Tax and financial advice from the Silicon Valley expert.

California NOL suspension and $800 business tax waiver for new businesses

The California legislature has passed budget legislation, AB 85, and sent it to Governor Newsom, who is expected to approve it.

Notably, there were no provisions conforming California tax law to the CARES Act relief measures adopted by the federal government earlier this year.

Net operating loss deductions won’t be allowed on California income (including corporate franchise) tax returns for 2020-2022 tax years for businesses with business income, or modified adjusted gross income of $1 million or more.  The term for which net operating losses that could have been deducted in those years is extended by one year for losses incurred in taxable years years beginning on or after January 1, 2021 and before January 1, 2022, by two years for losses incurred in taxable years beginning on or after January 1, 2020  and before January 1, 2021, and by three years for losses incurred in taxable years beginning before January 1, 2020.

The $800 “privilege tax” for corporations, limited partnerships and limited liability companies “doing business” in California is waived for new companies organized (registered with the California Secretary of State) on or after January 1, 20121 and before January 1, 2024.

Business credits will be limited to $5 million for the 2020 – 2022 tax years.  The carryover period for the credits is extended to compensate for the years the limitation applies.

The exemption for sales tax for baby diapers and for menstrual hygiene products, which was scheduled to expire on January 1, 2022 is extended to June 30, 2023.

New sales tax collection and reporting rules will apply for auto dealers, other than new car dealers, effective January 1, 2021.  The details are beyond the scope of this summary.  See your tax advisor for details.

The maximum monthly penalty for not having mandated health insurance for a responsible person with an applicable household size of five or more individuals is capped at the penalty for five individuals.

 

 

 

Due date for property tax statements for California businesses extended

After I spent the day on May 7, 2020 preparing the 2020 property tax statement (Form 571-L) for my business, I learned that Governor Newsom issued an Executive Order on May 6, 2020 extending the date on which penalties can be assessed for late filing from May 7 to May 31, 2020.

Here is a URL for the Order.  https://www.gov.ca.gov/wp-content/uploads/2020/05/5.6.20-EO-N-61-20-text.pdf

So, if you haven’t filed the statement yet for your business, you still have a few days to take care of it.

The county assessors weren’t happy with this decision because they will be scrambling to get the property tax bills out after the information is received.

The governor’s order also suspends penalties and interest for certain real estate taxes paid after April 10, 2020 for California residential real estate occupied by the taxpayer and California real estate owned and operated by a small business until May 6, 2021.  The following requirements must be met to qualify for the waiver :

  • The taxes owed on the property must not have been delinquent as of March 4, 2020;
  • The taxpayer must timely file a claim for relief in a time and manner prescribed by the tax collector; and
  • The taxpayer must demonstrate to the satisfaction of the tax collector that the taxpayer has suffered economic hardship, or was otherwise unable to pay the taxes on time due to the COVID-19 pandemic, or any local, state or federal response to COVID-19.

If the taxes owed on a property are being paid on an installment plan and the payments were made on time as of March 4, 2020, the balance of the taxes due under the installment plan will not be considered to be delinquent for this purpose.

Real estate taxes being paid using an impound account aren’t eligible for this relief.

If you have questions about this matter, consult with your tax advisor or call your county tax collector.

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.)

California sales tax relief for small businesses

Thanks to the Supreme Court’s Wayfair decision, retailers that sell tangible personal property to customers located in states where they don’t have a physical presence may be required to collect sales and use tax.  For example, a company located in Nevada that sells furniture to a California customer may be required to collect California sales and use tax and report the sale and pay the tax to California.

The same concept can require a retailer located in one sales tax district, say Santa Clara County, that sells property to a customer located in another district, say Los Angeles County, to collect and remit the sales and use tax to the district where the customer is a resident (in this example, Los Angeles County.)  (This requirement has long applied to sales of motor vehicles.)

Initially, California’s Department of Tax and Fee Administration (CDTFA) issued rules imposing this collection requirement when a taxpayer had in either the preceding or current calendar year either (1) sales into the state or district exceeding $100,000 or (2) 200 or more separate transactions.

The new requirements were proposed to be effective on April 1, 2019.

Smaller retailers complained that the requirements were too burdensome — especially because they might have 200 separate transactions with a small dollar amount.

On April 25, 2019, Governor Newsom approved Assembly Bill No. 147, which provides relief to smaller retailers.

The new threshold for the requirement to collect California state and district sales and use taxes is more than $500,000 of sales of tangible personal property to customers located in California.  (Sales of motor vehicles are still subject to the use tax reporting requirement, regardless of the amount.)

The second threshold of 200 or more separate transactions has been repealed and is disregarded.

The new $500,000 of sales threshold is retroactively effective on April 1, 2019.

A change in the new law this isn’t favorable to small businesses doing business in California is that district sales and use taxes for all districts must be collected and reported when a business reaches the $500,000 threshold for all of California.  Under the previous guidelines, reporting and collection was only required when the $100,000 or 200 transactions threshold was reached for the district.  To help get the rates that apply, the CDTFA has on online lookup tool, Find a Sales and Use Tax Rate by Address.  Here is a link to the tool. https://gis.cdtfa.ca.gov/public/maps/taxrates/  (Spidell’s California Taxletter, May, 2019, p. 3, California adopts $500,000 economic nexus threshold for use taxes.)

Retailers with a physical presence in California are still required to report and collect California sales and use tax and local district sales and use tax.  They only need to be concerned about the $500,000 threshold as it relates to sales to customers located in another district.

The new law also includes a new requirement that requires “marketplace facilitators” that sell goods for other companies on their web sites, like Amazon and EBay, to treat those sales as made by the marketplace facilitator.  The marketplace facilitator will report the sales and collect and remit the sales and use taxes when it exceeds the $500,000 of sales threshold for the State of California and the various districts.

If the marketplace facilitator reports the sale and collects and remits the sales and use tax, the retailer isn’t required to do so.

The marketplace facilitator rules won’t be effective until October 1, 2019.

Some retailers might have to report sales made through a marketplace facilitator from April 1 through September 30, 2019 and their reporting burden may be shifted to marketplace facilitators thereafter.

There may be audit issues with the new marketplace facilitator reporting requirement, because the sales reported on the sales tax report won’t agree to the books and records of the retailer and the marketplace facilitator.

Despite the complexity of the new reporting requirements, many smaller retailers will find a lot to be thankful for in this relief legislation.

What should you know about California real estate change of ownership?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Friday, July 21, is with G. Scott Haislet, CPA and attorney at law.   Our interview subject is “Real estate reassessment change of ownership in California.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What should you know about spousal and child support for a California divorce? (Part 2)

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, February 24, is with Mark Erickson, attorney at law.   Our interview subject is “Divorce California Style – child and spousal support – part 2 of 2.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What should you know about property settlement for a California divorce?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell on Fridays, February 3 and 10, is with Mark Erickson, attorney at law.   Our interview subject is “Divorce California Style – property settlement basics.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

Tax and financial advice from the Silicon Valley expert.