The California saga for taxing Paycheck Protection Program funds continues.
The ever-changing landscape for how California will or won’t tax a business’s Paycheck Protection Program (PPP) funds continues to resemble a game of ping pong.
First, California lawmakers were clear they would tax the proceeds (by not allowing deductions paid with the funds). Then, as the political blow back about taking that position arose quickly, lawmakers proposed several pieces of legislation to partially change course.
California legislators sat, without action, on the proposed legislation for more than a month. All the while preventing taxpayer businesses from knowing how to file their 2020 state tax returns. Then, the American Rescue Plan Act (ARPA) was passed which had some vague language that California (and some other states) seized on to tell California business owners “no, we cannot allow any tax break for PPP funds otherwise the state cannot get funds available to it from the American Rescue Plan Act.”
I am not sure anyone could make this craziness up if they tried. Well, it now appears there may be a break in the clouds and some positive movement might finally occur on this topic. Yesterday, the IRS and the Treasury announced that states can conform to recent federal tax benefits (such as the allowance of deductions for amounts paid with forgiven PPP debt) and still benefit from the federal funding provided to states through the ARPA. This eliminates the concern about whether California will lose federal ARPA funding if California enacts legislation, which would allow taxpayers to deduct up to $150,000 in expenses paid with forgiven PPP debt (Assembly Bill 80).
While the federal clarification is encouraging, it still does not mean the deductions are now allowed for California. But it does mean California has the green light to enact the legislation, or at least until they find more excuses not to help on the PPP tax front.
We will continue to monitor the situation and will let you know as soon as any law is passed. For now, we continue to recommend extending returns for all clients with PPP loans.
Tax and cash flow planning is more critical than ever in today’s business environment. Do not hesitate to call us with any questions or concerns you may have. Just give us a call at (831) 758-5966 or email us at info@schollcpa.com.