Tax News March 2023

What’s New for Filing 2022 Tax Returns

Filing Status Name Changed to Qualifying Surviving Spouse/Registered Domestic Partner (RDP)

The filing status qualifying widow(er) is now called qualifying surviving spouse/RDP. The rules for the filing status have not changed.

Pass-Through Entity (PTE) Elective Tax and Other State Tax Credit Calculation

For taxable years beginning on or after January 1, 2022, and before January 1, 2026, the calculation of the other state tax credit (OSTC) has changed. California law allows a qualified partner, member, or shareholder of an electing qualified entity to increase the net tax payable by the amount of the allowed PTE tax credit that reduced net tax, before application of the OSTC, in the same taxable year.

For more information, get Schedule S, Other State Tax Credit, or see California Revenue and Taxation Code (R&TC) Section 17052.10.

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

Middle Class Tax Refund 

The California Middle Class Tax Refund (MCTR) is a one-time payment issued to provide relief to qualified recipients. California excludes this payment from gross income. The Internal Revenue Service (IRS) issued guidance on February 10, 2023, that Californians do not need to report MCTR payments on their 2022 tax return, and that the IRS will not challenge the taxability of these payments for the 2022 tax year.

For more information about the IRS’s guidance visit IRS issues guidance on state tax payments to help taxpayers.

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

Timeliness Penalty Abatement

For taxable years beginning on or after January 1, 2022, an individual taxpayer may elect to request a one-time abatement of a failure-to-file or failure-to-pay timeliness penalty either orally or in writing. The requirements for one-time abatement include:

1. the taxpayer was not previously required to file a California personal income tax return or has not previously been granted abatement under R&TC Section 19132.5,
2. the taxpayer has filed all required returns as of the date of the request for abatement, and
3. the taxpayer has paid, or is in a current arrangement to pay, all tax currently due.

For more information, see R&TC Section 19132.5.

Young Child Tax Credit Expansion (YCTC)

For taxable years beginning on or after January 1, 2022, California expanded the YCTC eligibility to include an eligible individual with a qualifying child who would otherwise have been allowed the California EITC, but the individual has earned income of zero dollars or less, does not have net losses in excess of $32,490 in the taxable year, and does not have wages, salaries, tips, and other employee compensation in excess of $32,490 in the taxable year.

For more information, get Form 3514, or go to ftb.ca.gov and search for YCTC.

Foster Youth Tax Credit (FYTC)

For taxable years beginning on or after January 1, 2022, the refundable FYTC is available to an individual and/or spouse/RDP age 18 to 25, who is allowed the California EITC for the taxable year, was in foster care while 13 years of age or older and placed through the California foster care system. The maximum amount of credit allowable for each eligible taxpayer is $1,083. The credit amount phases out as earned income exceeds the threshold amount of $25,000, and completely phases out at $30,000.

For more information, see specific line instructions for Form 540 and Instructions for Form 540, and Form 3514, and Instructions for Form 3514. Also see R&TC Section 17052.2, or go to ftb.ca.gov and search FYTC.

Voter Registration Information

For taxable years beginning on or after January 1, 2022, we added a new Voter Registration Information checkbox on the tax return. For voter registration information, check the box on Form 540, Side 5 and go to sos.ca.gov/elections for more information. Also, see specific line instructions for Form 540, Voter Information Section and “Voting is Everybody’s Business” under Additional Information section for more information.

Principal Business Activity Codes

The Principal Business Activity Codes have been updated and revised to reflect updates to the North American Industry Classification System (NAICS).

For more information, see business entity booklets.

Repeal of Net Operating Loss (NOL) Suspension

For the 2022 taxable year, the NOL suspension has been repealed.

For more information, see R&TC Section 17276.23 and 24416.23 or get FTB 3805V, NOL Computation and NOL and Disaster Loss Limitations - Individuals, Estates, and Trusts or FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations - Corporations.

Repeal of Credit Limitation

For the 2022 taxable year, the credit limitation has been repealed. AB 85 chaptered June 29, 2020, included Credit Limitation – For taxable years beginning on or after January 1, 2020, and before January 1, 2023, there is a $5,000,000 limitation on the application of credits for taxpayers. The total of all credits including the carryover of any credit for the taxable year may not reduce the “tax” by more than $5,000,000.

SB 113 chaptered February 09, 2022, repealed credit limitation for the 2022 tax year. TFDD has include WN paragraphs in applicable products.

For more information, see R&TC Section 17039.3 and 23036.3.

Reporting Requirements

Taxpayers may need to file FTB 4197, Information on Tax Expenditure Items, with the Franchise Tax Board (FTB) to report tax expenditure items as part of FTB’s annual reporting requirements under R&TC Section 41.

To determine if you have an R&TC Section 41 reporting requirement, see R&TC Section 41, Reporting Requirements section, or get FTB 4197.

Homeless Hiring Tax Credit (HHTC)

For taxable years beginning on or after January 1, 2022, and before January 1, 2027, an HHTC will be available to a qualified taxpayer that hires eligible individuals. 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, get FTB 3831, Homeless Hiring Tax Credit or go to ftb.ca.gov and search for HHTC.

Soundstage Filming Tax Credit

For taxable years beginning on or after January 1, 2022, R&TC Section 17053.98(k) and 23698(k) allows a fourth film credit, the Soundstage Filming Tax Credit against tax. The credit is allocated and certified by the California Film Commission (CFC). The qualified taxpayer is allowed:

• a credit against income tax liability
• to sell the credit to an unrelated party (independent films only)
• to assign the credit to an affiliated corporation
• to apply the credit against qualified sales and use taxes

For more information, get FTB 3541, California Motion Picture and Television Production Credit, FTB 3551, Sale of Credit Attributable to an Independent Film, go to ftb.ca.gov and search for motion picture or go to the CFC website at film.ca.gov and search for soundstage filming tax credit.

State Historic Rehabilitation Tax Credit (SHRTC)

For taxable years beginning on or after January 1, 2021, a SHRTC is available to qualified taxpayers that received a tax credit allocation from the California Tax Credit Allocation Committee (CTCAC). The credit is for the rehabilitation of certified historic structures and for individual taxpayers, a qualified residence. Any credits not used in the taxable year may be carried forward up to eight years. Taxpayers should apply for the tax credit reservation with CTCAC and have received a tax credit allocation confirmation number from CTCAC prior to claiming the SHRTC on FTB 3835. While the credit was not funded, and cannot be claimed, for tax year 2021, the credit has been fully funded for the 2022 tax year.

For more information, get FTB 3835, State Historic Rehabilitation Tax Credit, or go to the California Office of Historic Preservation website at ohp.parks.ca.gov and search for SHRTC.

High Road Cannabis Tax Credit (HRCTC)

For taxable years beginning on or after January 1, 2023, and before January 1, 2028, a HRCTC will be available to a qualified taxpayer that is a licensed commercial cannabis business that meets specified criteria. The HRCTC is allowed in an amount equal to 25% of the total amount of the qualified taxpayer’s qualified expenditures in the taxable year not to exceed $250,000 per taxable year. Any credits not used in the taxable year may be carried forward up to eight years. A qualified taxpayer must request a tentative credit reservation from FTB during the month of July for each taxable year or within 30 days of the start of their taxable year if the qualified taxpayer’s taxable year begins after July.

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

College Access Tax Credit

The sunset date for the College Access Tax Credit is extended until taxable years beginning before January 1, 2028.

For more information, get FTB 3592, College Access Tax Credit.

Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Relief Grant

For taxable years beginning on or after January 1, 2021, and before January 1, 2030, California law allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the California Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Relief Grant Program that is established by Section 12100.975 of the Government Code.

For more information, see Schedule CA (540) instructions and business entity booklets or R&TC Section 17158 and 24312.

Thomas and Woolsey Wildfires Exclusion

For taxable years beginning before January 1, 2027, California law allows a qualified taxpayer an exclusion from gross income for any amount received in a settlement from Southern California Edison for claims relating to the 2017 Thomas Fire or the 2018 Woolsey Fire. If a qualified taxpayer included income for an amount received from these settlements in a prior taxable year, the taxpayer can file an amended tax return for that year. If the normal statute of limitations has expired, the taxpayer must file a claim by September 29, 2023.

For more information, see Schedule CA (540) instructions and business entity booklets or R&TC Section 17138.6 and 24309.1.

Fire Victims Trust Exclusion

For taxable years beginning before January 1, 2028, California law allows a qualified taxpayer an exclusion from gross income for any amount received from the Fire Victims Trust, established pursuant to the order of the United States Bankruptcy Court for the Northern District of California dated June 20, 2020, case number 19-30088, docket number 8053. If a qualified taxpayer included income for an amount received from the Fire Victims Trust in a prior taxable year, the taxpayer can file an amended tax return for that year. If the normal statute of limitations has expired, the taxpayer must file a claim by September 29, 2023.

For more information, see Schedule CA (540) instructions and business entity booklets or R&TC Section 17138.5 and 24309.3.

Turf Replacement Water Conservation Program

For taxable years beginning on or after January 1, 2022, and before January 1, 2027, California law allows an exclusion from gross income for any amount received as a rebate, voucher, or other financial incentive issued by a public water system, as defined, local government, or state agency for participation in a turf replacement water conservation program.

Please note that taxpayers claiming this gross income exclusion should file FTB 4197, Information on Tax Expenditure Items. For more information, see Schedule CA (540) instructions and business entity booklets or R&TC Section 17138.2 and 24308.9.

California Treatment of the Employment Retention Credit

The Federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, Consolidated Appropriations Act, 2021, American Rescue Plan Act (ARPA) of 2021, and Infrastructure Investment and Jobs Act, allowed an Employee Retention Credit (ERC) for eligible employers who paid qualified wages.

Under federal law, employers that claim the ERC must reduce their wage and salary expense deduction by the amount of the ERC. California does not conform to these provisions and does not have a similar credit.

Based on the applicable federal rules and guidance related to the ERC, an employer receiving the ERC is not required to include the portion of the credit that reduces the employer’s applicable employment taxes, nor the refundable portion of the credit, in its gross income for California income tax purposes.

Single Member LLC Clients to File a Form 568

Since filing season is underway for the small business community, this is a good time to remind your single member limited liability company (SMLLC) clients that Form 568 is also due. An SMLLC disregarded for federal tax purposes, is also generally disregarded for California tax purposes, and the income and expenses of the SMLLC are reported directly on the return of the SMLLC’s owner, including on a Schedule C (Form 1040) for an SMLLC owner who is an individual.

They should also be aware, however, that California law states the separate existence of the business entity that is disregarded for federal tax purposes is not disregarded for California tax purposes for the:

• LLC tax
• LLC fee
• LLC return filing requirement

Generally, a disregarded SMLLC must file a tax return (Form 568) by the same deadline applicable to the owner's tax return. California does grant an automatic extension of time to file a return; however, keep in mind that an extension of time to file is not an extension of time to pay the LLC tax or fee.

In summary, SMLLC taxpayers should be aware a disregarded SMLLC is also required to:

• File a tax return (Form 568)
• Pay the LLC annual tax
• Pay the LLC fee (if applicable)

Items of income, deduction, and credit (after applying appropriate limitations) from the SMLLC should be included in the owner’s tax return.

Go to Due dates for Businesses for more information.

New MyFTB Features

The following updates are intended to further improve self-service options available to MyFTB account users:

• Beginning, May 16, 2023, taxpayers and Power of Attorney (POA) representatives may request an Individual Status Letter (aka: Student Status Letter) online.
• We added the public field offices information to Other Services.

Occasions When We Send Text Messages

We will only deliver texts if you request to receive text messages via the Interactive Voice Response (IVR) telephone line or select the text deliver option through your MyFTB account.

One-Time Text

If you call the Liens Program IVR at 916-845-4350 and select the option to receive a text, the text will include a link to ftb.ca.gov and instructions on how to make the payment.

Ongoing Texts

Individuals with a MyFTB account can update their profile to receive text message alerts when the following activities occur on their account:

• A new notice or document is available.
• We approved a new Tax Information Authorization (TIA) relationship or approved a tax professional’s request to renew the TIA.
• A tax professional submitted a Power of Attorney (POA) declaration for approval.
• A tax professional with a TIA or POA relationship requested full online access to the taxpayer’s MyFTB account and the request is pending the taxpayer’s approval.
• Updates were made to contact preferences such as add, change, or remove SMS text notifications.

Individuals and tax professional representatives can manage the text message notifications through MyFTB, and choose to receive text messages, change which number we send them to, or stop receiving text messages.

Security is Important

FTB does not send text messages asking for personal or financial information, or account numbers.

If you did not request to receive text messages from FTB, do not respond or click on any links. Report the issue to Scams.