Tax tis the season: California Developments & Opportunities.

• Author: West, Nick

While 2022 has presented a shift toward pre-pandemic habits and expectations for some people, pressing issues and questions remain for tax professionals across California. Some topics have evolved, while others are seeing their first appreciable development in several years.

Updates and Changes

In the following, you'll find details on income tax perspectives, income tax credits, disaster loss deductions, as well as an item discussing an important development related to unclaimed property enforcement.

Income Tax Perspective

There are updates or updated guidance for some tax rules, including the elective pass-through entity tax, suspension or limitation of certain attributes, and nexus considerations.

Elective Pass-through Entity Tax

California enacted an elective pass-through entity (PTE) tax regime in 2021. The election is administered by the Franchise Tax Roard (FIR) and can be an avenue for qualifying taxpayers to mitigate the tax impact of the federal 110,000 cap on the deductibility of taxes imposed at the state and local level by shifting the incidence of tax off individual partners or shareholders and onto the PTEs themselves.

On Feb. 9, Gov. Gavin Newsom signed CA Senate Bill 113 (SB 113), which expanded the definition of a qualified taxpayer in Section 17052.10(b)(3)(b) of the California Revenue and Taxation Code to also include:

* PTEs with one or more owners that are partnerships

* Disregarded limited liability companies owned by individuals The legislation also adopted the following modifications to the PTE tax, which may be favorable to certain taxpayers:

* Guaranteed payments, as defined by Internal Revenue Code (IRC) Sec. 707(c), qualify for inclusion in the income base for the PTE tax credit

* Credit for PTE tax paid and passed through to owners may reduce their regular tax below tentative minimum tax for taxable years beginning on or after Jan. 1, 2021

* PTE tax credit to be applied after applying credits for taxes paid to other states for tax years beginning on or after Jan. 1, 2022 Keep an eye on the FIB site (ftb.ca.gov/filc/business/crcdits/

pass-through-entity-clectivc-tax/index.html) for more information and updates.

Net Operating Loss Suspension

Assembly Bill 85 (AB 85), which was signed into law in 2020, suspended the utilization of NOLs (mossadams.com/arliclcs/2020/06/california-assernbly-bill-85)--for both corporate and individual taxpayers with taxable income of more than $1 million--for tax years beginning Jan. 1, 2020, and ending on or before Dec. 31, 2022. SB 113 decreased that suspension period by one year, making the suspension applicable for tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2022.

The state's general 20-year NOL carryforward may be extended by taxpayers impacted by the NOL suspension for up to three years if the losses can't be used due to the NOL suspension.

One potential ramification of NOL deductions is the possibility of owing alternative minimum tax (AMT) due to an existing limitation on using NOLs when computing AMT.

Business Tax Credit Limitation

SB 113 also removed the former limitation on the use of business tax credits to offset a maximum of 85 million of tax for tax year 2022. AB 85 had originally placed said limit on the use of business tax credits for tax years 2020-22.

Nexus

For California income tax purposes, doing business is defined as actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.

Economic-Nexus Thresholds

For the taxable year beginning on or after Jan. 1, 2021, a taxpayer is seen as doing business in California for a taxable year if any of the following conditions are satisfied:

* The taxpayer is organized or commercially domiciled in California;

* The taxpayer's California sales exceed the lesser of $637,252 or 25 percent of total sales;

* The taxpayer's real property and tangible personal property in California exceed the lesser of $63,726 or 25 percent of total real properly and tangible personal property; or

* The taxpayer's compensation amount paid in California exceeds the lesser of 163,726 or 25 percent of total compensation paid. The doing business thresholds for taxpayers are indexed for

inflation and rexised annually.

Public Law (PL) 86-272

Federal PL 86-272 protects businesses from state taxes based on...