It was a long slow and tumultuous process, but California Assembly Bill 80 is now officially law, providing partial conformity to federal law allowing taxpayers to deduct expenses paid with PPP forgiven loan amounts as well as EIDL targeted and advance grants. The California Assembly also, and thankfully, did away with the $150,000 limitation that has been debated for several months now.
California excludes both forgiven PPP loans and EIDL advance and targeted grants from taxable income and allows most taxpayers to deduct expenses paid with these amounts.
But, just to be sure things continue to be somewhat unclear, AB 80 leaves many questions as to how the law will be applied. These questions include:
What will the procedure be for taxpayers who have already filed returns?
Will the FTB follow the SBA 25% gross reduction threshold guidelines allowing taxpayers to compare gross receipts in any 2020 calendar quarter to the comparable 2019 calendar quarter, or 2020 annual totals to 2019 totals?
Can taxpayers merely certify a 25% reduction, or will specific documentation be required?
Will self-employed individuals who do not meet the 25% reduction threshold still be able to deduct owner compensation?
Will businesses that changed entity forms (such as an LLC electing to be taxed as a corporation) in 2020 be able to use the former business entity’s 2019 gross receipts in the calculation?
While there are some unknowns yet to be sorted out, with the passage of AB 80 we can now proceed to finalize 2020 tax returns for most businesses that received any PPP loans. We will be contacting everyone as the process moves forward and final 2020 business tax returns are prepared for our clients.
We appreciate all your support and understanding during these rapidly changing tax law times. If you need help, or know of someone who does, we are ready to assist you. Just give us a call at (831) 758-5966 or email us at info@schollcpa.com.