Time to Conform: What You Need to Know About California's AB 91.

• Author: Klasing, David W.

Gov. Gavin Newsom signed Assembly Bill 91 on July 1 to achieve federal/state tax conformity. At the start of 2019, there were only a handful of states that had yet to conform their tax codes--at least in part--to the Tax Cuts and Jobs Act. States have chosen to handle the TCJA in different ways, but California was one of the last states to address it.

The following provides background to AB 91--known officially as the Loophole Closure and Small Business and Working Families Tax Relief Act of 2019--its importance and some key provisions. Lawmakers who went about drafting the budget proposal, too, were relying on the measures that are a part of AB 91 to raise additional revenue.

AB 91 arrived on the governor's desk with overwhelming support in the Legislature. There were a small number in opposition, arguing that most of the additional funds raised by AB 91 came from conformity with federal tax laws that were largely unfavorable to California business owners. They indicated California already heavily taxes businesses, so the new source of revenue would place a renewed undue burden on them.

What Does AB 91 Mean For California Taxpayers? Like-Kind Exchanges

AB 91 marks the end of the road for the like-kind exchange for most, providing only exceptions for real estate and for those taxpayers under a particular income threshold. California's personal and corporate tax provisions were amended to limit transactions that previously qualified for tax deferral under IRC Sec. 1031. Individuals with an adjusted gross income of less than $250,000 (or 5500,000 for joint filers) can still qualify for deferral on the like-kind exchange of tangible personal property.

Losses

AB 91 contained some notable changes relating to the treatment of losses. First, following federal treatment under the TCJA, California will not allow the carryback of net operating losses from tax years beginning after Dec. 31, 2018. Mirroring federal tax law, the changes do not affect the 20-year carryforward of those losses.

Certain business owners will feel the effects of AB 91, as losses that result from non-corporate entities (commonly referred to as passthroughs) will not be deductible. Instead, they will be classified as an "excess business loss" and will be treated similarly to an NOL carryforward in later years.

However, this conformity provision is modified slightly from the federal version of the rule. Under the TCJA, the prohibition on current deductibility of passthrough...