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State law now allows some California businesses to deduct federal pandemic loans from their state taxes

April 30, 2021 3300

Quick Summary:

California business owners whose PPP loans are forgiven can deduct the qualifying expenses paid for with the loan funds from their state income taxes if they can show at least a 25% reduction in gross receipts for at least one quarter as a result of the pandemic.

Gov. Gavin Newsom on April 29 signed legislation that will provide a $6.2 billion tax cut to businesses that received a Paycheck Protection Program loan to pay for employee salaries, group health care benefits, other debt obligations and worker-protection costs related to COVID-19.

Assemblymember Autumn burke (D-Inglewood) introduced AB 80 in February to offer tax relief to California businesses by allowing business owners whose PPP loans are forgiven to deduct the qualifying expenses paid for with the loan funds from their state income taxes if they can show at least a 25% reduction in gross receipts for at least one quarter as a result of the pandemic. 

The law also applies to businesses that received an Economic Injury Disaster Loan advance grant. 

Gov. Newsom and Democratic leaders placed the bill on hold in March as they sought clarification from the Biden administration on whether the bill would conflict with federal tax laws that restrict states from cutting taxes while receiving federal aid. 

Federal and state laws do not impose taxes on businesses for PPP loans that were forgiven after the funds were properly used to prevent layoffs and pay for other eligible expenses. The Treasury Department on April 7 announced that conforming state taxes to match the federal PPP deductions is permissible under the American Rescue Plan Act. 

With clearance to move forward with the bill, lawmakers modified it to extend the tax relief to a larger pool of businesses that received PPP loans. 

The legislation originally would have capped the tax deductions at $150,000, excluding many businesses in sectors like the restaurant industry, fitness and recreation and health care services that in some cases received millions of dollars in loans. 

The modifications now only exclude publicly traded companies and businesses that did not report a loss of at least 25% of gross receipts in at least one quarter of 2020.

Practice owners can find details about PPP loan forgiveness on the Small Business Administration’s website.