All about business September 2018 Tax News

There has been a lot of talk recently about the federal tax reform for 2018. The IRS is working on implementing the Tax Cuts and Jobs Act (TCJA) and preparing for the major impact this tax legislation will have on individuals, businesses, tax exempt, and government entities.

Because California’s tax system is based in part on specified date conformity to provisions of federal tax law, concerns about the growing disparity between federal and California tax laws are again one of the topics of these discussions. Each of the federal provisions in the Act was analyzed to determine its impact on California’s Revenue and Taxation Code (R&TC). You can find this analysis in reports at:

• Preliminary Report on Specific Provisions of the Federal Tax Cuts and Jobs Act
• May 16, 2018 Summary of Federal Income Tax Changes 2017

These reports and more can be found on our Legislation Information page.

An issue to watch out for is the new disparity between federal and California tax laws when your client has an exchange of property. For purposes of Internal Revenue Code (IRC) Section 1031, the determination of whether property is of a “like-kind” relates to the nature or character of the property. The New Federal Law (IRC Section 1031) provision modified the existing law providing for nonrecognition of gain in the case of like-kind exchanges by limiting its application to real property that is not held primarily for sale completed after December 31, 2017. [1] Since California law conforms to the federal rules for like-kind exchanges under IRC Section 1031, as of the “specified date” of January 1, 2015, with modifications, it does not conform to the federal law that now limits like-kind exchanges to real property that is not held primarily for sale.

In addition, California has an annual information reporting requirement for taxpayers that claim nonrecognition of gain or loss for a like-kind exchange when property in California is exchanged for property located outside of California. Taxpayers are required to file an information return (form FTB 3840, California Like-Kind Exchanges), in the taxable year of the exchange and in each subsequent taxable year in which the gain or loss attributable to the exchange has not been recognized.

Failure to comply with that reporting requirement and failing to file a return to properly report the recognition of the gain or loss attributable to the exchange, may result in us making an estimate of the net income from the exchange using any available information, including the amount of deferred gain or loss reported in the year of the exchange, and proposing to assess the amount of tax, interest, and penalties due in the same manner as assessments that are proposed for the failure to file a return.

More information on when and how to file our form FTB 3840, can be found on our Like-Kind IRC Section 1031 Property Exchange Reporting — Information Return Requirement page.