Can you deduct expenses paid with PPP forgiven loan amounts from your California state taxes? The answer is still: We don’t know.
We were hopeful earlier this month when a bill, AB 80, was introduced to the California legislature to partially conform to federal tax rules, but this bill has now been “delayed temporarily.” AB 80 provided that $150,000 of expenses would be deducted for California based on PPP forgivable amounts. The amount of any forgiveness over $150,000 would be lead to expenses net being deductible.
Given the state of limbo, our best advice is that you calculate extension payments to the Franchise Tax Board based on the conservative assumption that the state does not conform, and therefore expenses are not deductible. Though we are still holding onto hope that the state will conform, taking the conservative route will protect you from underpaying.
Why has the legislation been delayed?
The problem stems from the most recent federal legislation. The American Rescue Plan Act, which President Biden signed into law earlier this month, bans states receiving additional funding from using allocated funds to legislate state income tax cuts. And since California received additional funding from the American Rescue Plan Act, it isn’t sure whether it is legally allowed to give state taxpayers the opportunity to deduct expenses paid with forgiven PPP loans.
In other words, Governor Newsom and the Legislature are waiting for guidance from the federal government. Rumor has it that the state might provide additional grants or otherwise make available funds to help small businesses.
We will, of course, keep your updated, but in the meantime, here is the full statement from Governor Newsom, state senate president pro tempore, Toni Atkins, and state assembly speaker, Anthony Rendon.
“With small businesses and their employees still suffering from the consequences of COVID-19, we continue to work on measures to provide them additional relief related to federal Paycheck Protection Program (PPP) loans, as was done last year under AB 1577.
“The legislation that would conform to the federal tax treatment of these grants will be delayed temporarily while we seek detailed guidance from the U.S. Treasury Department regarding provisions in the American Rescue Plan Act signed yesterday by President Biden.
“We remain committed to an equitable and broad-based recovery and acting expeditiously to provide additional relief to businesses in the state—especially those that have been hardest hit by COVID-19, such as bars, restaurants, barbers, nail and hair salons, and performing arts venues, among others.”