Paycheck Protection Program (PPP) loan forgiveness

Overview

On September 9, 2020, Assembly Bill (AB) 1577 (Coronavirus Aid, Relief, and Economic Security (CARES) Act Conformity) was enacted which allowed an income exclusion for tax years beginning on or after January 1, 2020, for forgiven PPP loans.

On April 29, 2021, AB 80 (Consolidated Appropriations Act (CAA) Conformity) was enacted which allowed the additional income exclusion for second draw PPP loans and Economic Injury Disaster Loan (EIDL) advance grants and allowed the deduction of expenses, basis adjustments, and tax attribution adjustments for qualifying taxpayers, for tax years beginning on or after January 1, 2019.

The American Rescue Plan Act (ARPA) (Public Law 117-2) was enacted on March 11, 2021. The ARPA expanded the PPP to include certain nonprofit entities and certain internet publishing organizations. California law does not conform to this expansion of PPP eligibility.

The Paycheck Protection Program Extension Act (PPPEA) (Public Law 117-6) was enacted on March 30, 2021, and extended the covered period of the PPP from March 31, 2021, through June 30, 2021. California law does not conform to this extension and does not allow an exclusion from income for PPP loans made after March 31, 2021.

On February 9, 2022, Senate Bill (SB) 113 (Economic Relief) was enacted to allow an income exclusion for Shuttered Venue Operator (SVO) grants provided under CAA for tax years beginning on or after January 1, 2019 and for Restaurant Revitalization Fund (RRF) grants provided under ARPA for taxable years beginning on or after January 1, 2020. SB 113 also allows the deduction of expenses, basis adjustments, and tax attribution adjustments for qualifying taxpayers for SVO and RRF grants.

Income exclusion

For California purposes, forgiven PPP loans, SVO grants, and RRF grants are excluded from gross income. However, this does not include PPP loans forgiven under the PPPEA.

Deductions and other adjustments

AB 80

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 relates to an EIDL Grant or Targeted EIDL Advance, you are not required to meet these qualifications to deduct expenses.

SB 113

To qualify for expense deductions, basis adjustments, and lack of reduction of tax attributes related to an SOV grant under SB 113, you must meet the following qualifications.

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

If your forgiven loan relates to an RRF, you are not required to meet these qualifications to deduct expenses.

The treatment of deductions, basis, and tax attributes for California income tax purposes may differ from the federal income tax treatment. For federal qualifications regarding income tax treatment, visit Coronavirus Tax Relief for Businesses and Tax-Exempt Entities.

25% reduction from gross receipts

California conforms to the federal gross receipts test requiring a 25% or greater reduction in gross receipts and will therefore follow the rationale of this related federal guidance.

For additional information, visit Section 311 of the CAA, 2021, Revenue and Taxation Code (RTC) section 17131.8(g)(3)), and Small Business Administration (SBA) guidance.

For additional information on the RRF grants, visit Section 5003 of the ARPA, RTC 17158.2(a), and SBA guidance.

How to file

AB 80

Use the information below to determine your filing path.
If And Then
You qualify under AB 80 You have filed TY 2019 or TY 2020 Amend your return if you need to report:
  • Additional deductions
  • Basis adjustments
  • Restore tax attributes
You have not filed TY 2019 or TY 2020 Report any allowable deductions on your original return.
You do not qualify under AB 80 You may qualify under Rev. Rul. 2020-27 to deduct some expenses.

If you make an election under Rev. Proc. 2021-20 for federal purposes, we will follow the federal treatment for California tax purposes.

If you do not qualify for deductions under AB 80, California follows the Rev. Rul. 2020-27.

Amending returns

Claim deductions or adjustments

Follow our normal amended return procedures to claim any deduction or adjustment related to PPP loans.

Deduction claimed in error

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