Tax and financial advice from the Silicon Valley expert.

How to make a retroactive small business accounting election for California

The Franchise Tax Board has released preliminary guidance about how to make a small business accounting election on a 2018 income tax return.  California recently passed legislation, the “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019”, adopting some of the provisions of the federal Tax Cuts and Jobs Act of 2017, including elections for certain small businesses that were previously required to use the accrual method of accounting to use the cash method and other accounting simplification measures.  The effective date for these accounting changes is for years beginning on or after January 1, 2019, but taxpayers may elect to apply the changes for years beginning on or after January 1, 2018.

Until formal procedures are issued, taxpayers may make the election by providing the following information to the Franchise Tax Board:

  1. A statement with the original or amended California income tax return stating the taxpayer’s intent to make a small business accounting election and which election(s) the taxpayer is making;
  2. On the top of the first page of the original or amended tax return, write “AB 91 – Small Business Accounting Election” in BLUE INK; and
  3. Mail the return to:

Franchise Tax Board

PO Box 942857

Sacramento, CA  94257-0500

Note:  These returns must be PAPER-FILED.

(Spidell’s Flash E-mail: How to make a retroactive small business accounting election, July 31, 2019.)

Heterosexual couples under age 62 can now be registered domestic partners in California

Governor Newsom approved Senate Bill No. 30 on July 30, 2019.  The bill was authored by Senator Scott Weiner (Democrat state senator from San Francisco).  Under the new law, California’s Family Code is amended to allow heterosexual couples (a man and a woman) under age 62 to be registered domestic partners.

Before the change, only same-sex couples and heterosexual couples age 62 and greater could be registered domestic partners in California.

This change is important because registered domestic partners have essentially the same legal rights as married couples in California (including community property rights), and the relationship is not recognized as being married by the federal government.  THEREFORE, HETEROSEXUAL COUPLES WHO ARE CALIFORNIA REGISTERED DOMESTIC PARTNERS CAN AVOID THE FEDERAL INCOME TAX MARRIAGE PENALTY.

The federal marriage penalty means that a couple that files their income tax returns as married persons generally pays more income taxes than they would as unmarried persons.  The federal marriage penalty was increased under the Trump tax legislation, the Tax Cuts and Jobs Act of 2017.

Registered domestic partners are treated the same as married persons for California income tax reporting.

Be aware that registered domestic partners don’t qualify for some federal tax benefits that married couples do qualify for.  For example, gifts to a spouse who is a U.S. citizen qualifies for an unlimited marital deduction.  A bequest to a spouse who is a U.S. citizen also qualifies for an unlimited marital deduction.  The executor of a deceased spouse can elect on an estate tax return to give any unused lifetime exemption of the deceased spouse to a surviving spouse.  Only married persons are allowed to treat property settlements incident to a divorce as tax-free.

Heterosexual couples who are California residents and are planning to be married should consider being registered domestic partners, instead.

Heterosexual married couples who are California residents and who are paying a substantial federal marriage penalty should consider terminating their marriages and becoming registered domestic partners.  (Consult with your tax advisor to find out if you actually have a marriage penalty.)

I recommend consulting with a lawyer that specializes in family law and estate planning before making your decision.

(California S.B. 30, July 30, 2019.)

Tax and financial advice from the Silicon Valley expert.