Last week, Governor Newsom signed Assembly Bill 80 (AB 80) into law.  The new law, effective immediately, concerns the state tax treatment of expenses paid with proceeds of forgiven Paycheck Protection Program (PPP) loans.

Under AB 80, in order to deduct expenses paid with forgiven PPP loan proceeds for California state tax purposes, taxpayers must show that they experienced at least a 25% reduction in gross receipts in any 2020 calendar quarter relative to the same quarter in 2019.

The eligibility requirement is the same for both original PPP loans and Second Draw PPP loans.

This eligibility requirement does not apply to federal tax deductions.

Economic Injury Disaster Loan (EIDL) advances and targeted grants are not subject to this eligibility requirement, so expenses paid with such funds are deductible for both federal and state tax purposes.

We strongly recommend that our clients discuss the effects of AB 80 with their CPA.