What’s new for filing 2021 tax returns February 2022 Tax News

Tax Law Changes for 2021

Voluntary Contributions

Taxpayers may contribute to the following new funds:

Mental Health Crisis Prevention Voluntary Tax Contribution Fund California Community
Neighborhood Tree Voluntary Tax Contribution Fund

COBRA Premium Assistance

The American Rescue Plan Act (ARPA) of 2021, enacted on March 11, 2021, allows an exclusion from gross income for COBRA premium assistance subsidies received by eligible individuals. ARPA effects the COBRA coverage period beginning on April 1, 2021 and ending on September 30, 2021. California law does not conform to this federal provision.

For more information, see Schedule CA (540) instructions.

Employer-Provided Dependent Care Assistance Exclusion

California conforms to the employer-provided dependent care assistance exclusion from gross income as of the specified date of January 1, 2015, without any modifications. The ARPA of 2021 enacted on March 11, 2021, temporarily increases the amount of the exclusion from gross income from $5,000 to $10,500 for employer-provided dependent care assistance (and half of that amount for married filing separate). CA law does not conform to this change under the federal ARPA.

For more information, see Schedule CA (540) instructions.

Expanded Definition of Qualified Higher Education Expenses

For taxable years beginning on or after January 1, 2021, California law conforms to the expanded definition of qualified higher education expenses associated with participation in a registered apprenticeship program and payment on the principal or interest of a qualified education loan under the federal Further Consolidated Appropriations Act, 2020.

Federal Acts

In general, California Revenue and Taxation Code (R&TC) does not conform to the changes under the following federal acts:

ARPA of 2021 (enacted on March 11, 2021)
Consolidated Appropriations Act (CAA), 2021 (enacted on December 27, 2020)
Coronavirus Aid, Relief, and Economic Security (CARES) Act (enacted on March 27, 2020)
Setting Every Community Up for Retirement Enhancement (SECURE) Act (enacted on December 20, 2019)

California taxpayers continue to follow the Internal Revenue Code (IRC) as of the specified date of January 1, 2015, with modifications. For specific adjustments due to the following acts, see the Schedule CA (540) instructions.

California Microbusiness COVID-19 Relief Grant

For taxable years beginning on or after January 1, 2020, and before January 1, 2023, California law allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the California Microbusiness COVID-19 Relief Program administered by the Office of Small Business Advocate (CalOSBA).

For more information, see R&TC Section 17158.1 and 24311.

Shuttered Venue Operator Grants

The CAA, 2021, enacted on December 27, 2020, allows an exclusion from gross income for grants received by shuttered venue operators. California does not conform to this federal provision.

For more information, see Schedule CA (540) instructions and business entity booklets.

California Venues Grant

For taxable years beginning on or after September 1, 2020, and before January 1, 2030, California law allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the California Venues Grant Program that is administered by CalOSBA.

For more information, see R&TC Section 17158 and 24312.

Restaurant Revitalization Grants

The ARPA allows an exclusion from gross income for restaurant revitalization grants awarded to eligible entities that are used for allowable expenses for the covered period. California law does not conform to this federal provision.

For more information, see Schedule CA (540) instructions and business entity booklets.

Small Business COVID-19 Relief Grant Program

For taxable years beginning on or after January 1, 2020, and before January 1, 2030, California allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the COVID-19 Relief Grant under Executive Order No. E 20/21-182 and the California Small Business COVID-19 Relief Grant Program established by Section 12100.83 of the Government Code.

For more information, see Schedule CA (540) instructions and business entity booklets.

Income Exclusion for Rent Forgiveness

For taxable years beginning on or after January 1, 2020, and before January 1, 2025, gross income shall not include a tenant’s rent liability that is forgiven by a landlord or rent forgiveness provided through funds grantees received as a direct allocation from the Secretary of the Treasury based on the federal CAA, 2021.

For more information, see Schedule CA (540) instructions.

Paycheck Protection Program (PPP) Loans Forgiveness

For taxable years beginning on or after January 1, 2019, California law allows an exclusion from gross income for covered loan amounts forgiven under the federal CARES Act, Paycheck Protection Program (PPP) and Health Care Enhancement Act, Paycheck Protection Program Flexibility Act of 2020, or the CAA, 2021. However, the Paycheck Protection Program Extension Act extends the covered period of the PPP to June 30, 2021. California law does not conform to this extension and does not allow an exclusion from gross income for PPP loans forgiven due to the extended covered period after March 31, 2021 to June 30, 2021.

For more information, see Schedule CA (540) instructions and business entity booklets.

Also, the ARPA expands PPP eligibility to include “additional covered nonprofit entities” which includes certain Code 501(c) nonprofit organizations and Internet-only news publishers and Internet-only periodical publishers. California law does not conform to this expansion of PPP eligibility.

For more information, see Schedule CA (540) instructions and business entity booklets.

The CAA, 2021, allows deductions for eligible expenses paid for with covered loan amounts. California law conforms to this federal provision, with modifications. For California purposes, these deductions do not apply to an ineligible entity. “Ineligible entity” means a taxpayer that is either a publicly-traded company or does not meet the 25 percent reduction from gross receipts requirements under Section 311 of Division N of the CAA, 2021.

For more information, see Schedule CA (540) instructions and business entity booklets or R&TC Section 17131.8 and 24308.6 or go to ftb.ca.gov and search for AB 80.

Revenue Procedure 2021-20 allows taxpayers to make an election to report the eligible expense deductions related to a PPP loan on a timely filed original 2021 tax return including extensions. If a taxpayer makes an election for federal purposes, California will follow the federal treatment for California tax purposes.

Advance Grant Amount

For taxable years beginning on or after January 1, 2019, California law conforms to the federal law regarding the treatment for an emergency Economic Injury Disaster Loan (EIDL) grant under the federal CARES Act or a targeted EIDL advance under the CAA, 2021.

Other Loan Forgiveness

For taxable years beginning on or after January 1, 2019, California law allows an exclusion from gross income for borrowers of forgiveness of indebtedness described in Section 1109(d)(2)(D) of the federal CARES Act as stated by section 278, Division N of the federal CAA, 2021. The CAA, 2021, allows deductions for eligible expenses paid for with covered loan amounts. California law conforms to this federal provision, with modifications. For California purposes, these deductions generally do not apply to an ineligible entity. “Ineligible entity” means a taxpayer that is either a publicly-traded company or does not meet the 25 percent reduction from gross receipts requirements under Section 311 of the CAA, 2021.

For more information, see Schedule CA (540) instructions and business entity booklets or go to ftb.ca.gov and search for AB 80.

Gross Income Exclusion for Bruce’s Beach

Effective September 30, 2021, California law allows an exclusion from gross income for the first time sale in the taxable year in which the land within Manhattan State Beach, known as “Peck’s Manhattan Beach Tract Block 5” and commonly referred to as “Bruce’s Beach” is sold, transferred, or encumbered. A recipient’s gross income does not include the following:

Any sale, transfer, or encumbrance of Bruce’s Beach;
Any gain, income, or proceeds received that is directly derived from the sale, transfer, or encumbrance of Bruce’s Beach.

Reporting Requirements

For taxable years beginning on or after January 1, 2021, taxpayers who benefited from the exclusion from gross income for the PPP loans forgiveness, other loan forgiveness, or the EIDL advance grant and related eligible expense deductions under the federal CARES Act, Paycheck Protection Program and Health Care Enhancement Act, Paycheck Protection Program Flexibility Act of 2020, or the CAA, 2021, should file form FTB 4197, Information on Tax Expenditure Items, as part of the Franchise Tax Board’s annual reporting requirement.

For more information, get form FTB 4197.

Moving Expense Deduction

For taxable years beginning on or after January 1, 2021, taxpayers should file California form FTB 3913, Moving Expense Deduction, to claim moving expense deductions. Attach the completed form FTB 3913 to Form 540, California Resident Income Tax Return.

For more information, see Schedule CA (540) instructions and get form FTB 3913.

Homeless Hiring Tax Credit

For taxable years beginning on or after January 1, 2022, and before January 1, 2027, a Homeless Hiring Tax Credit (HHTC) will be available to a qualified taxpayer that hires individuals who are, or recently were, homeless. The amount of the tax credit will be based on the number of hours the employee works in the taxable year. Employers must obtain a certification of the individual’s homeless status from an organization that works with the homeless and must receive a tentative credit reservation for that employee. Any credits not used in the taxable year may be carried forward up to three years.

For more information, go to ftb.ca.gov and search for HHTC.

Elective Tax for Pass-Through Entities (PTE) and Credit for Owners

For taxable years beginning on or after January 1, 2021, and before January 1, 2026, California law allows an entity taxed as a partnership or an “S” corporation to annually elect to pay an elective tax at a rate of 9.3 percent based on its qualified net income. The election shall be made on an original, timely filed return and is irrevocable for the taxable year.

The law allows a credit against the personal income tax to a taxpayer, other than a partnership, that is a partner, shareholder, or member of a qualified entity that elects to pay the elective tax, in an amount equal to 9.3 percent of the partner’s, shareholder’s, or member’s pro rata share or distributive share of qualified net income subject to the election made by the qualified entity. A disregarded entity and its partners or members cannot claim the credit.

For more information, go to ftb.ca.gov and search for pte elective tax and get the following new PTE elective tax forms and instructions:

Form FTB 3893, Pass-Through Entity Elective Tax Payment Voucher
Form FTB 3804, Pass-Through Entity Elective Tax Calculation
Form FTB 3804-CR, Pass-Through Entity Elective Tax Credit

Main Street Small Business Tax Credit II

For the taxable year beginning on or after January 1, 2021, and before January 1, 2022, a new Main Street Small Business Tax Credit is available to a qualified small business employer that received a tentative credit reservation from the California Department of Tax and Fee Administration (CDTFA).

For more information, get form FTB 3866, Main Street Small Business Tax Credits.

New Donated Fresh Fruits or Vegetables Credit

The sunset date for the New Donated Fresh Fruits or Vegetables Credit is extended until taxable years beginning before January 1, 2027.

For more information, get form FTB 3814, New Donated Fresh Fruits or Vegetables Credit.

Natural Heritage Preservation Credit

The Natural Heritage Preservation Credit is available for qualified contributions made on or after January 1, 2021, and no later than June 30, 2026. This credit may not be claimed for any contributions made on or after July 1, 2020 and on or before December 31, 2020.

For more information, get form FTB 3503, Natural Heritage Preservation Credit.