California $ crisis: "conformity, or the Lack thereof, has to be the single biggest issue for practioners (and their clients).".

• Position: Finalentry

Kathleen "Kitty" Wright has more than a few credentials JD, CPA, MBA (Taxation) and LLM (Taxation)--so, California CPA asked this top California CPA Education Foundation instructor for her thoughts about California's fiscal crisis. To go more in-depth, check out her upcoming Education Foundation courses at www.calcpa.org/rsvp. Search for "California Slate Taxation" .

What are the tax implications of California's "budget" for individuals and businesses?

Conformity, or the lack thereof, is the single biggest issue for practitioners (and their clients) California conforms to federal law as of Jan. 1, 2005, which means we are at least 10 tax bills behind federal. Federal has enacted several "economic stimulus" plans and bailout packages and Californians can only enjoy these benefits on their federal return, and then watch most of that federal benefit disappear on their state return. This is probably the biggest single issue that could give rise to malpractice claims for practitioners. The big tax items in this year's budget are a two-year suspension of the net operating losses (with an exception for "small" business): a limit on the use of business credits (again with same small business exception); and acceleration of payment of estimated tax payments.

Will the state budget's various accounting changes--collecting some taxes earlier in the year, removing a few corporate tax deductions and hiking penalties charged to companies that underpay their taxes--make a difference?

The problem with these provisions is the penalty: 20 percent of the understated tax if the understated tax is more than SI million. The penalty does not apply if the understatement is due to a change in the law or reliance on written advice from the FTB. However, there is no reasonable cause exception (a common exception for relief from penalties). Corporations are going to be much less aggressive on the tax return as filed.

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Is California any closer to federal conformity?

No. That's the biggest problem we have. Nonconformity impacts individuals and many industries. Entertainment, for example, does not get benefits awarded under federal law or benefits, such as transferable credits, made available by other states. The California Legislature looks at many of the Bush tax cuts as only benefiting business and too expensive for our state.

If the recession spreads and tax revenues drop, will California municipalities, or the state itself, risk going bankrupt?

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