California ~ Corporate, Personal Income Taxes: IRC Conformity Updated and Large Corporate Understatement Penalty Relief Provided

Legislation has been enacted that changes California’s specified date of conformity to the Internal Revenue Code (IRC) for corporation franchise and income and personal income tax purposes from January 1, 2009, to January 1, 2015, for taxable years beginning on or after January 1, 2015, except as otherwise provided. In addition, the legislation generally conforms to the federal net operating loss (NOL) rules that allow corporations expecting an NOL carryback to extend the time for payment of taxes for the preceding taxable year, and modifies the state’s large corporate understatement penalty (LCUP) to provide additional exceptions to the penalty.

The provisions in the bill are generally applicable for taxable years beginning on or after January 1, 2015, except that certain LCUP modifications relating to the imposition of an alternative apportionment or allocation method by the Franchise Tax Board (FTB) are applicable to understatements for any taxable year for which the statute of limitations on assessments has not expired as of the effective date of the legislation. The technical corrections and clarifications made by the Tax Technical Corrections Act of 2014 (P.L. 113-295), to the extent that they correct provisions that are incorporated by reference into California law, are declaratory of existing law and are applicable in the same manner and for the same periods as specified for federal purposes or, if later, the specified date of incorporation.

General Conformity

 

The legislation provides conformity or partial conformity to the following federal provisions:

– exclusion from gross income of qualified military base realignment and closure fringe benefits (Worker, Homeowner, and Business Assistance Act of 2009 (P.L. 111-92));

– disclosure of information with respect to foreign financial assets (Hiring Incentives to Restore Employment Act (P.L. 111-147));

– increase in additional tax on distributions from Archer medical savings accounts not used for qualified medical expenses (Patient Protection and Affordable Care Act (P.L. 111-148));

– denial of deductions for the annual fee on branded prescription manufacturers and importers (Patient Protection and Affordable Care Act (P.L. 111-148));

– certain swaps not treated as IRC §1256 contracts (Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203));

– special rule with respect to certain redemptions by foreign subsidiaries (State Fiscal Relief and Other Provisions; Revenue Offsets (P.L. 111-226));

– limitation on penalty for failure to disclose reportable transactions based on resulting tax benefits (Small Business Jobs Act of 2010 (P.L. 111-240));

– removal of cellular telephones and similar telecommunications equipment from listed property (Small Business Jobs Act of 2010 (P.L. 111-240));

– increase in information return penalties (Small Business Jobs Act of 2010 (P.L. 111-240));

– special rules for annuities received from only a portion of a contract (Small Business Jobs Act of 2010 (P.L. 111-240));

– modification of the definition of “control” for purposes of IRC §249 (FAA Modernization and Reform Act of 2012 (P.L. 112-95, Title IX));

– transfers of excess pension assets (Moving Ahead for Progress in the 21st Century Act (P.L. 112-141));

– extension and modification of research credit (American Taxpayer Relief Act of 2012 (P.L. 112-240));

– Indian general welfare benefits (Tribal General Welfare Act of 2014 (P.L. 113-168));

– various technical and clerical corrections (Tax Technical Corrections Act of 2014 (P.L. 113-295)); and

– investment direction rule for IRC §529 plans (Achieving a Better Life Experience (ABLE) Act of 2014 (P.L. 113-295)).

In addition, the legislation states that it is the intent of the Legislature to confirm the validity and ongoing effect of Ch. 14 (S.B. 401), Laws 2010, the state’s last federal conformity bill, which was enacted in 2010.

Nonconformity

 

Federal provisions to which the legislation does not conform include the following:

– treatment of certain ownership changes for purposes of limitations on NOL carryforwards and certain built-in losses (American Recovery and Reinvestment Act of 2009 (P.L. 111-5));

– increase in penalty for failure to file a partnership or S corporation return (Worker, Homeowner, and Business Assistance Act of 2009 (P.L. 111-92));

– requirements for certain tax preparers to file tax returns electronically (Worker, Homeowner, and Business Assistance Act of 2009 (P.L. 111-92));

– modification of itemized deduction for medical expenses (Patient Protection and Affordable Care Act (P.L. 111-148));

– extension of the work opportunity credit (Tax Increase Prevention Act of 2014 (P.L. 113-295));

– qualified Achieving a Better Life Experience (ABLE) programs (ABLE Act of 2014 (P.L. 113-295)); and

– inflation adjustment for certain civil penalties (ABLE Act of 2014 (P.L. 113-295)).

Federal NOL Carryback Procedures

 

The legislation generally conforms to the federal provision that allows a corporation expecting an NOL carryback to extend the time for payment of taxes for the immediately preceding taxable year. The federal provisions are modified for California purposes to substitute references to the Secretary of the Treasury with references to the Secretary or the FTB, and references to IRC provisions with references to California Rev. & Tax. Code provisions. Also, IRC §6164(d)(2) (relating to the period of extension if an application for tentative carryback adjustment is filed) is inapplicable for California purposes.

Large Corporate Understatement Penalty Relief

 

The LCUP, which is assessed against any corporation that has an understatement of tax that exceeds the greater of $1 million or 20% of the tax shown on an original return (or amended return filed on or before the original or extended due date of the original return), is modified to provide additional exceptions to the penalty for the following:

– an increase in tax shown on the first amended return reflecting a proper IRC §338 election (relating to certain stock purchases treated as asset line acquisitions);

– an understatement attributable to the imposition of an alternative apportionment or allocation method by the FTB, under the authority of Rev. and Tax. Code §25137, because the standard allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s business activity in the state; and

– an understatement attributable to a change to the taxpayer’s federal method of accounting, but only to the extent of understatements for taxable years where the due date of the return, without regard to any extension of time for filing the return, is before the date the Secretary of the Treasury consents to that change.

Ch. 359 (A.B. 154), Laws 2015, effective September 30, 2015, and applicable as noted

 

AUTHOR

Wolters Kluwer Tax and Accounting

Wolters Kluwer Tax and Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. Wolters Kluwer Tax and Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2016 annual revenues of €4.3 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

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