Legislation has been enacted that requires certain business entities to electronically file their California tax returns, allows the California Competes credit to reduce a taxpayer’s regular tax below the tentative minimum tax, generally conforms to the federal tax treatment of charitable remainder trusts that have unrelated business taxable income, and provides that no dependent exemption credit will be allowed unless the dependent’s taxpayer identification number (TIN) is included on the personal income tax return on which the credit is claimed.
Business Entity E-Filing
For taxable years beginning on or after January 1, 2014, for returns filed on or after January 1, 2015, certain business entity returns that are prepared using tax preparation software must be filed using electronic technology in a form and manner prescribed by the Franchise Tax Board (FTB), unless a waiver is granted. The requirement applies to original or amended franchise and income tax returns required to be filed by corporations, S corporations, partnerships, limited liability companies, and exempt organizations, other than returns for unrelated business taxable income. A business entity required to file a return electronically may annually request a waiver of the requirement from the FTB. The FTB may grant a waiver if it determines that the business entity is unable to comply with the requirement due to, but not limited to, technology constraints, where compliance would result in undue financial burden, or due to circumstances that constitute reasonable cause and not willful neglect.
For taxable years beginning on or after January 1, 2017, if a business entity required to file a return electronically fails to comply with the requirement, a penalty will be imposed in the amount of $100 for an initial failure and in the amount of $500 for each subsequent failure, unless the failure is due to reasonable cause and not willful neglect. If a group return is filed on behalf of eligible electing taxpayer members of a combined reporting group, the penalty will apply to the combined reporting group and not to a taxpayer member of the combined reporting group.
The FTB is required to conduct a robust education program advising business entities affected by the new requirement and to liberally interpret and grant waivers of the penalty imposed, in order to minimize any unnecessary adverse impact to business entities that experience difficulty complying with the new requirement.
California Competes Credit
For taxable years beginning on or after January 1, 2014, the California Competes credit may reduce a taxpayer’s regular tax below the tentative minimum tax for corporation franchise and income and personal income tax purposes. The legislation also contains language preventing this change from chaptering out the provision in A.B. 1839 (TAXDAY, 2014/09/19, S.3) that allows the new motion picture production credit to reduce a corporate taxpayer’s tax below the tentative minimum tax.
Charitable Remainder Trusts
For taxable years beginning on or after January 1, 2014, California law is modified to generally conform to the federal tax treatment of charitable remainder trusts that have unrelated business taxable income, except that instead of the excise tax imposed on unrelated business taxable income under federal law, a tax will be imposed on unrelated business taxable income for California purposes at the graduated rates set forth in Rev. and Tax. Code §17651 (currently, 1% to 13.3%). This allows charitable remainder trusts that have unrelated business taxable income to retain their tax-exempt status on other trust income. Previously, if a charitable remainder trust had unrelated business taxable income in any taxable year, then for California purposes it lost its tax-exempt status for that taxable year.
For taxable years beginning on or after January 1, 2015, no dependent exemption credit will be allowed unless the dependent’s TIN is included on the return on which the credit is claimed. A disallowance of the credit due to the omission of a TIN will be treated by the FTB as a math error. A claimant will have the right to subsequently provide the TIN and claim a credit or refund prior to the expiration of the statute of limitations.
Ch. 478 (A.B. 2754), Laws 2014, effective January 1, 2015, and applicable as noted