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California Tax Hot Topics (12/2014)


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In this presentation, we discuss California's hot topics of the year from tax non-conformity, and medical marijuana to health insurance, and motion picture credits

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California Tax Hot Topics (12/2014)

  1. 1. IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein. Roger Royse Royse Law Firm, PC Palo Alto, San Francisco, Los Angeles Skype: roger.royse Twitter @rroyse00 CALIFORNIA HOT TOPICS
  2. 2. California Tax Non-Conformity • Self-employed health insurance deduction – The California tax system does not properly conform with the Affordable Care Act with regards to the application of the tax credits • Under the ACA, taxpayers can elect to receive an “advanced tax credit” to reduce monthly health insurance premiums or pay the entire premium and receive a “premium tax credit” on their federal tax return • Self-employed taxpayers can take a deduction for health insurance premiums • Broadly, the amount of the health insurance deduction at the federal level should be the net amount paid after any ACA tax credits (either the advanced tax credit or the premium tax credit) – When calculating their California tax liability, self-employed taxpayers can deduct the amount “paid” for health insurance in the year • According to the FTB, the amount paid: (1) for Advanced tax credit taxpayers = the net amount of the insurance premiums; or (2) for Premium tax credit taxpayers = the gross amount without adjustment for the premium tax credit – Therefore, taxpayers get a larger California tax deduction if they take the premium tax credit on their federal tax return as opposed to receiving an advanced tax credit
  3. 3. California Tax Non-Conformity • Cancellation of indebtedness and reacquisition of debt – Under federal tax law, taxpayers could defer and spread out certain cancellation of indebtedness income from 2009 and 2010 (relating to the reacquisition of debt instruments) over a five year period commencing in 2014 – California did not comply with this provision and therefore the income would have been taxed in full in 2009 or 2010 – Any federal income relating to this adjustment for 2014 and beyond can be excluded for California tax purposes • Tax Depreciation – For C Corporations only, California does not comply with the accelerated deductions available under MACRS and ACRS (§ 168)
  4. 4. California Tax Non-Conformity • Federal Tax Extenders – In December, Congress extended certain tax provisions that had expired on December 31, 2013 (inc. energy efficient tax credits, work opportunity tax credit, and tax free distributions from IRAs for charitable purposes) to cover the 2014 calendar year – California does not automatically conform to Congress’ extension of the following tax provisions: (1) exclusion of discharge of indebtedness income on principal residences (§ 108); (2) asset expense elections (§ 179); (3) bonus depreciation (§ 168(k)); and (4) reduced built-in gain holding periods for S Corps (§ 1374)
  5. 5. California Hot Topics • “Doing Business” in California – Swart Enterprises, Inc. v FTB: • An out-of-state corporation held a 0.2% membership interest in a California LLC • The membership interest was held as an investment and the corporation had no right to manage the affairs of the LLC • The FTB assessed the $800 minimum tax on the corporation alleging that it was “doing business in California” due to its interest in a California LLC • The Court held that the corporation only had a passive interest in the LLC and as such was not doing business in California • The corporation was more akin to a limited partner than a general partner and therefore the general partnership rules (dictating that if the partnership was doing business in California then all the partners were considered to be as well) did not apply here
  6. 6. California Hot Topics • Like-kind exchanges – From January 1, 2014, taxpayers need to file an information return (Form 3840) with the FTB if they complete a like-kind exchange of California property for property located outside California – The form must be filed in the year of the exchange and for each subsequent year until the entire gain has been recognized • Administrative dissolutions of non-profits – A.B. 1529 would have allowed for administrative dissolution of non-profit entities that either the FTB had suspended for a period of at least 48 months or had not filed a statement of information for a period of at least 48 months – Any California tax liabilities (together with interest and penalties) would have been wiped-out with the exception of unpaid taxes relating to unrelated business income – The Governor vetoed the bill because it would have required reprogramming of a computer system that is due to be replaced soon
  7. 7. California Hot Topics • Asset sales in bankruptcy reorganizations – A recent ruling from the FTB stated that a series of asset sales made over a period of two years as part of a company’s post-Chapter 11 bankruptcy reorganization were not “occasional sales” for the purposes of apportionment under the California sales factor • Motion Picture Credit – A new motion picture credit will come into effect on January 1, 2016 – Increases annual funding from $100 million to $330 million – Introduces a competitive system that allocates money based on type of production and the number of jobs created – The credit is now available for one-hour television series and television pilots
  8. 8. California Hot Topics • Medical marijuana – From August 2015, marijuana dispensaries in the City of Berkeley must donate a minimum of 2% of their product to residents of low-income cities. – Applicable residents are those with annual income below $32,000 (or $46,000 per family) and a prescription for marijuna – This will result in a loss of the sales tax ordinarily collected on that 2% of marijuana – Marijuana dispensaries are still having problems opening bank accounts due to their activities being illegal under federal law • Without a bank account, these businesses are forced to pay IRS liabilities in cash which results in a 10% penalty each time – Legislation prohibiting the IRS from imposing this penalty for businesses that legally sell marijuana passed the House but has not passed the Senate
  9. 9. RoyseLink: Connecting founders with investors and service partners. Royse University: Providing business, tax, and personal finance ideas to founders and executives. Royse Law Legal Wizard: Offering legal document templates and more. RoyseLaw Legal Wizard Royse Law Incorporator: Designed to help you incorporate and structure your company in Delaware or California. RoyseLaw
  10. 10. @RoyseLaw PALO ALTO 1717 Embarcadero Road Palo Alto, CA 94303 LOS ANGELES 11150 Santa Monica Blvd. Suite 1200 Los Angeles, CA 90025 SAN FRANCISCO 135 Main Street 12th Floor San Francisco, CA 94105 Palo Alto Office: 650-813-9700 Contact Us