On December 27, 2020, the President signed into law the Additional Coronavirus Response and Relief Act. Among other items, ACRRA clarified the tax treatment of deductible expenses paid from Paycheck Protection Program (PPP) loan funds by nullifying the previous administrative guidance from the IRS and clarifying that “no deduction shall be denied” for otherwise deductible expenses paid for with forgiven PPP loan amounts. As such, expenses paid with a forgiven PPP loan may be deducted for federal income tax purposes. However, California does not currently conform to this federal law.
At present, California taxpayers will still be required to reduce their deductions on their respective state returns because California enacted AB 1577 (Ch. 20-39), which specifically prohibits taxpayers from claiming any deductions or credits for expenses that are paid with forgiven PPP loan amounts.
This could result in a larger than expected 2020 California tax bill.
However, California legislation (AB 281) has been introduced in the State Assembly that declares the intent to conform California state law to the federal law, thereby allowing the deduction of expenses paid with forgiven PPP debt. We are closely monitoring this legislation and will provide updates as the situation develops.