Paycheck Protection Program Loan Forgiveness and Treatment of Related Expenses May 2021 Tax News

FTB has received several questions recently regarding the deductibility of expenses paid with Paycheck Protection Program (PPP) loan proceeds when the loan has been forgiven, and whether the amount of the loan that has been forgiven enters into the calculation of the LLC fee.

AB 1577 (Stats. 2019-2020, Ch. 39) provides that any deduction or credit otherwise allowed for any amount paid or incurred by the taxpayer upon which the exclusion is based must be reduced by the amount of the loan forgiveness exclusion allowed[1].

When reducing the deductions by amounts paid or incurred with PPP loan proceeds, taxpayers should base the amount on records indicating which expenses were paid with the forgiven funds. 

Generally, the information submitted to lenders to obtain loan forgiveness would be sufficient to document the correct amount of the reduced deduction.  However, taxpayers should use the most accurate information they have available to them in making this determination.

With regard to the LLC fee, this is calculated based on "total income from all sources derived from or attributable to this state," plus the cost of goods sold that are paid or incurred in connection with the trade or business of the taxpayer.[2] As the forgiveness of a PPP loan is excluded from gross income, for LLCs, the amount of the forgiven PPP loan amount does not come within the meaning of "total income from all sources derived from or attributable to this state" and should not be included in the computation of the fee.

[1]California Revenue and Taxation Code (R&TC) sections 17131.8(b) and 24308.6(b).

[2]R&TC 17942.