PPP Deductions Bill Becomes Law

Governor Gavin Newsom signed into law AB 80, which would conform California law to federal tax law in allowing deductions for expenses paid with Paycheck Protection Program (PPP) loans. The bill passed the assembly unopposed after passing the Senate unopposed last week. The bill takes effect immediately and the tax provisions are effective for tax years beginning on or after January 1, 2019.

Newsom and Democratic leaders had delayed discussion of the bill due to concern that it could conflict with provisions in the American Rescue Plan Act that provide federal funding for states but limit the ability of states to reduce taxes. In March, Treasury Secretary Janet Yellen stated that the stimulus act did not prevent state tax cuts, but state lawmakers remained uncertain. Lawmakers now have assurance that allowing for PPP deductions will not violate the stimulus bill provisions in question.

The bill conforms state law to federal law by excluding forgiven PPP loans and Economic Injury Disaster Loans (EIDL) advance grants from gross income for state purposes. This bill also conforms state law to federal law by allowing deductions for expenses paid for using forgiven PPP loan funds and EIDL advance grants. The bill excludes as “ineligible entities” companies that are either publicly traded or taxpayers that did not experience at least a 25% reduction in gross receipts.

The state assembly passed the original version of the bill in January. The final version, as amended in the Senate, did not include the original bill’ $150,000 deductions limit for business expenses paid with forgiven PPP loans or the limitation the carryover of net operating losses from the deductions.