On June 2, 2021, the California Franchise Tax Board (FTB) issued much anticipated guidance concerning loan forgiveness related to the Paycheck Protection Program (PPP). Originally, California enacted legislation to tax the PPP loan forgiveness by not allowing businesses to deduct necessary and ordinary operating expenses (including payroll) paid using emergency PPP funds. California based its legislation on an IRS ruling that held the same. The federal government subsequently enacted legislation reversing the IRS from taking this position based on certain income requirements. Uncertainty arose whether California would reverse course and conform with the federal government. California delayed doing so right away due to concerns it had related to jeopardizing billions of dollars in federal stimulus aid it had received. The federal stimulus funds California received had strings attached. To receive the stimulus funds California had to agree not to lower any any taxes. Allowing businesses to deduct legitimate business expenses lowers the taxes it owes. Of course this is the right result. Moreover, legislation to not allow the deduction of legitimate business expenses increases taxes. After many months of uncertainty, public unrest and debate, California worked it out and enacted legislation to conform with the IRS. On April 29, 2021, AB 80 was enacted which allowed more income exclusion (from second draw PPP loans and EIDL advance grants) and allowed the deduction of expenses, basis adjustments, and tax attribution adjustments for qualifying taxpayers, for tax years beginning on or after January 1, 2019.
The FTB guidance confirms:
- The FTB will follow the SBA guidance regarding how to determine whether the 25% gross receipts threshold is met. This means taxpayers may compare any calendar quarter in 2020 to the comparable calendar quarter in 2019 (or total 2020 gross receipts to total 2019 gross receipts);
- Taxpayers do not have to provide documentation or certification if they meet the 25% gross receipts threshold, they may simply deduct all expenses paid with PPP forgiven loan amounts;
- Multistate taxpayers should use total gross receipts (not just California-source gross receipts) to determine whether the 25% gross receipts threshold is met; and
- For taxpayers who do not meet the 25% gross receipts threshold, the disallowance of deductions must be reported on the tax return for the taxable year in which they reasonably expect the PPP loan will be forgiven. This would mean deductions must be reduced on the 2020 return if in 2020 the taxpayer reasonably expected that the PPP loan would be forgiven in 2021.
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, APLCNewport Beach and Yorba Linda, California
Tel:
(949) 397-2292 (
Newport Beach Office)Tel:
(714) 463-4430 (
Yorba Linda Office)
The FTB’s updated webpage regarding PPP loan forgiveness is at:
www.ftb.ca.gov/about-ftb/newsroom/covid-19/paycheck-protection-program-loan-forgiveness.htmlThe FAQs for Paycheck Protection Program is available at:
www.ftb.ca.gov/about-ftb/newsroom/covid-19/faqs-for-paycheck-protection-program.html