California Passes AB 80 Clarifying Taxability of PPP Loans
California Passes AB 80 Clarifying Taxability of PPP Loans
By: D. Keith Dunnagan, Esq.
May 11, 2021
As we all recall early in the COVID pandemic the CARES Act was passed creating PPP loans for struggling small businesses. Many small businesses jumped at the opportunity to take these forgivable loans to help them weather the struggles related to COVID shutdowns. In less than four weeks the first round of PPP funds was exhausted. Forcing Congress to work on additional legislation to create a second round of funding.
As fast as the money was being made available regulations was being promulgated by the SBA on how the forgiveness application would work, eligibility and so forth. Eventually, the forgiveness issues were resolved by the SBA and many businesses have already obtained forgiveness of the PPP loans they received.
However, in November of 2020 a new issue was created by the IRS when a released guidance that stated that business expenses that were paid for by PPP funds would not be deductible on a tax return. Normally, under Sections 161-163 of the Internal Revenue Code, normal business expenses would be fully deductible. Because the CARES Act was silent on the issue the IRS determined they would be non-taxable. This sent business owners and Congress scurrying about to figure out a fix. The CARES Act was designed to provide the PPP loans to small businesses to help them retain their employees – these same businesses that maintained employment levels should not be punished on their taxes for keeping employees on payroll. Ultimately, at the end of December 2020 in a consolidated budget act the federal tax issue was resolved and allows for deductibility of the expenses paid for by PPP funds. This was a great outcome.
For those small businesses in California, the state tax issues remained a mystery, until recently when AB 80 was passed and signed into law. This new law deals with deductibility of expenses paid for by PPP money at the state level. While this law is not as good as its federal counterpart it does appear to provide some relief to small businesses in California that received PPP money. Under the new law as passed it appears that small businesses that can show a 25% drop in revenues for a quarter in 2020 as compared to the corresponding quarter in 2019, then the expenses paid for by PPP money will likely be tax deductible. For many of our small business clients that should prove to be valuable relief.
The significance of the 25% drop comes from Congressional legislation. When Congress created the second round of PPP loan availability, it stated that for a small business to be eligible for a second PPP loan, that business has to show a 25% drop in revenues in a 2020 quarter as compared to the same quarter in 2019. This federal requirement dealt with eligibility on second round of PPP funds and unrelated to any taxing issues. Despite, this, California used it as a benchmark for determining tax deductibility related to use of PPP proceeds. Unfortunately, for the small business owner that had a 24% drop in revenues for a 2020 quarter as compared to the same 2019 quarter — the tax relief likely will not be available.
For many, the initial stay at home orders shuttered a significant percentage of business and revenues slowed tremendously, especially during the second quarter of 2020. Many small businesses were dark and conducting limited or no business in April and May of 2020. Dental and Medical service providers were limited to emergency healthcare services in many places. Realtor services were severely limited during most of April 2020. Hospitality, entertainment and personal care providers were for large parts of the year entirely suspended. Those that were able to secure a PPP loan should under the new language qualify for deductibility of expenses covered by PPP loan proceeds. The main thing to take from this is that if you are a small business owner you need to look not only at your 2020 financials as a whole, but also work with your accountant on to look at a comparison of 2020 and 2019 quarterly financials for eligibility.
While the new state law appears to provide some relief, it is not the relief small businesses had hoped for and not the same level of relief provided by the federal government.
If you own a small business that received a PPP loan and you have questions about your tax deductions, you should engage competent accounting services to help with your tax filings.
The information presented in this article is not to be taken as legal or accounting advice. Every situation is different. If you are facing a legal or accounting issue of any kind, get competent legal and/or accounting advice in your state immediately so that you can determine your best options.
Recent and Popular Articles From Our Blog:
- March 30 – The CARES Act Stimulus Package Guidance
- April 23 – Pending Legislation in the Wake of COVID-19
- April 28 – A New Reality – Temporary or Permanent – Virtual Showings and Disclosures
- May 12 – Executive Order Creates Worker’s Comp Liability for Small Business
- May 18 – Planning for Bankruptcy
- May 22 – Servant Leadership
- June 8 – Paycheck Protection Program Flexibility Act is Enacted
- June 10 – Impact to Credit Score After Filing Chapter 7 Bankruptcy
- June 26 – SBA Rolls Out Updated PPP Loan Forgiveness Application
- July 2 – Understanding the Home Equity Sales Contract Act 2020
- July 14 – Governor Rolls Back Re-Opening
- August 4 – August 2020 COVID-19 Update
- August 18 – Status Of Selected California State Operations re: COVID-19
- September 1 – COVID Update on Foreclosures and Evictions
- September 3 – State Passes AB 3088
- September 15 – Update on PPP Forgiveness and Impacts
- November 10 – Changes to the Fair Housing and Discrimination Advisory CAR Form
- November 24 – In a Season of Difficulty – We Choose Gratitude
- December 15 – Cal/OSHA Issues New COVID Prevention Rule
- January 5 – Introduction to New Laws 2021
- January 26- Rain and the Prevalence of Failure to Disclose Claims
California Passes AB 80 Clarifying Taxability of PPP Loans
By: D. Keith Dunnagan, Esq.
May 11, 2021
As we all recall early in the COVID pandemic the CARES Act was passed creating PPP loans for struggling small businesses. Many small businesses jumped at the opportunity to take these forgivable loans to help them weather the struggles related to COVID shutdowns. In less than four weeks the first round of PPP funds was exhausted. Forcing Congress to work on additional legislation to create a second round of funding.
As fast as the money was being made available regulations was being promulgated by the SBA on how the forgiveness application would work, eligibility and so forth. Eventually, the forgiveness issues were resolved by the SBA and many businesses have already obtained forgiveness of the PPP loans they received.
However, in November of 2020 a new issue was created by the IRS when a released guidance that stated that business expenses that were paid for by PPP funds would not be deductible on a tax return. Normally, under Sections 161-163 of the Internal Revenue Code, normal business expenses would be fully deductible. Because the CARES Act was silent on the issue the IRS determined they would be non-taxable. This sent business owners and Congress scurrying about to figure out a fix. The CARES Act was designed to provide the PPP loans to small businesses to help them retain their employees – these same businesses that maintained employment levels should not be punished on their taxes for keeping employees on payroll. Ultimately, at the end of December 2020 in a consolidated budget act the federal tax issue was resolved and allows for deductibility of the expenses paid for by PPP funds. This was a great outcome.
For those small businesses in California, the state tax issues remained a mystery, until recently when AB 80 was passed and signed into law. This new law deals with deductibility of expenses paid for by PPP money at the state level. While this law is not as good as its federal counterpart it does appear to provide some relief to small businesses in California that received PPP money. Under the new law as passed it appears that small businesses that can show a 25% drop in revenues for a quarter in 2020 as compared to the corresponding quarter in 2019, then the expenses paid for by PPP money will likely be tax deductible. For many of our small business clients that should prove to be valuable relief.
The significance of the 25% drop comes from Congressional legislation. When Congress created the second round of PPP loan availability, it stated that for a small business to be eligible for a second PPP loan, that business has to show a 25% drop in revenues in a 2020 quarter as compared to the same quarter in 2019. This federal requirement dealt with eligibility on second round of PPP funds and unrelated to any taxing issues. Despite, this, California used it as a benchmark for determining tax deductibility related to use of PPP proceeds. Unfortunately, for the small business owner that had a 24% drop in revenues for a 2020 quarter as compared to the same 2019 quarter — the tax relief likely will not be available.
For many, the initial stay at home orders shuttered a significant percentage of business and revenues slowed tremendously, especially during the second quarter of 2020. Many small businesses were dark and conducting limited or no business in April and May of 2020. Dental and Medical service providers were limited to emergency healthcare services in many places. Realtor services were severely limited during most of April 2020. Hospitality, entertainment and personal care providers were for large parts of the year entirely suspended. Those that were able to secure a PPP loan should under the new language qualify for deductibility of expenses covered by PPP loan proceeds. The main thing to take from this is that if you are a small business owner you need to look not only at your 2020 financials as a whole, but also work with your accountant on to look at a comparison of 2020 and 2019 quarterly financials for eligibility.
While the new state law appears to provide some relief, it is not the relief small businesses had hoped for and not the same level of relief provided by the federal government.
If you own a small business that received a PPP loan and you have questions about your tax deductions, you should engage competent accounting services to help with your tax filings.
The information presented in this article is not to be taken as legal or accounting advice. Every situation is different. If you are facing a legal or accounting issue of any kind, get competent legal and/or accounting advice in your state immediately so that you can determine your best options.
Recent and Popular Articles From Our Blog:
- March 30 – The CARES Act Stimulus Package Guidance
- April 23 – Pending Legislation in the Wake of COVID-19
- April 28 – A New Reality – Temporary or Permanent – Virtual Showings and Disclosures
- May 12 – Executive Order Creates Worker’s Comp Liability for Small Business
- May 18 – Planning for Bankruptcy
- May 22 – Servant Leadership
- June 8 – Paycheck Protection Program Flexibility Act is Enacted
- June 10 – Impact to Credit Score After Filing Chapter 7 Bankruptcy
- June 26 – SBA Rolls Out Updated PPP Loan Forgiveness Application
- July 2 – Understanding the Home Equity Sales Contract Act 2020
- July 14 – Governor Rolls Back Re-Opening
- August 4 – August 2020 COVID-19 Update
- August 18 – Status Of Selected California State Operations re: COVID-19
- September 1 – COVID Update on Foreclosures and Evictions
- September 3 – State Passes AB 3088
- September 15 – Update on PPP Forgiveness and Impacts
- November 10 – Changes to the Fair Housing and Discrimination Advisory CAR Form
- November 24 – In a Season of Difficulty – We Choose Gratitude
- December 15 – Cal/OSHA Issues New COVID Prevention Rule
- January 5 – Introduction to New Laws 2021
- January 26- Rain and the Prevalence of Failure to Disclose Claims