TAX SEASON toolkit: Highlights to Help You Navigate the 2019 Busy Season.

• Author: Saechao, San

The 2019 tax busy season is quickly approaching. For most taxpayers, this will be the first season that impacts of the new tax reform will take place.

This means now is the time to familiarize yourself with tax updates that may affect 2018 tax-year filings-as well as items that may have been missed in 2017 filings.

California and Federal Tax Reform

Tax reform--commonly known as the Tax Cuts and Jobs Act (TGJA)--affects individuals, businesses, tax-exempt entities and government entities. Many of these changes will affect individuals and organizations in California in various capacities, but it's worth noting California doesn't conform to most of the federal tax law changes. Below are changes to tax laws that California taxpayers should watch for.

Qualified Business Income Deduction

The IRS issued proposed regulations for the newly created Internal Revenue Code (IRC) Sec. 199A, which allows certain owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of qualified business income.

The deduction is subject to certain limitations and is effective for lax years beginning after Dec. 31, 201 7, through Dec. 31, 2025. California doesn't conform to IRC Sec. 199A, and there's no existing proposal to change for the 2018 tax year.

1031 Exchanges

The new federal law retains IRC Sec. 1031, Exchange of Real Property Held for Productive Use or Investment, for real estate exchanges. However, it may no longer be used to defer taxes for transactions involving personal properly and is limited to like-kind exchanges of real property that isn't held primarily for sale.

California conforms to IRC Sec. 1031, as of the specified date of Jan. 1, 2015, with modifications, but it doesn't conform to the new federal change enacted by tax reform. Because of this, taxpayers may run into a situation where a like-kind exchange may qualify for deferred tax gain under California law and not federal law.

Full-expensing Deduction

The cost of certain tangible business use personal property assets can be written off using the full-expensing deduction which allows for 100 percent depreciation-in the year they're placed in service to offset any capital gain or depreciation recapture recognized in the same or future years. California doesn't conform to these provisions.

State and Local Tax Deduction

Under federal tax reform, an individual's deduction for the aggregate amount of state and local taxes (SALT) paid during a calendar year is limited to $10,000--or S5,000 in the case of a married individual filing separately. SALT payments exceeding those amounts arc not deductible for federal personal income tax purposes.

California conforms to the deductibility of taxes as of the specified date of Jan. 1, 2015, with modifications. For example, California doesn't allow a deduction for SALT paid in the calculation of income. California doesn't conform to the new federal SALT deduction limitation enacted by tax reform.

Tax Form Changes

Tax reform changed federal itemized deductions as well as the federal standard deduction amounts beginning with the 2018 taxable year. These changes significantly impact California Schedule CA (Forms 540 and 540NR) and California adjustments requiring the Franchise Tax Board to make major changes to the forms.

Once made, these changes will put the entire form into a consistent format while allowing a taxpayer to see California adjustments made to each federal line item.

Untaxed Foreign Earnings

Under IRC Sec. 965, Treatment oj Deferred Foreign Income, U.S. shareholders are now required to pay a one-time federal transition tax on untaxed foreign earnings of certain foreign corporations, as if those earnings had been repatriated--or deemed dividend--to the United Slates. This means certain taxpayers may have had to pay additional federal tax under IRC Sec. 965 when their 201 7 federal lax returns were filed.

2017 adjustments: California doesn't conform to IRC Sec. 965, which means taxpayers that reported IRC Sec. 965 amounts on their 201 7 federal tax return should have made an adjustment on their 2017 California tax return.

Adjustments after 2017: When a foreign corporation makes an actual dividend distribution of the previously tax foreign earnings, those earnings aren't taxed again for federal purposes. For California income tax purposes, the actual dividend distribution hasn't been taxed and may be includible in taxable income for California.

California Tax Credits

Earned Income Tax Credit

The California Earned Income Tax Credit has been extended by Senate Bill 855 to help put money in the pockets of low-income taxpayers. The bill revised the age limit for an eligible individual without a qualifying child to 18 years or older and increased the income thresholds.

The FTB web page (fib.ca.gov) details credit amounts, income limits, qualifications, and additional information.

California Competes Tax Credit Extension

SB 855 also extends the California Competes Tax Credit (CCTC) program for an additional five years. CCTC is an economic development incentive to attract or retain businesses considering a significant new investment in California by reducing taxpayers' personal income tax or corporation tax.

In the CCTC program's 2018-19 fiscal year, the California Governor's Office of Business and Economic Development is authorized to negotiate up to $180 million in tax credits over three application periods. However, the application process is very competitive.

The first application period ended Aug. 20, 2018. The next two CCTC application periods for the program's 2018-19 fiscal year are shown in Figure 1.

FIGURE 1 PERIOD BEGINS PERIOD ENDS ALLOCATION January 2,2019 January 21, 2019 $75,000,000 March 4,2019 March 15,2019 To Be Determined New Employment Credit Extension

SB 855 extends the New Employment Credit program for an additional five years. For further details on how to qualify for the credit, visit the FIB web page.

California Legislative Update

The California Legislature proposed more than 900 bills in 2018. Here are selected highlights that may be useful to know for 2018 tax-year filings.

Corporate and LLC Dissolution, Cancellation & Tax Abatement

Signed by Gov. Brown on Sept. 22, 2018, and effective as of Jan. 1, 2019, Assembly Bill 2503 subjects domestic corporations and LLCs to administrative dissolution or administrative cancellation if their corporate powers were suspended by the FTB for 60 continuous months. As part of the law, the FTB must provide notice to the company of any pending action.

Once dissolution or cancellation has occurred, the bill authorizes the FIB to abate upon written request by a qualified entity--the unpaid qualified taxes, interest and penalties for the taxable periods in which an entity certifies it wasn't doing business in California.

The bill also requires the FTB to prescribe rules and regulations to carry out these abatement provisions, which the agency is currently in the process of producing.

Partnership Audit Rules

On Sept. 23, 2018, the governor signed SB 274, incorporating into California law certain federal precisions related to the audit of partnerships. The bill requires a partnership to report each change or correction to the FTB for a reviewed period within six months after the date of each final federal determination if the following are true:

* Any item required to be shown on a federal partnership return is changed or corrected; and

* The partnership is issued an adjustment or makes a federal election for an alternative to payment.

SB 274 closely aligns with federal rules, but there are some differences where a partnership is unitary with another entity or where a partnership elects to push out federal audit adjustments to its partners.

While the federal partnership representative is the default representative in California, SB 274 does allow partnerships to designate a separate partnership representative for California tax purposes. It also includes provisions addressing tiered partnership structures that allow an additional 90 days from the federal deadline to comply with all necessary filing and payment requirements.

This bill took immediate effect upon signing.

2018 Disaster Losses

Taxpayers may deduct a disaster loss for any loss sustained in California during an event proclaimed by the governor to be a state of emergency. California hasn't conformed to the new federal tax law in this regard and instead generally follows the former federal law regarding the treatment of losses incurred because of a casualty or a disaster.

Hurricanes Florence and Michael

The FTB follows the announced federal postponement periods for hurricanes Florence and Michael. Affected taxpayers were granted an extension to file tax returns and make payments until Jan. 31, 2019, and Feb. 28, 2019, respectively. This means, for example, if Hurricane Florence impacted a taxpayer who earns income in California, that taxpayer has extra time to file a California tax return.

The IRS disaster relief web page (irs.gov/uewsroom/tax-relief-in-disaster-situations) lists additional designated areas eligible for a postponement period, which the FIB will also follow, cancelling any interest and late-filing or late-payment penalties that would otherwise apply.

Other 2018 Disasters

Taxpayers may deduct a disaster loss for any loss sustained in a California city or county proclaimed by the governor to be in a state of emergency. For more information regarding California disaster losses, sec the FTB website and Publication 1034, Disaster Loss How to Claim a State Deduction.

Figure 2 includes California Qualified Disasters published on the FTB website as of Oct. 31.

FIGURE 2 DISASTER INCIDENT GOVERNOR CODE PERIOD DISASTER COUNTY DECLARED Southern 95 January California Ventura, Santa Yes 2018 Mudslides Barbara Amador, Fresno March Winter Korn, Mariposa, 96 March 2018 Storms Merced, Stanislaus, Yes Tulare, Tuolumne 97 June 2018 Pawnee Fire Lake Yes 98 July 2018...