FAQs for Paycheck Protection Program (PPP)

General

Does California follow the exclusion from gross income for covered loan amounts forgiven pursuant to the CARES Act?

Yes, for taxable years beginning on or after January 1, 2019, gross income does not include any covered loan amounts forgiven pursuant to the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Protection Program Flexibility Act of 2020, and the Consolidated Appropriations Act, 2021 (CAA).

Does California follow the exclusion from gross income for emergency Economic Injury Disaster Loan (EIDL) grants forgiven pursuant to the CARES Act or targeted EIDL advances under the CAA?

Yes, for taxable years beginning on or after January 1, 2019, gross income does not include any EIDL grants under the CARES Act or targeted EIDL advances under the CAA.

Can I deduct business expenses I paid with my PPP loans?

It depends. To qualify for expense deductions, basis adjustments, and lack of reduction of tax attributes related to AB 80, you must meet the following qualifications.

  • Your business cannot be publicly traded.
  • You meet the 25% gross receipts reduction qualifications.

If your forgiven loan was an Emergency EIDL Grant or Targeted EIDL Advance, you are not required to meet these qualifications to deduct expenses.

If you do not qualify for the expense deductions under AB 80, California follows IRS Revenue Ruling 2020-27, which may allow for some limited deductions.

Amending returns

Is there any special process or form for amending returns to claim the newly-allowed deductions?

No, taxpayers should follow FTB’s normal amended return procedures. However, if a taxpayer makes an election under IRS Rev. Proc. 2021-20 for federal purposes, California will follow the federal treatment for California tax purposes.

Additionally, FTB does not anticipate creating any new forms to implement AB 80, but we are in the process of updating line item instructions.

What if I already filed and claimed a deduction that do not qualify for?

If you already filed and claimed a deduction that you do not qualify for, you must file an amended return using our normal amended return procedures

Gross receipts test

How do I determine if I meet the 25% gross receipts test?

California adopted Section 311 of Division N of the CAA. Taxpayers should follow the federal guidance related to this code section to determine if they meet the gross receipts test.

If I meet the 25% gross receipts requirement to deduct expenses, do I need to attach documentation to the return?

Taxpayers who meet the documentation requirements at the federal level will be considered as having met them for California purposes as well. California is not adding additional supporting documentation requirements.

How do I compute the 25% gross receipts test for a multistate business?

Under AB 80, California adopted Section 311 of Division N of the CAA. This federal law provides the computation for determining whether a taxpayer has a 25% or greater reduction in gross receipts by comparing total sales. For California purposes, taxpayers should also use total sales when computing their reduction in gross receipts.

The Small Business Administration (SBA) issued guidance on the gross receipts test. Does California follow that guidance?

Yes, pursuant to AB 80, California adopted Section 311 of Division N of the CAA. California will follow the rationale of related federal guidance relating to this code section.

What if I do not meet the 25% gross receipts test?

AB 80 generally prohibits “ineligible entities” from deducting expenses paid with loans forgiven under the Original Paycheck Protection Program Loans, Subsequent Paycheck Protection Program Loans, and U.S. Treasury Program Management Authority Loans.

An “ineligible entity” is any entity that is publicly traded or that fails to meet the 25% reduction in gross receipts test. If the loan was obtained through one of these programs and the taxpayer cannot demonstrate a 25% or greater reduction in gross receipts, then the taxpayer will be considered an “ineligible entity” and cannot deduct expenses paid with the loan.

For taxpayers who do not meet the 25% gross receipts test, does California still follow IRS Revenue Ruling 2020-27?

Yes, for taxpayers who do not qualify for deductions under AB 80, California follows the rationale of IRS Revenue Ruling 2020-27.

If my loan was an Emergency EIDL Grant or Targeted EIDL Advance, do I still need to demonstrate a 25% reduction in gross receipts?

No. Since the Emergency EIDL Grants and Targeted EIDL Advances do not contain a prohibition against “ineligible entities,” taxpayers are not required to meet the 25% reduction in gross receipts test to deduct expenses paid with by these specific loans or advances.

Penalties

Do I have to pay underpayment of estimated tax, late payment penalties, or substantial underpayment penalties if I was not aware of the limitation on deductions?

Generally, there would be no exception to the imposition of the underpayment of estimated tax, late payment penalties, or substantial underpayment penalties due to a misunderstanding of the requirements of the law. This type of error does not generally constitute reasonable cause for penalties that can be abated due to reasonable cause. If a taxpayer receives a penalty and believes that the actions for which they were penalized were the result of reasonable cause (for penalties that can be abated due to reasonable cause) or that a reason exists for waiver of a penalty, they can make a request for penalty abatement/waiver in which the facts and circumstances will be evaluated on a case by case basis.

Miscellaneous

Does California conform to the exclusions for other SBA loan forgiveness or grants?

No, not at this time. AB 1577 and AB 80 only provide gross income exclusion for covered loan amounts forgiven pursuant to the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Protection Program Flexibility Act of 2020, and CCA and EIDL grants under the CARES Act or targeted EIDL advances under the CCA.