AB 80 is now officially law in California, providing partial conformity to federal law allowing taxpayers to deduct expenses paid with PPP forgiven loan amounts as well as EIDL targeted and advance grants.
Effective retroactively to post-2018 taxable years, California excludes both forgiven PPP loans and EIDL advance and targeted grants from taxable income and allows eligible taxpayers to deduct expenses paid with these amounts. However, only PPP loan recipients who meet the 25% gross receipt reduction eligibility test applied to second draw PPP loan applicants are eligible to claim deductions for amounts paid with their forgiven PPP debt. (The 25% gross receipt threshold requirement does not apply to EIDL advance/targeted grant recipients for income exclusions or deductions.)
Now that the law has been signed, practitioners have many questions as to how the law will be applied. We’ve asked the FTB for additional guidance, and we anticipate a response next week. The questions we posed include:
What will the procedure be for taxpayers who have already filed returns?
Will the FTB follow the SBA 25% gross reduction threshold guidelines allowing taxpayers to compare gross receipts in any 2020 calendar quarter to the comparable 2019 calendar quarter, or 2020 annual totals to 2019 totals?
Can taxpayers merely certify a 25% reduction or will specific documentation be required?
Will self-employed individuals who do not meet the 25% reduction threshold still be able to deduct owner compensation?
Will businesses that changed entity forms in 2020 be able to use the former business entity’s 2019 gross receipts in the calculation?