AB 115 conformity: AB 115 conforms state with federal tax acts, with some exceptions.

• Position: TAX LEGISLATION

In October, Gov. Schwarzenegger signed AB 115, a conformity bill that adopts many 2004 federal tax changes in California. The bill conforms to federal tax law as enacted Jan. 1, 2005, for taxable years beginning after 2004, moving California's conformity date four years ahead.

Some of the more significant aspects of the legislation include the liberalized student loan deduction in the Job Creation and Worker Assistance Act of 2002; limited Sec. 179 asset expense election in the Jobs and Growth Tax Relief Reconciliation Act of 2003; and the uniform definition of a qualified child as defined by the Working Families Tax Relief Act of 2004.

AB 115 also conforms to the Economic Growth and Tax Relief Reconciliation Act of 2001; the Medicare Prescription Drug, Improvement, and Modernization Act of 2003; and the American Jobs Creation Act of 2004.

However, several areas of nonconformity remain. The following is an overview of some of AB 115's provisions, according to CCH's review in its Oct. 11, 2005 TAXDAY daily newsletter (reprinted with permission from CCH, Inc.).

IRC SEC. 179

Corporations and franchise income taxpayers now can claim the Sec. 179 asset expense election that was available only to personal income taxpayers in California.

For California franchise and income tax purposes, the maximum Sec. 179 expense allowance is $25,000. Additionally, in California, the deduction's phase-out amount is $200,000 ($400,000 for federal purposes). The election can't be claimed for off-the-shelf software.

One area of nonconformity is the federal provision that allows the taxpayer to revoke a Sec. 179 asset expense election during taxable years 2003-07.

NONCONFORMITY

The following are federal provisions to which California does not conform for personal income, corporate income and franchise tax purposes:

* Passive activity loss rules regarding rental real estate;

* Exclusion of federal subsidies for prescription drug plans;

* Expensing of environmental remediation costs, applicable to expenditures paid or incurred after 2003;

* Treatment of certain passive foreign investment companies;

* Additional first-year bonus depreciation;

* Tax deferral allowed for gains on electric transmission assets;

* Deduction of income attributable to domestic production activities;

* Deduction for clean-fuel vehicles and certain refueling property;

* 15-year recovery period for qualified leasehold improvements and qualified restaurant property;

* Prohibition against taking...