For federal purposes they get to take all of the deductions for amounts paid with forgiven PPP debt. However, the loan remains on the books, until the debt is forgiven. That means they will not have an increase in basis until the year the debt is forgiven. For most borrowers this will be 2021. That is creating an issue for some partnerships and S corporations that made distributions in excess of basis in 2020, because of the PPP funds.
For California purposes, the deductions are limited in the year the expenses are paid, so 2020 for most taxpayers. Again, the debt stays on the books until the loan is forgiven. However, because the deductions are limited, that increases the borrowers income, which increases their basis. So they are not likely to have a basis issue on the CA return for 2020 (if we don’t get conformity). In 2021, when the debt is cancelled, California does not conform to the provision allowing the increase in basis for the tax-free income from the forgiven debt.