CARES Act Provisions w/ Tax Benefits - with Which Does the CA FTB Not Conform?
As the 2020 tax year comes to a close it's important to take a closer look at key provisions of the CARES Act providing valuable tax benefits and identify those provisions with which the California FTB does not conform. California does not conform to select federal provisions under the CARES Act, including:
The five-year carryback of net operating losses generated in 2018, 2019 or 2020
The increase of the limit on charitable contribution deductions from 60 percent to 100 percent of adjusted gross income
Adjustments to business interest limitations under IRC Sec. 163(j)
CARES Act-related student loan forgiveness provisions
Additional $600 of Unemployment Compensation
Generally, unemployment benefits are taxable income for both federal and California income tax purposes. The CARES Act provided those workers who are unemployed with an additional $600 per week for up to four months.
For federal tax purposes, the additional unemployment benefits are taxable income. In contrast, California has exempted the additional unemployment benefits from tax.
Paycheck Protection Program Debt Forgiveness
Another popular element of the CARES Act is the Paycheck Protection Program, a government-backed loan that can be forgiven if certain employee retention goals are achieved. Generally, the IRC considers forgiven debt to be taxable income.
In an attempt to not burden businesses with an additional tax bill, the CARES Act specifically excludes the forgiven proceeds of the Paycheck Protection Program from gross income. Because California does not conform to the current version of the IRC, any forgiven debt is taxable income for California income tax purposes.
Further, in anticipation of the new federal stimulus package it's important to note unlike Federal law California law specifically requires taxpayers to reduce their deductions for expenses paid for with forgiven PPP funds on their California return. California AB 1577 (Ch. 20-39) specifically prohibits taxpayers from claiming any deductions or credits for expenses paid with forgiven PPP loan amounts.
If you have questions on your year-end Federal and State tax positions as the 2020 comes to a close, feel free to give us a call to get our conversation started.
Cobalt PacWest Advisors
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Redwood Shores, CA 94065
221 Main Street #1416
Los Altos, CA 94022