What's New/Tax Law Changes
In general, California
law conforms to the Internal Revenue Code (IRC) as of January 1, 2001. Therefore,
California has conformed to the income tax changes made to the IRC by the federal
Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206),
the Tax and Trade Relief Extension Act of 1998 (Public Law 105-277), the Surface
Transportation Revenue Act of 1998 (Public Law 105-178), the Ricky Ray Hemophilia
Relief Fund Act of 1998 (Public Law 105-369), the Ticket to Work and Work Incentives
Improvement Act of 1999 (Public Law 106-170), the Miscellaneous Trade and Technical
Corrections Act of 1999 (Public Law 106-36), the FSC Repeal and Extraterritorial
Income Exclusion Act of 2000 (Public Law 106-519), the Consolidated Appropriations
Act of 2001 (Public Law 106-554), and to technical corrections made by the Economic
Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16). However,
there are continuing differences between California and Federal law. California
has not conformed to some of the law changes made by the Economic Growth and Tax
Relief Reconciliation Act of 2001 (Public Law 107-16) or the federal Job Creation
and Worker Assistance Act of 2002 (Public Law 107-147).
Note: Fiscal year taxpayers are subject to California tax law as it conforms to federal law that is applicable for taxable years beginning prior to January 1, 2002.
For the 2002 taxable year only, no addition to tax shall apply with respect to any underpayment of estimated tax to the extent the underpayment of an installment was created or increased by any provisions of law enacted or amended by an act chaptered during the 2002 calendar year. To request a waiver of underpayment of estimated tax penalty, get form FTB 5806, Underpayment of Estimated Tax by Corporations.
For taxable years beginning on or after January 1, 2002, California law conforms to the federal law relating to:
- Employer deductions for Vacation and Severance Pay. For purposes of determining whether an item of compensation is deferred compensation under IRC Section. 404, the compensation is not "paid" or "received" until actually received by the employee. In addition, an item of deferred compensation is not "paid to an employee" until actually received by the employee.
- Trade receivables arising out of the sale of nonfinancial goods and services that are held by the taxpayer or a related person at all times since they were issued are not eligible for mark-to-market treatment.
- The denial of the deduction for lobbying activities, club dues, and employee remuneration in excess of one million dollar.
- The deduction for contributions of appreciated property. Contributions of appreciated property are no longer treated as tax preference item for purposes of Alternative Minimum Taxable Income.
- The methodology for calculating deductions for bank bad-debt losses, which limits these deductions for large banks (have more than $500 million in assets) to actual losses rather than contributions to a reserve for bad debts. Large banks must recognize 50% of their existing bad-debt reserve balances as income in taxable year 2002. For more information, see question AA and Schedule G instructions.
For taxable years beginning on or after January 1, 2002, the credit for prior year alternative minimum tax (AMT) has to be applied before any credits that can reduce the regular tax below the tentative minimum tax (TMT) in accordance with California Revenue and Taxation Code (R&TC) Section 23036 (c).
For taxable years beginning in 2002 and 2003, California has suspended the Net Operating Loss (NOL) carryover deduction. Taxpayers may continue to compute and carryover an NOL during the suspension period. However, the deduction for disaster losses is not affected by the NOL suspension rules.
The carryover period for suspended losses is extended by two years for losses incurred before January 1, 2002, and by one year for losses incurred after January 1, 2002, and before January 1, 2003. For more information, see form FTB 3805Q.
For taxable years beginning on or after January 1, 2002, the NOL carryover computation for the California taxable income of a nonresident or part-year resident is no longer limited by the amount of net operating loss from all sources. Only your California sourced income and losses are considered in determining if you have a California NOL. For more information, get FTB Pub. 1100, Taxation of Nonresidents and Individuals Who Change Residency, and form FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations - Individuals, Estates, and Trusts.
The authority of the Wildlife Conservation Board to award Natural Heritage Preservation Tax Credit has been suspended between July 1, 2002, and June 30, 2003, inclusive. Thus, any credits that were allocated before June 30, 2002, may be claimed on the 2002 tax return. Any credits that could have been allocated, but were not allocated, or any new credits that are allocated on or after July 1, 2003, could be claimed on the 2003 tax return, or subsequent tax returns. Carryover is not affected for previously awarded credits, credits awarded before June 30, 2002, or any credits allocated on or after July 1, 2003.
For taxable years beginning on or after January 1, 2002, California no longer allows a federal S corporation to elect to be a California C corporation. Therefore, for the taxable year beginning in 2002, and thereafter, any corporation with a valid federal S corporation election is considered an S corporation for California purposes. The effective date of the election is the first day of the corporation's taxable year beginning in 2002.
California allows these corporations to request a portion of their 2002 taxable year's estimated tax payments be transferred to the personal income tax accounts of their shareholders. Transfers are allowed only for S corporation taxable year beginning in 2002, and only if the total amount to be transferred is at least $500. For more information, get form FTB 3833, Application for Transfer of S Corporation 2002 Overpayments to Shareholders.
Corporations that elect to be an S corporation for federal purposes on or after January 1, 2002, and have a California filing requirement are deemed to make the California S election on the same date as the federal election.
For taxable years beginning on or after January 1, 2002, if the corporation's total receipts (see page 15 of the instructions in the Form 100 Booklet) for the taxable year and total assets at the end of the taxable year are less than $250,000, the Corporation is not required to complete Schedules L, M-1, and M-2. However, this information must be available in the future upon request.
California law has not conformed to federal law regarding the additional 30% first-year depreciation allowance for qualified property or the additional 30%t first-year depreciation allowance for Qualified New York Liberty Zone property as added by the federal Job Creation and Worker Assistance Act of 2002 (Public Law 107-147).