Finally – California Provides Businesses With PPP and EIDL Tax Relief

On April 29, 2021, Governor Gavin Newsom signed into law Assembly Bill 80, which passed unanimously in the California Assembly and the California Senate. The bill provides guidance to businesses that received assistance from the federal government under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

California businesses that received Paycheck Protection Program loans (“PPP Loans”) as well as Economic Injury Disaster Loans (“EIDL”) are eligible to claim the tax relief offered by AB 80. There are some eligibility requirements.

Under prior California law, if a loan is forgiven, then typically the recipient of the forgiven loan had to report the amount of the forgiven loan as taxable income. However, Congress enacted legislation specifically geared to CARES Act relief which provided that these types of forgiven loans would not be treated as taxable income at the federal level. California enacted this legislation to make sure California businesses would be treated similarly under California tax laws.

Since the forgiven loan was not to be treated as taxable income, the question arose as to whether businesses could deduct the business expenses paid with the forgiven loan proceeds. Under the previous California law, it could not deduct those business expenses.

Under AB 80, for fiscal years starting on January 1, 2019, there will be no California income tax on the forgiven amounts of the PPP Loan and EIDL Loan if the requirements of the bill are met. In particular, the proceeds from the loans had to be used to pay qualifying expenses such as employee wages, rent and utilities. Additionally, the business must be able to prove that during one of its quarters during COVID-19, it had revenue of 25% less than the prior year’s revenue that was related to the COVID-19 impact on its business.

If a business meets these requirements, it will not have to pay California income tax on the forgiven loan amounts and will be able to deduct the business expenses it paid using the loan proceeds. However, this relief is not available for publicly traded companies.

Governor Newsom characterized Assembly Bill 80 as providing small businesses in California with a $6.2 billion tax cut. There was criticism from some lawmakers who thought the 25% reduction in revenue for at least one quarter was unfair since this was not an original requirement of the first round of PPP Loans. Analysts believe that this bill will cost California between $4.4 billion and $6.8 billion over six years. It is estimated that broadening the tax cuts would cost at least one billion more.

So after a particularly tough year economically, there is some tax relief for California businesses hard hit by the COVID-19 pandemic.