PPP California "Non" forgiveness, and how to handle in Drake

Technical topics regarding tax preparation.
#1
MikeH  
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121
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Location:
Bullhead City, Arizona
Cross-post between the Drake Forum, and here.

I've spent so much time on this issue that I thought I'd post this procedure in the small chance someone else might not need to spend so much time. Some of this is from some assistance I received on several forums, including this one. Please chime in with corrections, etc. These issues seem to change almost daily ([well, maybe weekly, now...] :-)

There's 2 issues:
1) Is the PPP forgiveness taxable to CA?, and,
2) If so, how to enter in Drake. The one I did was an 1120S, but the answer is probably similar for the 1065 and maybe the 1120(?).

First of all, the California FTB has flipped back and forth as to how to report this, initially refusing to provide guidance, then saying to reduce the appropriate expenses. Last month, after saying they were done with the issue, they apparently, without any announcement, amended the 100S instructions to report the difference as income on line 7 of the 100S. Please note that the online PDFs of the CA100S instructions seem to precede this change. Many people do not seem to have seen this yet...

If you search for "Forgiveness" in the link below,
https://www.ftb.ca.gov/forms/Search/home/results/4238
the 2nd "hit" says:
Line 7 – Other additions
Paycheck Protection Program Loans Forgiveness. Under federal law, the Consolidated Appropriations Act, 2021 allows deductions for eligible expenses paid for with covered loan amounts. California law conforms to this federal provision with modifications. For California purposes, if you are an ineligible entity and deducted eligible expenses for federal purposes, include this amount on line 7.

1) Is the PPP forgiveness taxable to CA?
The FTB, in the paragraph above, talks about being an "ineligible entity" but doesn't seem to define that. It's my understanding that, under CA law. the forgiveness is tax-free only if they *qualify* for the 2nd Draw PPP loan... they don't need to actually receive the 2nd loan.

Partnerships may have another alternative... but I didn't spend any time on this because I don't have any partnerships, so I've not been through the PPP application for a partnership. It's likely that any partnership draws during the 8-24 week covered period reduce the amount taxable to CA.

2) How to enter in Drake, once you've decided that the forgiveness is taxable to California:
First of all, I would make this the last transaction I entered. Make sure that the forgiveness is entered on Line 16b of the 1120S Schedule K (1065 = s/b line 18b?), the Balance sheet balanced, and the return was ready to efile for both Fed & CA. While viewing, note the amount on the Cal. Schedule K, line 1, column C. You will need to override this figure by adding the amount of the CA taxable forgiveness to it. If there happens to be an amount on the CA Schedule K, line 16b, you will need to subtract the CA taxable amount from this.

Next go to the main California screen 100S, and add the taxable forgiveness amount to line 7 per the FTB's instructions. I would do this via a worksheet behind line 7 that says: 'PPP loan forgiveness taxable to California"

Now go to CA Schedule K ,override line 1 by the sum of the taxable forgiveness, along with the number you noted that was already there ($800++ Franchise tax, maybe some depreciation, and whatever else), and:

subtract the taxable forgiveness amount from line 16b. I would do this via a worksheet behind line 16b that says: 'PPP loan forgiveness taxable to California"

I would then view the return and make sure that:
Line 8 on the CA 100S =
the sum of all the CA K-1s. line 1, column d.

In case anyone brings this up...CA does not recognize the QBI deduction, otherwise you might need to re-calculate it for CA purposes. I can't think of anything else that might come into play where this CA taxable increase would affect some other CA Calculation... ??
Mike Hartfield
Bullhead City, Arizona
Cell: 818/433-5359
 

#2
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1017
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10-Jun-2019 4:20pm
Location:
WESTERN USA
Thanks for your post. I also use Drake.

Did a similar CA entry for SBA 1112 payments ( non taxable income Fed, CA not conform). Did the 100 S line7, did the Schedule K line 16b. However, rather than override Schedule K line 1, used line 10b other income.
For ERC credit, I used Schedule K line 1(with $800,depreication included).
 

#3
MikeH  
Posts:
121
Joined:
10-Jun-2014 3:00pm
Location:
Bullhead City, Arizona
I think you meant 10b "Other Income/loss" [not tax exempt.]

That's probably a better answer, in that it leaves a better "Audit trail" and better visibility if anyone from the FTB happens to look at it, rather than burying it in line 1.
Mike Hartfield
Bullhead City, Arizona
Cell: 818/433-5359
 


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