Regulatory and Industry News Alerts from Armanino
Article

State PPP Conformity and California Legislative Updates

by Alex Thacher, Stephanie Shorkley
April 30, 2021

Summary

States have been very active in updating their conformity to federal PPP guidance. Currently, almost all states conform to the federal treatment, however, there are a few states who don’t intend to conform. These states either don’t allow the deduction of expenses paid with PPP loan proceeds orlimit the deduction for specific taxpayers, to specific amounts, or both.

A good example of these limits is California, which doesn’t include forgiven PPP loan proceeds in taxable income. Earlier this year, Governor Newsom announced the state would allow deductions up to $150,000 for expenses paid with PPP loan proceeds. However, this was never passed into law. Assembly Bill 80, which is expected to be passed in the next few weeks, has now been amended to only allow conformity with expenses paid with PPP loan proceeds for entities that meet certain qualifications.

In Detail

The U.S. Small Business Administration’s Paycheck Protection Program (PPP) was created to provide an important service to help keep millions of small businesses open and their workers employed during the COVID-19 pandemic. For a borrower to have their loan forgiven, they must comply with certain requirements. Forgiveness eligibility requires using the loan for qualifying purposes (e.g., payroll costs, mortgage interest payments, rent and utilities) within a specified amount of time.

Generally, a forgiven loan qualifies as income. However, Congress chose to exempt forgiven PPP loans from federal income taxation. Most states conform to this treatment, however, Florida, Minnesota, New Hampshire and Texas all view the forgiveness as income. Other states deny the deduction for expenses paid for using forgiven loans or have specific guidance limiting the deduction, like California, Hawaii, North Carolina, Utah and Virginia. For up-to-date details related to individual states’ treatment of PPP see the Armanino matrix.

California AB 80

As noted above, California has recent legislation in the works to conform to the federal treatment of expenses paid with PPP loan proceeds. Assembly Bill 80 (AB 80) has passed both the assembly and senate. It’s now awaiting the signature of Governor Newsom. Once passed, this bill will allow eligible taxpayers to deduct business expenses paid by a forgiven PPP debt.

For a taxpayer to be eligible for these deductions, it can’t be a public company and it must demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. The fourth quarter of 2020 may also be used if the PPP application was submitted on or after January 1, 2021. AB 80 will also include deductibility for all forgivable Emergency Injury Disaster Loan (EIDL) loans.

For more details related to the revenue reduction calculation, see the SBA guidance on how to calculate revenue reduction for second draw PPP loans.

Insights

Conformity with federal treatment of these loans is a constantly shifting field that should be monitored closely, exemplified by the recent changes in California. It’s important to pay attention to developing guidance in your state as these constant changes are impacting taxpayers’ extensions, returns, estimates and provisions.

Please reach out to our State and Local Tax experts if you’d like to discuss any questions or concerns related to the state treatment of PPP proceeds or expenses paid with proceeds.

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Authors
Alex Thacher - Partner, Tax - San Jose, CA | Armanino
Partner
Stephanie Shorkley - Tax, San Ramon | Armanino
Senior Manager
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