As an early response to the economic impacts of the COVID-19 pandemic, the Paycheck Protection Program was offered to businesses nationwide as a loan that could be used to pay employees, rent, and similar expenditures. The amount that a business could receive was limited to two and a half times the applicant’s average monthly payroll costs. If the applicant kept their employee headcount and did not reduce wages, they are eligible for forgiveness of their PPP loans. As tax season approaches, many businesses are seeking guidance as to how to treat the funds that were received under the PPP initiative for tax purposes, as well as whether the expenditures made with the PPP funds are deductible.
California’s individual and business tax code generally conforms to the Internal Revenue Code, but does not do so automatically. Therefore, although loan amounts that are forgiven under the terms of the PPP are not includible in gross income under federal law, they were not automatically excludable from income for California income tax purposes. Nevertheless, the California legislature passed a conformity bill late last year that specifically indicated that forgiven PPP funds did not constitute additional gross income for California individuals or businesses. Though, the bill specifically indicated that expenditures that were made with the forgiven PPP loan funds were not deductible for California income tax purposes. Thus, if an employer paid rent or employee wages with PPP funds that were later forgiven, such expenses could not be deducted.
This week, Governor Gavin Newsom and legislators agreed to a statutory relief package that if passed would allow California taxpayers to deduct up to $150,000 of otherwise deductible expenses that were paid for using forgiven PPP funds. Therefore, if a taxpayer received less than $150,000 in eventually forgiven PPP funds, they receive a double benefit: excluding the forgiven PPP funds from gross income and claiming a deduction for expenses paid with the same funds. For taxpayers who received more than $150,000 of PPP proceeds that were later forgiven, they can still deduct up to $150,000 of expenses paid for with the PPP proceeds. As a part of the proposed legislative text, the $150,000 deductibility limit would also apply to loan proceeds under the Economic Injury Disaster Loan program.
For individuals and businesses, 2020 was full of stress and uncertainty. State and federal governments made attempts to assist business owners through the PPP and other programs. Although the new programs provided some relief, they also created several tax compliance uncertainties. As we move into tax season, businesses that have questions as to the tax treatment of certain items of income or deduction should consult with an experienced tax attorney. Working through potential issues together with a seasoned tax lawyer will ensure that you do not overpay on your taxes and confirm that you have taken advantage of all of the pro-business programs that are being offered in the wake of the COVID-19 pandemic.
Regardless of your particular business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
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