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Changes to 2011 Forms

Updates to the Publication 1001 on 02/19/2013 –– Supplemental Guidelines to California Adjustments

We replaced text on Page 9, Item 1.

Previous Version

DIFFERENCES BETWEEN FEDERAL AND CALIFORNIA LAW

Federal law allows an exclusion under IRC Section 1202 of 50% of the gain on the sale of qualifying small business stock originally issued after 08/10/93, that was held for more than five years. California law provides a similar exclusion (under R&TC Section 18152.5); however, for California purposes, 80% of the issuing corporation’s payroll must be attributable to employment located within California, and at least 80% of the value of the issuing corporation’s assets must be used by the corporation to actively conduct one or more qualified trades or businesses in California.

WHAT TO DO FOR CALIFORNIA

Use California Schedule D (540 or 540NR) if you claim the federal IRC Section 1202 exclusion on your federal return.

Revised Version

DIFFERENCES BETWEEN FEDERAL AND CALIFORNIA LAW

Federal law allows deferral and exclusion under IRC Section 1045 and IRC Section 1202 of 100% of the gain on sale of qualifying small business stock originally issued after August 10, 1993, that was held for more than five years. California does not conform.

WHAT TO DO FOR CALIFORNIA

Use California Schedule D (540 or 540NR) if you claim the federal IRC Section 1045 deferral or IRC Section 1202 exclusion on your federal return.

Reason for the changes

The Court of Appeal’s held in Cutler v. Franchise Tax Board (2012) 208 Cal. App. 4th 1247, that the qualified small business stock exclusion and deferral statutes under California Revenue and Taxation Code (R&TC) Sections 18152.5 and 18038.5 are unconstitutional. These sections are now invalid and unenforceable.

Impact

This revision increases the tax liability for taxpayers who reported a qualified small business stock exclusion or deferral for taxable years beginning on or after January 1, 2008.

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Updates to the Publication 1001 on 02/08/2012 –– Supplemental Guidelines to California Adjustments

We replaced text on Page 13, Adjustment to Income section.

Previous Version

Note: new text added.

Revised Version

Deductible part of Self-Employment Tax Effective January 1, 2011, federal law increased the amount of the adjustment to income for the deductible part of self-employment tax to over fifty percent of the self-employment tax. California does not conform. Enter on Sch CA (540 or 540NR), line 27, column B the difference between your federal self-employment tax adjustment minus 50% of your self-employment tax.

Reason for the changes

Federal law increased the amount of the adjustment to income for the deductible part of self-employment tax to over fifty percent of the self-employment tax. California does not conform.

Impact

Increase in tax liability because the California deductible amount is less than the federal deductible amount.

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