New California Law AB80 Allows Businesses to Deduct Expenses Paid Using PPP Loan Funds on Their Taxes

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By Sukhpaul Hundal

On April 29, 2021, California Governor Gavin Newsom signed into law Assembly Bill 80 (AB80), the Coronavirus Aid, Relief, and Economic Security Act: Federal Consolidated Appropriations Act, 2021. Previously, California law[1] allowed businesses to exclude forgiven PPP loan funds from their taxable income, but did not allow businesses to deduct expenses paid using forgiven PPP loan funds on their income taxes. AB80 now permits many California taxpayers to claim a tax deduction for expenses paid using PPP loan proceeds.

[1] Assembly Bill 1577, passed on September 9, 2020.

Eligibility for Deductions

To deduct expenses paid with forgiven PPP loan funds on their California tax return, businesses must:

  • Not be a publicly traded company, and
  • Have incurred at least a 25% reduction in gross receipts in any quarter during 2020 as compared to the same quarter in 2019.

Businesses must demonstrate the same reduction in gross receipts to qualify for a second round PPP loan. Thus, if a private company qualified for a second round PPP loan, they would also be entitled to deduct expenses paid using forgiven PPP loan funds on their California tax return.

The legislation is retroactive to tax years beginning on or after January 1, 2019, so all taxpayers who received PPP loans and have either applied for or are planning on applying for forgiveness can take advantage of this new law. Eligible businesses that have already filed their California tax return based on prior law may now file an amended return with the Franchise Tax Board.

Conclusion

Please contact your trusted Chugh CPAs, LLP professional for any questions or for assistance with navigating the everchanging Federal and State tax landscape.