Summary of Federal Income Tax Changes

This section provides an employer a credit applied against the Social Security Tax (SST) and the Railroad Retirement Tax (RRT) for each calendar quarter in an amount equal to 100% of the qualified sick leave wages paid by such employer with respect to such calendar quarter, subject to certain limitations. For purposes of this section, the term “qualified sick leave wages” means wages, defined by IRC section 3121(a), and compensation, defined by IRC section 3231(e), paid by an employer, which is required to be paid by reason of the Emergency Paid Sick Leave Act.

The credit allowed for any calendar quarter is limited to the SST and RRT tax imposed for such calendar quarter, and any excess will be treated as an overpayment that can be refunded under IRC section 6402(a), credits against estimated taxes, and IRC section 6413(b), overpayments of certain employment taxes. The amount of the credit allowed under this provision can be increased by certain employer qualified health plan expenses. In addition, the gross income of the employer for the taxable year that includes the last day of any calendar quarter with respect to which a credit is allowed under this section shall be increased by the amount of such credit. Any wages taken into account in determining the credit allowed under this section shall not be taken into account for purposes of determining the credit allowed under IRC section 45S, the employer credit for paid sick leave.

Employers can elect not to have these provisions apply.

This section provides a refundable income tax credit to eligible self-employed individuals for any taxable year for an amount equal to qualified sick leave equivalent amount, as defined. An eligible self-employed individual is one who carries on any trade or business and would be entitled to receive paid leave during the taxable year pursuant to the Emergency Paid Sick Leave Act (EPSLA) if the individual were an employee of an employer (other than the individual themselves).

The term “qualified sick leave equivalent amount” means an amount equal to the number of days during the taxable year (but not more than the applicable number of days) that the individual is unable to perform services in any trade or business for a reason to which such individual would be entitled to receive sick leave under the EPSLA if the individual were an employee of an employer (other than the individual themselves), multiplied by the lesser of (i) $200 ($511 in the case of any day of paid sick time described in paragraph (1), (2), or (3) of section 5102(a) of the EPSLA), or (ii) 67% (100% in the case of any day of paid sick time described in paragraph (1), (2), or (3) of section 5102(a) of the EPSLA) of the average daily self-employment income of the individual for the taxable year. The term “average daily self-employment income” means an amount equal to the net earnings from self-employment of the individual for the taxable year, divided by 260.

The term “applicable number of days” means, with respect to any taxable year, the excess (if any) of 10 days over the number of days taken into account in determining the qualified sick leave equivalent amount in all preceding taxable years.

An eligible self-employed individual must maintain such documentation as prescribed by the Secretary of the Treasury (or the Secretary’s delegate) to qualify for the credit. In addition, this section denies a double benefit in the case of an individual who receives wages or compensation paid by an employer, which are required to be paid by reason of the EPSLA.

This section provides an employer a credit applied against the Social Security Tax (SST) and the Railroad Retirement Tax (RRT) for each calendar quarter in an amount equal to 100% of the qualified family leave wages paid by such employer with respect to such calendar quarter. For purposes of this credit, the amount of qualified family leave wages taken into account with respect to any individual cannot exceed for any day (or portion thereof) for which the individual is paid qualified family leave wages, $200, and, in the aggregate, with respect to all calendar quarters, cannot exceed $10,000.

The credit allowed for any calendar quarter is limited to the SST and RRT tax imposed for such calendar quarter, and any excess will be treated as an overpayment that can be refunded under IRC section 6402(a), credits against estimated taxes, and IRC section 6413(b), overpayments of certain employment taxes. The amount of the credit allowed under this provision can be increased by certain employer qualified health plan expenses.

For purposes of this section, the term “qualified family leave wages” means wages, defined by IRC section 3121(a), and compensation, defined by IRC section 3231(e), paid by an employer, which is required to be paid by reason of the Emergency Family and Medical Leave Expansion Act, including amendments made by this Act.

In addition, the gross income of the employer for the taxable year, which includes the last day of any calendar quarter with respect to which a credit is allowed under this section, shall be increased by the amount of such credit. Any wages taken into account in determining the credit allowed under this section shall not be taken into account for purposes of determining the credit allowed under IRC section 45S, the employer credit for paid family and medical leave.

Employers can elect not to have these provisions apply.

This section provides a refundable income tax credit for an eligible self-employed individual for any taxable year an amount equal to 100% of the qualified family leave equivalent amounts, as defined. An eligible self-employed individual is one who carries on any trade or business and would be entitled to receive paid leave during the taxable year pursuant to the Emergency Family and Medical Leave Expansion Act (EFMLEA) if the individual were an employee of an employer (other than the individual themselves).

The term “qualified family leave equivalent amount” means an amount equal to the product of the number of days (not to exceed 50) during the taxable year that the individual is unable to perform services in any trade or business for a reason to which such individual would be entitled to receive paid leave under the EFMLEA if the individual were an employee of an employer (other than the individual themselves), multiplied by the lesser of: (i) 67% of the average daily self-employment income of the individual for the taxable year, or (ii) $200. The term “average daily self-employment income” means an amount equal to the net earnings from self-employment income of the individual for the taxable year, divided by 260.

An eligible self-employed individual must maintain such documentation as prescribed by the Secretary of the Treasury (or the Secretary’s delegate) to qualify for the credit. In addition, this section denies a double benefit in the case of an individual who receives wages or compensation paid by an employer, which are required to be paid by reason of the EFMLEA. In this case, the qualified family leave equivalent amount would be reduced (but not below $0) to the extent that the sum of the qualified family leave equivalent amount and the wages described in PL 116-127, section 7003(b)(1) for the Payroll Credit for Required Paid Family Leave, exceeds $10,000.

California conforms to IRC section 72(t), additional tax on early distributions from qualified plans tax as applicable for federal purposes for the same taxable year using a rate of 2 1/2% in lieu of the federal tax rate. The COVID-19 early distributions would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions. (RTC section 17085(c))

RTC section 17081 conforms to federal law regarding loans from qualified plans as of 1/1/2015, and generally allows a qualified employer plan, to provide specified loans to a participant or a beneficiary that are not treated as taxable distributions from the plan if specified conditions are met.

AB 276 was chaptered on 9/11/2020 to conform to Section 2202(b) of the federal CARES Act, relating to qualified retirement plan loans.

The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during that year.

If all or a portion of a calendar year 2020 distribution that would have been a required minimum distribution is instead an eligible rollover distribution, the distribution (or portion thereof) is not treated as an eligible rollover distribution for purposes of the direct rollover and notice requirements, or the mandatory 20-percent income tax withholding for eligible rollover distributions.

California conforms to the definition of adjusted gross income under IRC section 62, as of the specified date of 1/1/2015, with modifications, but does not conform to the allowance of this partial above the line deduction for charitable contributions.

Therefore, a taxpayer would not be entitled to the same deduction at the state level.

Under the PITL, California generally conforms to the federal charitable contribution rules under IRC section 170 as of the specified date of 1/1/2015, and as a result, does not conform to the provisions related to increased limitations and carryovers for charitable contributions that were made during 2020.

Under the CTL, California does not conform to IRC section 170, but instead has standalone law that is generally similar to federal law allowing corporations a deduction for charitable contributions. There are no similar provisions for the increased charitable contribution limitations and carryovers for contributions made during 2020.

The provision suspending application of the 80% taxable income limitation applies to taxable years beginning after 12/31/2017, and to taxable years beginning on or before 12/31/2017, to which NOL arising in taxable years beginning after 12/31/2017, are carried.

The provision modifying the rules relating to carrybacks applies to NOLs arising in taxable years beginning after 12/31/2017, and taxable years beginning before, on, or after such date to which such NOLs are carried.

The technical amendments made by the provision are effective as if included in section 13302 of PL 115-97.

This provision suspended the application of the 80% taxable income limitation for taxable years beginning after 12/31/2017, and before 1/1/2021. The 80% taxable income limitation continues to apply in the case of any taxable year beginning after 12/31/2020. The 80% taxable income limitation was also eliminated for net operating losses (NOLs) arising in taxable years beginning after 12/31/2017, and carried to such a taxable year.

The CARES Act also modified the rules regarding carrybacks for NOLs arising in 2018, 2019, and 2020. Specifically, any NOL arising in a taxable year beginning after 12/31/2017, and before 1/1/2021, may be carried back to the 5 taxable years preceding the taxable year of such loss.

In general, California allows a taxpayer to calculate an NOL in accordance with federal rules, but has not conformed to the federal changes that apply to taxable years beginning after 12/31/2017 because California conforms to the Internal Revenue Code as of 1/1/2015.

NOLs attributable to taxable years beginning on or after 1/1/2008, may be carried forward 20 years. For NOLs attributable to taxable years beginning before 1/1/2013, and after 12/31/2018, NOL carrybacks are unavailable. California conforms to the federal NOL carryback rules for NOLs attributable to taxable years beginning on or after 1/1/2013, and before 1/1/2019, with modifications.

AB 85 was chaptered on 6/29/2020, and it includes provisions to suspend the use of NOL deductions. The suspension does not apply to taxpayers with a net business income or modified adjusted gross income of less than $1 million under the PITL or for taxpayers with income subject to tax under the CTL of less than $1 million for taxable years 2020, 2021, and 2022. This provision also extends the carryover period for NOL deductions disallowed under this provision.

Therefore, the 80-percent taxable income limitation is not applicable in California and any NOL arising in a taxable year beginning after 12/31/2017, and before 1/1/2021, may not be carried back.

This provision extends the due date to January 1, 2021, for certain required minimum contributions to single-employer defined benefit pension plans that would be due during the 2020 calendar year. The amount of each required minimum contribution is increased by the interest accruing between the original due date and the payment date.

In addition, a plan sponsor can elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, as the adjusted funding target attainment percentage for plan years that include calendar year 2020.

The Personal Income Tax Law (PITL) automatically conforms to federal changes made to IRC sections 430 and 436. As a result, the federal modifications to single-employer plan funding rules automatically apply under California law.

However, the Corporate Income Tax Law (CTL) conforms to federal changes made to IRC sections 430 and 436, as of the specified date, January 1, 2015. The legislature hasn’t passed a law that would conform to this provision. As a result, CA doesn’t conform under the CTL to the federal modifications to single-employer plan funding rules in this provision.

The provision applies to distributions from HSAs and MSAs for amounts paid after December 31, 2019.

The provision applies to reimbursements from health FSAs and HRAs for expenses incurred after December 31, 2019.

The Joint Committee on Taxation, Description of the Tax Provisions of Public Law 116-136 states:

This provision amends the definition of qualified medical expense for Archer Medical Savings Arrangements (MSAs) to permit distributions for over-the-counter medicine and menstrual care products.

The provision also amends the definition of qualified medical expense for health Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) to permit reimbursements for expenses incurred for over-the-counter medicine and menstrual care products.

Health Savings Accounts (HSAs)

California does not conform to any of the federal HSA provisions. Thus, contributions to an HSA are not excludable or deductible under California law.

Flexible Spending Arrangements (FSAs)

California conforms to FSAs as of the “specified date” of January 1, 2015. Thus, California does not conform to the inclusion within qualified medical expenses for FSA purposes of amounts paid for menstrual care products.

Archer Medical Savings Accounts (MSAs)

California conforms to Archer MSAs as of the “specified date” of January 1, 2015, with modifications. California law allows an Archer MSA contribution deduction equal to the amount deducted on the federal return for the same taxable year; however, because California conforms to the federal amount of qualified medical expenses as of the “specified date,” California does not conform to the inclusion within qualified medical expenses for Archer MSA purposes of amounts paid for menstrual care products.