On Thursday, April 29th, Governor Newsom signed California Assembly Bill 80 which partially conformed with the Federal tax treatment of PPP loans. In addition to the Paycheck Protection Program loan proceeds being tax-free, the expenses paid with those funds are also fully deductible with one important requirement. The California legislature added an additional requirement to be eligible to deduct the expenses: a taxpayer must have experienced a 25% or greater reduction in gross receipts in any calendar quarter in 2020 as compared to the same calendar quarter in 2019.
This new law brings us one step closer to PPP loan recipients being able to finalize their 2020 tax returns.
There are still some unanswered questions that may continue to delay the filing of returns. The California Franchise Tax Board will need to provide additional guidance on the new law and how it applies in certain circumstances. We are fairly certain that taxpayers who will not meet the 25% reduction requirement should be able to file their returns with the PPP expenses disallowed. If a taxpayer does meet the 25% reduction requirement, there is some uncertainty if the Franchise Tax Board will require additional support filed with the 2020 tax return.
What can I do now?
Determine whether you believe you qualify for the deduction of PPP expenses by comparing your gross receipts for 2019 and 2020, by quarter. If you need help making this determination, please reach out to an HW team member.
When can I expect my return to be completed?
We work with many clients who received PPP funds in 2020 and all of their tax returns are currently on-hold pending the recently enacted law. We are beginning to work through the returns in the order originally received and determining if we are currently able to file. It will take some time to get through the returns already in process, but we are committed to having returns finalized as soon as it is possible. We appreciate your patience during another unusual tax season.
As always, please do not hesitate to contact the HW partner or team member you work with for assistance or with any questions you may have.