On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. The Act changes California’s conformity date to the Internal Revenue Code from January 1, 2005, to January 1, 2009, for taxable years beginning on or after January 1, 2010.
The following is a list of the most important areas of conformity provisions.
Extension of Exclusion of Income from Discharge of Qualified Principal Residence
The Act allows taxpayers that had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013.
- The new law limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
- Limits debt relief to $500,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $250,000 for taxpayers who file as married/RDP filing separately.
Income Exclusion of Federal Energy Grants
Federal energy grants provided in lieu of federal energy credits are excluded from California gross income and alternative minimum taxable income of individuals and business. The income exclusion is retroactive and applies to any taxable year.
Allow Surviving Spouse to Exclude Gain from Sale of Residence
The new law allows a surviving spouse to exclude from gross income up to $500,000 of the gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse.
Increase in Age of Minor Children Whose Unearned Income is Taxed as if Parents’ Income
For taxable years beginning on or after January 1, 2010, California conforms to the provision in the Small Business and Work Opportunity Tax Act of 2007 that increased the age of minor children whose unearned income is taxed as if it were the parents’ income to apply to children who are either:
- Under age 18.
- Full-time students who over age 18, but under age 24.
Early Distributions Not Subject to Additional Tax
California now conforms to the exceptions from the penalty on early withdrawals from retirement plans for qualified distributions made after September 11, 2001, to reservists while serving on active duty for at least 179 days and for qualified distributions made after August 17, 2006, to public safety employees after separation from service after reaching age 50. If you received one or more of these distributions and were assessed a penalty you may amend your returns to claim a refund. If the normal statute of limitations for claiming a refund would otherwise prevent the allowance of a refund, you may still file a claim for refund by December 31, 2011.
New Reporting Requirements for Small Tax-Exempt Organizations
Starting January 1, 2011, California requires small tax-exempt organizations with normal gross receipts of $25,000 or less, to electronically file an annual informational notice, FTB Form 199N, Annual Electronic Filing Requirement for Small Tax-Exempt Organizations (California e-postcard). This filing requirement applies to account periods beginning on or after January 1, 2010, and does not include churches and church-related organizations. The due date for filing Form FTB 199N is the 15th day of the 5th month after an organization’s tax year ends.
Impose a Penalty for Failure to File S Corporation Returns
For S corporation returns required to be filed on or after January 1, 2011, a failure to file penalty will be assessed in addition to the existing failure to file a timely return penalty. The amount of the penalty for each month, or part of a month (for a maximum of 12 months) that the failure continues, is $18 multiplied by the total number of shareholders in the S corporation during any part of the taxable year for which the return is due.
Increased Penalty for Failure to File Partnership or an LLC Returns
For returns required to be filed after January 1, 2011, the penalty for failure to file a partnership return or an LLC return is increased from $10 to $18 multiplied by the number of partners or members for each month (or fraction of the month) that the failure continues. Under the new law, the maximum number of months is changed from five months to 12 months.
Increase in Penalty for Bad Checks and Money Orders
For all payments received after January 1, 2011, we impose a penalty if your financial institution does not honor a payment you make to us by your check, money order, or electronic funds transfer. For a payment of $1,250 or more, the penalty is two percent of the payment amount. For a payment less than $1,250, the penalty is $25 or the payment amount, whichever is less.
Increase in Minimum Penalty on Failure to File a Tax Return
An individual or fiduciary that fails to file a tax return within 60 days of its due date (including extensions) is subject to a penalty of the lesser of $100 or 100 percent of the amount of tax required to be shown on the return. For taxable year beginning January 1, 2011, the penalty increases from $100 to $135.