On April 29, 2021, under pressure to provide relief for California businesses suffering the impact of the COVID-19 coronavirus and government-ordered stay-home and shutdown orders, Governor Gavin Newsom signed into law Assembly Bill No. 80 (“AB 80”), a measure addressing the exclusion from income of, and deductibility of qualifying expenses paid with, funds provided by the Federal government under the Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan (“EIDL”) grants received under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the Consolidated Appropriations Act (“CAA”).
Under the enactment, the forgiven PPP and EIDL loans that businesses received from the Federal government during the pandemic will not be counted as taxable income, and these businesses can also deduct the costs of expenses that those loans paid for. The new law largely conforms California law to the Federal rules relating to deductibility of expenses paid with funds from forgiven PPP loans. In doubt a few months ago, the final bill pushed through the Legislature removed a $150,000 deduction limitation in earlier versions but now excludes publicly-traded companies from the income exclusion and expense deductibility.
Significant highlights of the new law’s provisions include:
- In general, the enactment conforms California’s tax treatment for expenses paid with forgiven loans under the CARES Act or the CAA for tax years beginning after January 1, 2019. Excluded are publicly-traded companies and “ineligible entities.”
- An entity is ineligible to deduct expenses from PPP and PPP2 funds if it does not have a 25% or greater reduction in gross receipts in any calendar quarter in 2020, compared to the same calendar quarter in 2019.
- Funds received from Economic Injury Disaster Loans (“EIDL”) are not taxable income, and are not subject to the 25% reduction test.
- AB 80 applies retroactively to taxable years beginning on or after January 1, 2019.
For any further analysis of how this California enactment will affect your interests, or if you have any questions on this article, please contact Ryan O. Hemminger or Mark I. Zelko