After the bustle of the holiday season, CPAs will be launched headlong into tax season. With the rapid changes taking place in the economy and regulatory world, there's much to be aware of this year when filing for your clients. But, never fear! CalCPA's annual Tax Season Toolkit is here to help.
California Tax Tips
This year the California Legislature passed long-awaited federal conformity. Instead of raising taxes, it extended suspension of net operating losses (NOLs) through 2011, further delayed NOL carrybacks and expanded use tax reporting requirements to help close the budget deficit. Favorable business tax changes included lifting the credit limitation, revising thresholds for the substantial underpayment penalty and enacting a sales and use tax exemption for alternative energy development. Other changes go into effect in 2011.
The following is a recap of enacted 2010 California tax law changes.
California Conformity to 2009 Federal Provisions
For taxable years beginning on or after Jan. 1, 2010, California now conforms (as modified) to the Internal Revenue Code as enacted on or before Jan. 1, 2009. However, a significant number of federal provisions continue not to apply, including most provisions under the American Recovery and Reinvestment Act of 2009.
Key conformity items applicable to 2010 tax filings include:
* Age limit for reporting unearned income of a child is now 18 years.
* Research credit conformity--except for alternative simplified credit method or credit for amounts paid to an energy research consortium or to eligible small businesses, universities and federal laboratories.
* Modified conformity to the exclusion of qualified principal residence indebtedness.
* Surviving spouses get up to a $500,000 gain exclusion for principal residences sold after Dec. 31, 2009.
* Rules regarding contributions and gifts under IRC Sec. 170 have modified conformity.
* California will allow elective deferrals and deferred compensation up to the same federal amount allowed as of Jan. 1, 2010.
* Informational returns now required for split-interest trusts, insurance contracts for certain exempt organizations and amounts paid in settlement of payment cards and third-party network transactions.
NOLs Remain Suspended for 2010 and 2011
Because of ongoing budget deficits, NOLs will continue to be suspended for both personal income and corporate taxpayers for 2010 and 2011. This applies to all California NOL provisions, including qualified small business and Enterprise Zone NOLs.
Exception to NOL Suspension for 2010 and 2011
For 2008 and 2009, a small-business exception allowed taxpayers with less than $500,000 in business income to claim an NOL. For 2010 and 2011, business entities with pre-apportioned taxable income of less than $300,000 can claim an NOL. Personal income taxpayers can claim an NOL if their modified adjusted gross income is less than $300,000. Suspended NOLs for 2008, 2009 and 2010 will be allowed additional carryover periods of three years, two years and one year respectively.
NOL Carrybacks Delayed Until 2013
The two-year NOL carryback provision scheduled to begin with 2011 NOLs is pushed back to 2013. NOLs incurred in 2013 may be carried back to 2012 and 2011.
Use Tax Reporting included on 2010 California Income Tax Filings
An irrevocable election to report and remit use tax can be made on all income (franchise) tax return filings for tax years beginning on or after Jan. 1, 2010. The election requires full reporting of use tax on purchases for that tax year along with remittance with the tax return.
Penalties and interest apply for unremitted use tax reported. Payments are applied first to income (franchise) tax, interest and penalties and secondly to use tax, applicable interest and penalties.
Use Tax Exams and Statute of Limitations for Reporting Enacted
Use tax reported on 2010 income (franchise) tax filings are subject to examination for a period of three years from the extended due date of the tax return. The exam period is extended to six years if the use tax is grossly underreported by 25 percent of the required amount. A collection cost recovery fee will be assessed on demands for payment of unpaid use tax.
Substantial Understatement Penalty Threshold Changed for 2010
For 2010 and forward, corporations with a tax understatement that exceeds the greater of $1 million or 20 percent of the tax shown on the tax return filed are subject to a 20 percent penalty on the amount of the understated tax. For years prior to 2010, the penalty applied to all corporations with more than a $1 million tax understatement.
Business Tax Credit Limitations Lifted for 2010 and Forward
Business tax credits (including the Enterprise Zone and research credits) may be fully used without limitation for tax year 2010 and forward. For 2008 and 2009, credits generally could only offset up to 50 percent of the tax.
Sales and Use Tax Exclusion for Alternative Energy Projects
Taxpayers can claim a California sales and use tax exclusion for qualifying projects that generate new and renewable energy. Qualifying projects use, or are designed to use, an "alternative" energy source. Projects include new construction, additions, replacements, renovations or improvements to existing facilities. An application must be submitted and approved by the California Alternative Energy and Advanced Transportation Financing Authority, which is authorized to gram annual sales and use tax exclusions of up to $100 million.
Small Businesses Owned by Deployed Service Members
Corporations and LLCs owned by deployed U.S. service members are exempt from minimum/annual tax if total business receipts are no more than $250,000 and operates at a loss or ceases operations. This provision is effective as of Sept. 27, 2010.
Three new voluntary check-off funds the Arts Council Fund, the California Police Activities Fund and the California Veterans Homes Fund--have been approved to be added to California personal income tax forms. However, the FTB cannot add a new check-off fund until a current voluntary check-off fund designation is removed.
Information compiled by Bob Reynolds, CPA, a partner at Moss Adams LLP. You can be reach him at Bob.Reynolds@mossadams.com.
Federal Tax Tips
2009 Worker, Homeownership, and Business Assistance Act
Electing Longer NOL Carryback Period
The 2009 American Recovery and Reinvestment Act (ARRA), P.L. 111-5, enacted Feb. 17, 2009, allowed an eligible small business (ESB) to elect to carryback an "applicable 2008 net operating loss" for three, four or five years.
An ESB is a corporation or partnership meeting IRC Sec. 448(c)'s gross receipts test for the tax year of the NOL or a sole proprietorship, which would meet this test if it were a corporation--but substituting $15 million for $5 million each place it appears in Sec. 448(c).
An applicable 2008 NOL is an NOL for any tax year ending in 2008 or, if the taxpayer elects, an NOL for any tax year beginning in 2008.
The 2009 Worker, Homeownership, and Business Assistance Act (WHBAA), P.L. 111-92, enacted Nov. 6, 2009. expanded ARRA's carryback provisions to allow all businesses, except those that received certain benefits (whether or not repaid) under the Troubled Assets Relief Program (TARP) with an "applicable NOL" to carryback that NOL to the prior five tax years.
An applicable NOL is an NOL for a tax year ending after 2007 and before 2010.
Generally, a taxpayer may elect an extended carryback period for only one tax year. However, an ESB that made, or makes, a timely election under the law in effect before Nov. 6, 2009--for an applicable 2008 NOL--also may elect for a 2009 NOL.
Rev. Proc. 2009-26 prescribes procedures for making ARRA elections by ESBs.
There is no limit on carrybacks to the first four preceding years. For the fifth year, the carryback is limited to 50 percent of that year's taxable income (without the NOL for the loss year or any tax year thereafter).
This limitation does not apply to an ESB's applicable 2008 NOL for which an ARRA election is made--even if it is made after Nov. 6, 2009.
For tax years ending after 2002, WHBAA suspends the 90 percent limitation on using any alternative minimum tax NOL deduction attributable to the carryback of an applicable NOL for which the extended carryback period is elected.
Rev. Proc. 2009-52 prescribes how and when to elect to carry back an applicable NOL.
Sec. 172(b)(1)(H) Election
This election can be made on an original or amended federal income tax return for the tax year of the applicable NOL by attaching a statement indicating the taxpayer is electing to apply Sec. 172(b)(1)(H) under Rev. Proc. 2009-52, and that the taxpayer is neither a TARP recipient nor, in 2008 or 2009, a TARP recipient affiliate.
This statement also must specify the length of the NOL carryback period that the taxpayer elects.
The statement must be filed with this original or amended return by the due date, including extensions, for filing the taxpayer's return for the last tax year beginning in 2009.
Carryback Applications or Refund Claims: A taxpayer making this election, as described above, must attach a copy of the election statement to a claim for tentative carryback adjustment, Form 1045 (individuals and fiduciaries) or Form 1139 (corporations), or to an amended return--applying the applicable NOL to the carryback year.
The due date for timely filing these documents for an electing taxpayer is extended to the due date, including extensions, for filing the taxpayer's return for the last tax year beginning in 2009.
Electing on an...