Tax Alert- California Excludes PPP Loan from Income but Disallows Necessary and Ordinary Business Expenses

California "will not tax" forgiven Paycheck Protection Program (PPP) loan amounts. For tax years beginning on and after January 1, 2020, California conforms to federal law excluding from income any covered loan amount forgiven pursuant to:

• Section 1106 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136);


• the Paycheck Protection Program and Health Care Enhancement Act (P.L. 116-139); or


• the Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142).

For California purposes, "covered loan" has the same meaning as in the CARES Act.

The BAD - No Credit or Deduction for Expenses Paid Using Forgiven PPP Funds

California will not allow a credit or deduction for any expenses paid for using forgiven PPP funds. Taxpayers must reduce any credit or deduction otherwise allowed for those expenses by the amount of the forgiven loan excluded from income.  So effectively

A.B. 1577, Laws 2020, operative as noted

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

IRS Warns of Higher Penalties on Tax Returns Filed After September 14

The IRS warns taxpayers who have not yet filed their tax returns, that higher penalties will be imposed if they file after September 14. Further, taxpayers who submitted an extension have until October 15 to file and would not face the failure to file penalty if they file their taxes by that deadline. However, an extension to file is not an extension to pay so any taxes the taxpayers owe after the July 15 deadline are subject to the failure to pay penalty and interest.

If a tax return is more than 60 days late, a minimum penalty applies. If no return has been filed after 60 days, the minimum penalty that can be charged is USD 435 or 100-percent of the unpaid tax, whichever is less. This year, that important 60-day date occurs after September 14. In addition to penalties, interest will also be charged on any tax not paid by the July 15 due date. The IRS has reminded taxpayers that Free File is available through October 15 to prepare and e-file a 2019 individual return. In addition, taxpayers who have not been assessed any penalties for the past three years may qualify to have penalties abated. A taxpayer who does not qualify for the first-time penalty relief may still qualify for penalty relief if their failure to file or pay on time was due to reasonable cause and not willful neglect. However, interest cannot be abated.

Moreover, qualified taxpayers can choose to pay any taxes over time through an installment agreement. Further, more information for taxpayers who owe taxes, but cannot afford to pay the full amount is available on the IRS website. Taxpayers can use the IRS Tax Withholding Estimator to do a paycheck checkup to have the right amount of tax withheld during the year. The IRS has reminded taxpayers to visit the "Are Payments I Receive for Being Unemployed Taxable?" tax tool to determine if their unemployment is taxable.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)