Although the Paycheck Protection Program (PPP) loan forgiveness has been enacted at a federal level, there is still some question as to whether or not the same treatment will be applied to California state taxes, affecting businesses in the Santa Clarita Valley.
As of Tuesday, no legislation has been passed at the state level regarding PPP loan forgiveness, which would require those in California to pay taxes on the PPP loans they received during the COVID-19 pandemic.
“While income from PPP loan forgiveness is excluded for California purposes, any credit or deduction allowed for any amount paid or incurred should be reduced by the amount of the exclusion allowed under the PPP,” according to the State of California Franchise Tax Board website.
For taxable years beginning on or after January 1, 2020, California provides an exclusion from gross income for covered loan amounts forgiven under the federal CARES Act, Paycheck Protection Program and Health Care Enhancement Act, or the Paycheck Protection Program Flexibility Act of 2020. For more information, see R&TC Section 17131.8.
The Consolidated Appropriations Act, 2021 was signed into federal law on December 27, 2020, allowing deductions for eligible expenses paid for with covered loan amounts that would be or would reasonably be expected to be forgiven under the PPP. California law does not conform to this federal provision.
The Franchise Tax Board will be monitoring state legislation for any changes to this Act, but at this time, no bill has been introduced that addresses this topic.
Forgiving loans would mean that the state gives up a 9-12 percent profit return, which California is “unlikely to do,” according to Matt Denny, a Certified Public Accountant (CPA) in Santa Clarita.
“It’s a nightmare. We thought last year was a bad tax season because they shut our offices down and extended everything to July 15,” said Denny. “Now, they announced new loans last week, it’s been a real challenge.”
CPAs are experiencing difficulties filing state taxes due to businesses with PPP not filing for California returns, forcing clients to pay what they owe.
Situations like that as well the millions of people who filed for unemployment have slowed down retroactive tax law halfway through the filing period.
“At the federal level, they were trying to provide relief. Their intentions were good but there are always unintended consequences for tax law. The IRS has to interpret the new law and then come up with new forms,” Denny concluded.
Generally, those that received PPP would pay the state as if it is taxed by the state, but hold off on filing the state return, according to Denny.
Tax filing for S-corps and LLC have been extended until September 15.
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