A version of this article appeared in the December issue of CalCPA’s California CPA magazine.
This year’s legislative session included a number of bills aimed at making California a more competitive business environment. Other bills focused on funding higher education grants and promoting college savings through tax refunds. We look at these and other changes you’ll want to be aware of for the 2016 filing season.
Retroactive and Extended Changes
College Access Tax Credit (AB 81) | Individuals & Businesses
The College Access Tax Credit can now reduce individuals’ and businesses’ regular tax below tentative minimum tax for tax years 2014 through 2017. Because the change is retroactive back to 2014, taxpayers whose credit was limited by tentative minimum tax in the past can file amended returns. In addition, the legislation added an additional year to the credit, moving its end date from 2016 to 2017.
Automatic Disaster Relief (SB 35) | Individuals & Businesses
This bill extended the provisions relating to disaster losses (defined under IRC Section 165(i)) to any city or county (or both) the California governor declares to be in a state of emergency. It also extends the period of time during which a taxpayer—either a business or an individual—may claim the deduction. In addition, any changes that reduce, suspend, defer, or diminish the net operating loss deduction won’t apply to the specified disaster losses.
These changes are effective for tax years 2014 through 2024.
Legislation Effective in 2015
Federal Conformity (AB 154) | Individuals & Businesses
AB 154 moves the California federal conformity date from January 1, 2009, to January 1, 2015, for tax years beginning on or after January 1, 2015. To give some highlights, the law affects a number of provisions relevant to both business and individual taxpayers:
- It increases the additional tax on nonqualified withdrawals from medical savings accounts from 10 percent to 12.5 percent.
- It retains the 7.5 percent threshold for medical expense deductions in California.
- It conforms to the Foreign Account Tax Compliance Act’s information reporting requirements for foreign financial assets, though it does modify penalty amounts.
- It excludes cell phones from listed property.
- It conforms to IRC Section 6164 as it relates to payment date extensions for current-year taxes by corporations expecting net operating loss carrybacks.
- It confirms the validity and the ongoing effect of SB 401 (Wolk, Chapter 14–Statutes of 2010).
- It makes exceptions to the large corporate understatement penalty (LCUP).
Exceptions to the LCUP are permitted under two circumstances: first, in the event of a tax increase that results from a proper election under IRC Section 338, as reported on the first amended return; second, if the understatement is attributable to either of the following:
- Imposition by the Franchise Tax Board (FTB) of an alternative apportionment or allocation method under R&TC Section 25137
- A change to the taxpayer’s federal method of accounting such that the return’s due date is before the secretary of the treasury’s determination to change the accounting method
California chose not to conform to some items. Those items are bonus depreciation, the increased IRC Section 179 deduction, the tax treatment of real estate professionals, and the penalty increase for failure to file a partnership or S corporation return.
Filing Enforcement and Collection Fees (AB 93) | Individuals & Businesses
Every fiscal year, the filing enforcement and collection fees, which apply to all California taxpayers, are indexed for inflation. Updated fees for the 2015/2016 fiscal year are as follows:
Taxpayer Advocate Program (SB 540) | Individuals & Businesses
This bill makes the relief provisions instituted by FTB’s Taxpayers’ Rights Advocate permanent. It applies to provisions for penalty, interest, and fee relief for both individual and business taxpayers. The bill also:
- Eliminates the requirement that a taxpayer file an application with the FTB to request relief.
- Requires the Taxpayers’ Rights Advocate, in coordination with the chief counsel, to provide relief if specified requirements are met.
- Limits the total amount of relief granted to a taxpayer to $10,000 per taxable year. This amount is subject to an annual adjustment for inflation beginning January 1, 2017, based on the percentage change in the California consumer price index.
- Requires the FTB to notify the board itself whenever relief is granted.
- Specifies a public record retention rule of at least one year.
- Removes the indexing requirement for the $500 amount that requires executive officer concurrence.
Student Loan Forgiveness (SB 150) | Individuals
This bill modifies IRC Section 108 in two ways for California tax purposes. First, gross income doesn’t include the discharge of any student loan for an eligible individual. Second, forgiveness also includes student loans incurred to:
- Attend a for-profit higher education company
- Consolidate or refinance a loan used to attend such an institution
California Earned Income Tax Credit (SB 80) | Individuals
Starting in 2015, California will have its own version of the federal earned income tax credit, which is available to individual taxpayers with income below certain thresholds.
Like the federal credit, California’s earned income tax credit is refundable. However, unlike the federal credit, the income used to determine eligibility must be subject to withholding. Self-employment income doesn’t qualify, and the California credit prohibits the married-filing-separately status when claiming the credit.
Check-Off Option for Charitable Contributions | Individuals
Various bills enact or extend existing voluntary contribution options that give individuals the choice to fund charitable organizations (or check-off funds) through an automatic deduction of a portion of their income. These organizations include:
- Prevention of Animal Cruelty Fund (AB 485)
- State Children’s Trust Fund for the Prevention of Child Abuse (AB 924)
- California Sea Otter Fund (SB 17)
Use Tax Is First Priority for Taxes Paid (AB 2758) | Individuals & Businesses
Though this bill was passed in the 2014 legislative session, it’s effective starting in tax year 2015. FTB will now first apply available tax payments or credits to satisfy any self-reported use tax before applying payments or credits to outstanding income taxes, penalties, or interest owed to FTB.
New Legislation Effective in 2016 or Later
Change to Federal Return Due Dates (House Bill 3236) | Individuals & Businesses
Although these changes at the federal level won’t take effect for individuals or businesses until the 2017 filing season (that is, on your 2016 returns), it has some interesting implications in terms of California’s nonconformity. Because California won’t automatically conform to the new tax return due dates, separate California legislation will be needed to change the dates.
Here’s an overview of the changes:
According to an informal call to FTB, if conformity doesn’t take place before the 2017 filing season, FTB will most likely waive penalties based on the differences between the due dates of the returns.
Not-for-Profit Administrative Dissolution and Abatement of Qualified Taxes (AB 557) | Not-for-Profits
AB 557 creates a streamlined administrative dissolution process for not-for-profits that have been suspended for 48 continuous months after proper notice is served. Organizations may now dissolve themselves through three methods:
- Administrative dissolution or surrender. This method is available to not-for-profits that have been suspended or forfeited for a specified time period. Once the administrative dissolution or surrender becomes final, the organization’s liabilities for qualified taxes, interest, and penalties are abated.
- Short-form certificate of dissolution. This option is similar to the short-form dissolution allowed to corporations. However, the liability to creditors or the liability of the directors won’t be discharged. In addition, the attorney general will continue to have the ability to enforce specified liabilities.
- Streamlined voluntary dissolution. Qualified not-for-profit corporations can make a written request to FTB to abate their unpaid taxes, interest, and penalties. The corporation must certify it wasn’t doing business and dissolve within a certain time period after making the request.
Gross Income Exclusion for Seismic Improvements (SB 84 & SB 102) | Individuals & Businesses
This bill establishes the California Earthquake Authority and allows individuals and businesses to exclude from gross income certain amounts received for seismic improvements. Excludable amounts include those issued as a loan, loan forgiveness, grant, credit, rebate, voucher, or other financial incentive issued by the California Residential Mitigation Program or the California Earthquake Authority.
Recent Tax Law Changes
Economic Nexus Thresholds | Businesses
The doing-business thresholds have been indexed for inflation. The new thresholds are:
- $53,644 in California property
- $53,644 in California payroll
- $536,446 in California sales
California Competes Application Update | Individuals & Businesses
There are two remaining application periods for the California Competes tax credit for the 2015/2016 fiscal year. Those application periods and the credit amounts available are as follows:
- January 4, 2016–January 25, 2016: $75 million in credits available
- March 7, 2016–March 28, 2016: $50.9 million in credits available and any remaining amounts not allocated in the prior two application periods
Sales and Use Tax on Software Licenses | Businesses
In the 2011 case Nortel Networks Inc. v. State Board of Equalization (BOE), a California appellate court ruled that the purchase of software licensed to operate telephone switching equipment was exempt from sales and use tax under the state’s technology transfer agreement (TTA) statutes. In 2015, another case—Lucent Technologies Inc. v. State Board of Equalization—brought this issue again to the foreground. In Lucent, the appellate court held that a license for prewritten software is intangible property pursuant to a TTA.
In the court’s decision, it stated that transferring software by physical means—such as magnetic tapes or a compact disc—doesn’t make it tangible personal property. It also stated that a TTA can exist even when the only intangible right transferred in the transaction is the right to copy the software onto tangible personal property.
This latest decision affirms Nortel and the scope of the TTA exclusion in the statutes. Although the State Board of Equalization may appeal, the California Supreme Court previously declined to hear Nortel, making it unlikely the appeal will be successful. Note, however, that no California regulations currently codify the conclusions reached in either decision.
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