Tax season toolkit: everything you need to navigate through the busy season.

• Author: Josephs, Stuart R.

After the bustle of the holiday season, CPAs will be launched headlong into tax season. With the rapid changes taking place in theM economy and regulatory world, there's much to be wary of when filing for your clients. But, never fear! CalCPA's annual Tax Season Toolkit is here to help.

California Tax Tips

California enacted more than 800 legislative bills over the past year. Here are several important highlights for your 2012 season.

Effective in 2011 Federal Conformity

California updated its conformity to certain federal legislation passed after 2009. Key conformity items applicable to 2011 tax filings include:

* Conformity to the deduction of health insurance for adult dependents under the age of 27.

* Conformity to income exclusions of simple cafeteria plans for small businesses and student loan repayment programs.

* Select modified conformity to Federal Regulated Investment Company Modernization Act of 2010, affecting capital loss carryovers, income and asset tests, holding period requirements, basis, dividend and distributions, and pass through of tax attributes and credits.

NOLs Remain Suspended for 2011

Because of ongoing budget deficits, NOLs will continue to be suspended for both personal income and corporate taxpayers. This applies to all California NOL provisions, including qualified small business and Enterprise Zone NOLs.

Exception to NOL Suspension for 2011

Business entities with pre-apportioned taxable income of less than $300,000 can claim an NOL. Individual taxpayers can claim an NOL if their modified adjusted gross income is less than $300,000. Suspended NOLs for 2008, 2009, 2010 and 2011 will be allowed additional carryover periods of four years, 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 was pushed back to 2013. NOLs incurred in 2013 may be carried back to 2011 and 2012.

Single-Sales Factor Election

All taxpayers, except certain businesses, may make an annual election to apportion their business income using a single-sales factor. New regulations clarify that even nonresident individuals with business income from sole proprietorships, single-member limited liability companies, partnerships or S corps should consider the election. The new regulations also clarify when an election is binding upon other business entities, such as members of unitary groups and tiered partnerships. Absent the election, the standard formula based on property; payroll and sales would apply.

Expanded Sales Factor: The Finnigan Rule Returns

Previously, California treated each corporation in a combined return group as separate taxpayers for purposes of sales factor sourcing and throwback rules. Starting in 2011, the Finnigan rule is again in effect. Accordingly all sales of a combined reporting group are included in the numerator of the sales factor if any member of the combined reporting group is subject to tax in California.

Similarly, sales shipped or delivered outside California are not included (not "thrown back") in the sales factor numerator if any member of the combined reporting group is taxable in the state of the purchaser.

Sourcing for Sales of Services and Other Intangibles

Gross receipts from various revenue-generating activities will be sourced using a "market" or "customer location" sourcing rule. These changes apply to taxpayers electing to use single-sales factor apportionment. Sales of items other than tangible personal property are sourced in the following ways:

* Services are in California to the extent the purchaser receives benefits in California.

* Sales from intangible property are sourced to California to the extent the property is used in California.

* Sales from licensing, leasing, or renting real or tangible personal property are in California if the property is located in California.

Taxpayers using the standard apportionment will continue to source certain gross receipts based on where income-producing activities occur. Taxpayers using independent contractors should be aware of regulation changes made in 2010. These rules change how costs associated with these contractors are treated in sourcing sales.

Economic Nexus Defined

To determine if taxpayers have economic nexus and are subject to related corporate income tax, the term "doing business" is redefined to include any of the following conditions:

* The business is organized or commercially domiciled in California.

* In-state sales exceed the lesser of $500,000 or 25 percent of total sales.

* In-state real and tangible personal property exceeds the lesser of $50,000 or 25 percent of total property.

* In-state payroll exceeds the lesser of $50,000 or 25 percent of total payroll.

In-state sales, property and payroll are determined by application of the corporate apportionment rules, including alternate apportionment rules. Despite this change, federal and constitutional limits to state taxation still apply.

Definition of 'Gross Receipts' Codified

For apportionment purposes, "gross receipts" are redefined to include all gross amounts realized, except for:

* Repayment and redemptions of loans, bonds, etc.

* Amounts received from repurchase agreements.

* Amounts from stock issuance or sale of treasury shares.

* Damages and other amounts resulting from litigation.

* Property acquired by an agent on behalf of another.

* Tax refunds and other tax benefit recoveries.

* Pension reversions.

* Contributions to capital.

* Income from discharge of indebtedness.

* Amounts realized from exchanges of inventor not recognized for Internal Revenue Code purposes.

* Amounts received from intangibles in connection with treasury functions (except for broker dealers).

* Amounts received from hedging transactions.

Use Tax Look-Up Tables

Taxpayers may report use tax on their personal income tax return using look-up tables provided by the State Board of Equalization. The look-up tables apply to individual nonbusiness purchases of SI,000 or less and are based on a person's adjusted gross income. Taxpayers will continue to have the option to calculate and report their use tax liabilities on actual basis.

Dependent Credit Reduced

The reduced dependent credit, equal to the individual personal exemption credit, still applies for 2011.

Disaster Relief

Victims of the San Bruno pipeline explosion and Mendocino County tsunami will be allowed to apply federal disaster loss rules carrying forward excess losses for up to 15 years. Pipeline explosion victims may exclude certain relief payments from gross income.

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