FAQs for Paycheck Protection Program (PPP)

General

Does California follow the exclusion from gross income for covered loan amounts forgiven pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act?

Yes, for taxable years beginning on or after January 1, 2019, gross income does not include any covered loan amounts forgiven pursuant to the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Protection Program Flexibility Act of 2020, the Consolidated Appropriations Act of 2021 (CAA), and the Paycheck Protection Program Extension Act of 2021 (PPPEA).

Does California follow the exclusion from gross income for Economic Injury Disaster Loan (EIDL) grants forgiven pursuant to the CARES Act or targeted EIDL advances and Shuttered Venue Operator (SVO) grants under the CAA?

Yes, for taxable years beginning on or after January 1, 2019, gross income does not include any EIDL grants under the CARES Act or targeted EIDL advances or SVO grants under the CAA.

Does California follow the exclusion from gross income for Restaurant Revitalization Fund (RRF) grants forgiven pursuant to the American Rescue Plan Act (ARPA) (Public Law 117-2)?

Yes, for taxable years beginning on or after January 1, 2020, gross income does not include any RRF grant provided under the ARPA.

Does California follow the exclusion from gross income for covered loan amounts made pursuant to the PPPEA?

Yes, California has conformed to the PPPEA. For taxable years beginning on or after January 1, 2019, California law allows an exclusion from gross income for covered loan amounts forgiven under the federal CARES Act, Paycheck Protection Program and Health Care Enhancement Act, Paycheck Protection Program Flexibility Act of 2020, the CAA or PPPEA. The PPPEA extends the covered period of the PPP to June 30, 2021. California law conforms to this extension and allows an exclusion from gross income for PPP loans made during the extended covered period after March 31, 2021 through June 30, 2021.

Can I deduct business expenses I paid with my PPP loans or SVO grant?

It depends. To qualify for expense deductions, basis adjustments, and lack of reduction of tax attributes related to AB 80 and SB 113, you must meet the following qualifications.

• Your business cannot be publicly traded.
• You meet the 25% gross receipts reduction qualifications.

If your forgiven loan was an EIDL grant or Targeted EIDL advance, you are not required to meet these qualifications to deduct expenses.

If you do not qualify for the expense deductions under AB 80, California follows Rev. Rul. 2020-27, which may allow for some limited deductions.

Amending returns

Is there any special process or form for amending returns to claim the newly-allowed deductions?

No, taxpayers should follow FTB’s normal amended return procedures. However, if a taxpayer makes an election under Rev. Proc. 2021-20 for federal purposes, California will follow the federal treatment for California tax purposes.

Additionally, FTB does not anticipate creating any new forms to implement AB 80, SB 113, and AB 194, but we are in the process of updating line item instructions.

What if I already filed and claimed a deduction that I do not qualify for?

If you already filed and claimed a deduction that you do not qualify for, you must file an amended return using our normal amended return procedures.

Gross receipts test

How do I determine if I meet the 25% gross receipts test?

California adopted Section 311 of Division N of the CAA. Taxpayers should follow the federal guidance related to this code section to determine if they meet the gross receipts test.

If I meet the 25% gross receipts requirement to deduct expenses, do I need to attach documentation to the return?

Taxpayers who meet the documentation requirements at the federal level will be considered as having met them for California purposes as well. California is not adding additional supporting documentation requirements.

How do I compute the 25% gross receipts test for a multistate business?

Under AB 80 and SB 113, California adopted Section 311 of Division N of the CAA. This federal law provides the computation for determining whether a taxpayer has a 25% or greater reduction in gross receipts by comparing total sales. For California purposes, taxpayers should also use total sales when computing their reduction in gross receipts.

The Small Business Administration (SBA) issued guidance on the gross receipts test. Does California follow that guidance?

Yes, pursuant to AB 80 and SB 113, California adopted Section 311 of Division N of the CAA. California will follow the rationale of related federal guidance relating to this code section.

What if I do not meet the 25% gross receipts test?

AB 80 and SB 113 generally prohibits “ineligible entities” from deducting expenses paid with loans forgiven under the Original Paycheck Protection Program Loans, Subsequent Paycheck Protection Program Loans, and U.S. Treasury Program Management Authority Loans.

An “ineligible entity” is any entity that is publicly traded or that fails to meet the 25% reduction in gross receipts test. If the loan was obtained through one of these programs and the taxpayer cannot demonstrate a 25% or greater reduction in gross receipts, then the taxpayer will be considered an “ineligible entity” and cannot deduct expenses paid with the loan.

For taxpayers who do not meet the 25% gross receipts test, does California still follow Rev. Rul. 2020-27?

Yes, for taxpayers who do not qualify for deductions under AB 80, California follows the rationale of Rev. Rul. 2020-27.

If my loan was an EIDL grant or Targeted EIDL advance, do I still need to demonstrate a 25% reduction in gross receipts?

No. Since the EIDL grants and Targeted EIDL advances do not contain a prohibition against “ineligible entities,” taxpayers are not required to meet the 25% reduction in gross receipts test to deduct expenses paid with by these specific loans or advances.

Penalties

Do I have to pay underpayment of estimated tax, late payment penalties, or substantial underpayment penalties if I was not aware of the limitation on deductions?

Generally, there would be no exception to the imposition of the underpayment of estimated tax, late payment penalties, or substantial underpayment penalties due to a misunderstanding of the requirements of the law. This type of error does not generally constitute reasonable cause for penalties that can be abated due to reasonable cause. If a taxpayer receives a penalty and believes that the actions for which they were penalized were the result of reasonable cause (for penalties that can be abated due to reasonable cause) or that a reason exists for waiver of a penalty, they can make a request for penalty abatement/waiver in which the facts and circumstances will be evaluated on a case by case basis. For assistance, see Help with penalties and fees.

Miscellaneous

Does California conform to the exclusions for other SBA loan forgiveness or grants?

AB 1577, AB 80, SB 113, and AB 194 provide gross income exclusions for covered loan amounts forgiven pursuant to the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Protection Program Flexibility Act of 2020, the CAA, PPPEA, EIDL grants under the CARES Act, targeted EIDL advances, SVO grants under the CAA, and RRF grants under the ARPA.

Does FTB follow the federal guidance under Revenue Procedures (Rev. Proc.) 2021-48, 2021-49, and 2021-50?

• Rev. Proc. 2021-48 – FTB will follow the rationale of the federal guidance set forth in Rev. Proc. 2021-48.
• Rev. Proc. 2021-49 – FTB will follow the rationale of the federal guidance set forth in Rev. Proc. 2021-49.
• Rev. Proc. 2021-50 – FTB will not follow the federal guidance set forth in Rev. Proc. 2021-50 because California does not conform to the underlying federal statutes.

Will California follow the SBA’s Paycheck Protection Program Loans and Changes of Ownership guidance on a change of ownership of a PPP borrower?

Yes, California will follow federal guidance regarding the change of ownership of a PPP borrower.