Paycheck Protection Program (PPP) loan forgiveness
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.
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.
On June 30, 2022, AB 194 was enacted which allowed an income exclusion for covered loan amounts forgiven pursuant to the Paycheck Protection Program Extension Act of 2021 (PPPEA)(Public Law 117-6). The PPPEA was enacted on March 30, 2021 and extended the covered period of the PPP from March 31, 2021, through June 30, 2021.
On September 29, 2022, AB 158 was enacted to add an operative date of January 1, 2019 for the PPPEA to ensure taxpayers that had loans made during PPPEA would be eligible for the income exclusion and other applicable tax treatment.
For California purposes, forgiven PPP loans, SVO grants, and RRF grants are excluded from gross income.
Deductions and other adjustments
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.
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
|You qualify under AB 80||You have filed TY 2019 or TY 2020||Amend your return if you need to report:
|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.
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.