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California "Other Adjustments" for covid SBA/EIDL loan forgiveness?

I'm a California taxpayer. In 2020, I received the $1000 Covid SBA Grant / EIDL, which was forgiven. In this year's TurboTax state interview, the "other adjustments" page has some verbiage about California "maybe" requiring adjustments & an additional form 4197, but it's extremely unclear & I honestly have no idea how to interpret what it's saying. The relevant verbiage is copied below. For example:


* It doesn't specify if this only applies to loans forgiven in 2023, or at any time (i.e. if I have to do something about the 2020 loan? I believe that was under the CARES act, which the text mentions).

* It talks about adding back a deduction, but I didn't input any deduction in my federal interview (shouldn't TurboTax already know that?)

* In the final paragraph below, it says California conforms to federal law for EIDL. But...then why did it start by saying EIDL is one of the things California doesn't entirely conform to, if later it just says California does?


Basically, I'm just trying to figure out if I do or don't have to put anything related to that $1000 here.


Explanation in TurboTax: "If you received a PPP loan, other loan forgiveness, or advance grant amount (EIDL) and all or a portion of that loan was forgiven, California only partially confirms to federal law allowing exclusion of those proceeds and deduction of the expenses incurred. See the following information to determine if you meet the requirements to exclude those proceeds from income or claim a deduction for the expenses on your California return. If you do not meet these requirements, add back the deduction below and identify this add-back by entering "PPP deduction add-back" next to the amount. Also, select the "Paycheck Protection Program/Other Loan Forgiveness/Economic Injury Disaster Loan' option on the screen titled 'A few things we wrap up your state taxes' to include the required information Form 4197 with your California income tax return."


The information pop-up says:


Reporting Requirements - For taxable years beginning on or after January 1, 2021, taxpayers should report Tax Expenditure Items with the Franchise Tax Board (FTB). A "Tax expenditure" means a credit, deduction, exclusion, exemption, or any other tax benefit provided for by the state. This includes the following: PPP loans forgiveness, other loan forgiveness, the EIDL advance grant, restaurant revitalization grant, or shuttered venue operator grant, and related eligible expense deductions under the CARES Act, Paycheck Protection Program and Health Care Enhancement Act, Paycheck Protection Program Flexibility Act of 2020, the American Rescue Plan Act(ARPA) of 2021, the CAA, 2021, or the PPP Extension Act of 2021.


I believe that this above part isn't relevant to me, since my EIDL was in 2020, and that's for tax year 2021 and later. Continuing:


Other Loan Forgiveness - For taxable years beginning on or after January 1, 2019, California law allows an exclusion from gross income for borrowers of forgiveness of indebtedness described in Section 1109(d)(2)(D) of the CARES Act as stated by Section 278, Division N of the federal CAA, 2021. The CAA, 2021, allows deductions for eligible expenses paid for with covered loan amounts. California law conforms to this federal provision, with modifications. For California purposes, these deductions generally do not apply to an ineligible entity. For more information, go to www.ftb.ca.gov and search for AB 80.


...This one says it's for taxable years after 2019, which does include 2020 in which I got the EIDL. But...are they expecting me to try to dig through & figure out that tax code to see if that federal code is what my EIDL was, and then to dig through AB 80 and try to figure out if it applies to me or not? Incredibly unhelpful. Then the next paragraph:


Advance Grant Amount - For taxable years beginning on or after January 1, 2019, California law conforms to the federal law regarding the treatment for an emergency Economic Injury Disaster Loan (EIDL) grant under the federal CARES Act or a targeted EIDL advance under the CAA, 2021.


...So...this makes it sound like there are no adjustments needed. But if that's the case, why did it even say above that there might be? Bafflingly unclear guidance.

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2 Replies
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California "Other Adjustments" for covid SBA/EIDL loan forgiveness?

If you received a grant/loan in 2020 and it was forgiven in a prior year, then it doesn't affect your 2023 California return.


California conformed to many of the COVID provisions, with some exceptions. See this FTB webpage for a comprehensive list of Federal-California statutes from 2020-2022 and where California does/doesn't conform.


Regarding the EIDL provisions, the document states:


California conforms to IRC section 61, as of the specified date of 1/1/2015, with modifications. California does not conform to IRC section 265, regarding expenses and interest relating to tax-exempt income, but instead has stand-alone language that disallows certain deductions related to tax-exempt income.

For taxable years beginning on or after 1/1/2019, California amended sections 17131.8 and 24308.6 (AB 1577 Stats. 2020 Ch. 39 and AB 80 Stats. 2021 Ch. 17) to partially conform to the CARES Act and the CAA relating to:

  • Exclusions from gross income for PPP loan forgiveness and certain EIDL loan forgiveness,
  • The allowance of deductions for expenses paid with the forgiven loan amounts not included in income under such sections, and
  • The allowance of tax basis increases and not requiring tax attribute reduction as a result of those forgiven loan amounts being excluded from gross income.

For PPP loans forgiven, these sections do not apply to ineligible entities, which are defined as:

  • A publicly-traded company, the securities of which are listed on a national securities exchange, and
  • An entity that does not meet the gross receipts requirement by demonstrating at least a 25 percent reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Special rules apply to entities that were not in business during certain quarters in 2019.

Taxpayers with loans forgiven under the Economic Injury Disaster Loan (EIDL) Grant or Targeted EIDL Advance, are not required to meet these qualifications to deduct expenses.

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California "Other Adjustments" for covid SBA/EIDL loan forgiveness?

Right, all that verbiage is pretty confusing to a non tax professional (who bought TurboTax in order to avoid the need to directly research tax codes - i.e. IRC section 61, IRC section 265, 17131.8, 24308.6, AB 1577 Stats. 2020 Ch. 39, AB 80 Stats. 2021 Ch. 17). However, if I'm understanding, it sounds like all of that is irrelevant in my case - the only thing that matters is:


> If you received a grant/loan in 2020 and it was forgiven in a prior year, then it doesn't affect your 2023 California return.


...In other words, nothing to do here 🙂

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