Welcome to Tax News for March/April 2002. In this issue:
- FTB Pubs.1345, 1345A--Handbook, supplement key to successful e-filing
- Attention tax practitioners: FTB closed April 1, 2002
- New law allows FTB to disclose some tax data to local governments
- Remember head of household questionnaire when e-filing
- Tax Practioner Services
- Mid-Alameda enterprise zone expires; others get extension
- Ask the Advocate
- Research and Development Credit
- Manufacturers' Investment Credit website debuts
- Corrections to tax forms, publications, instructions
- Check out our improved FTB website
FTB Pubs.1345, 1345A
Handbook, supplement key to successful e-filing
If you are an approved e-file provider, you should have received your FTB Pub. 1345, e-file Handbook and FTB Pub. 1345A, the Handbook Supplement. The booklets were included in the marketing kits that were mailed out the last week of December.
These booklets are important to you because they contain valuable information, such as the rules for participating in our e-file program, instructions, new legislation, new forms, and other helpful information to help you e-file your returns. If you didn't receive one, and you are an approved e-file provider, please call the e-file Help Desk at (916) 845-0353 to request copies of the handbooks. You can also access our website at www.ftb.ca.gov/online/index.shtml to download a copy.
If you are not yet in the e-file program, you can call our help desk and request an application (Form 8633). You can also download the application from our website at www.ftb.ca.gov Once you are accepted in the Internal Revenue Service's e-file program and you've passed our suitability check, a marketing kit, including booklets 1345 and 1345A will be sent to you.
New this year - you can now fax your signed application direct to us. Original signature is not required to process your application.
Attention tax practitioners:
Franchise Tax Board field offices and our Tax Practitioner Hotline will be closed on April 1, 2002 in observance of Cesar Chavez Day. Field offices and the hotline will also be closed Sunday, April 14, 2002. Our taxpayer service center is available on state holidays during the filing season. Call toll-free at (800) 852-5711. Here is a list of the remaining 2002 official state holidays:
Monday, April 1, 2002
Cesar Chavez Day
Monday, May 27, 2002
Thursday, July 4, 2002
Monday, September 2, 2002
Monday, October 14, 2002
Monday, November 11, 2002
Thursday, November, 28, 2002
Friday, November, 29, 2002
Day after Thanksgiving Day
Wednesday, December 25, 2002
New law allows FTB to disclose some tax data to local governments
Effective January 1, 2002, the newly chaptered Assembly Bill 63 (Chapter 915, Statutes of 2001) enacts Revenue and Taxation Code Section 19551.1, authorizing us to disclose limited tax information to local tax officials. Information available through this new law may assist local governments with the administration of local city business tax requirements.
Beginning with 2001 tax year data, the information we are authorized to disclose is limited to the taxpayer's name, address, social security number or taxpayer identification number, and principal business activity code (PBA Code). The 2001 tax forms were changed to provide a space on the front page of the return to record the PBA Code as reflected on the taxpayer's Schedule C return.
Remember head of household questionnaire when e-filing
Assuming you e-file - and we all know e-file saves all around - be sure you include form FTB 1540e, head of household questionnaire with the tax return. This year we've made the questionnaire more comprehensive; in fact it's identical to the head of household audit letter we send to taxpayers when we can't determine their eligibility.
By providing a completed form FTB 1540e with your clients return, it will allow us to determine if your head of household clients qualify for the filing status without them having to later respond to an audit letter. We will only contact your clients if we still can't make a determination based on the information in the form FTB 1540e.
Tax Practitioner Services
The Tax Practitioner Hotline hours for the remainder of the 2002 filing season are as follows:
- Monday through Friday: 8 a.m. to 5 p.m.
- From March 2 through April 13, 2002: Saturdays, 8 a.m. to 4:30 p.m.
The Tax Practitioner Hotline will not be open on April 1 and April 14, 2002.
Tax Practitioner Hotline
Telephone (916) 845-7057
Fax (916) 845-6377
Personal Income Tax Collection
Fax (916) 845-0494
Business Entities Collection
Fax (916) 845-0145
FTB e-file Help Desk
Telephone (916) 845-0353
Mid-Alameda enterprise zone expires; others get extension
Effective October 14, 2001, a portion of the Mid-Alameda Corridor enterprise zone, City of Lynwood, expired.
All remaining enterprise zones that were scheduled to expire this year have been granted a five-year extension from the California Technology, Trade, and Commerce Agency (TTCA). Here's how the expiration of enterprise zone tax incentives affect taxpayers operating in the City of Lynwood:
The hiring credit is available after the expiration of the enterprise zone for qualified wages paid to those employees that are hired on or before the expiration date of the enterprise zone.
For purposes of calculating the hiring credit, all portions of the hiring credit statute are deemed to remain in effect. Further, the enterprise zone designation is also deemed to remain in effect.
The sales or use tax credit is available for property purchased and placed in service before the expiration date of the enterprise zone. Sales or use tax paid or incurred on qualified property that is purchased and placed in service on or before October 14, 2001 can be used for purposes of computing the sales or use tax credit.
The business expense deduction is available to qualified
taxpayers for qualified assets purchased and placed in service on or before
the expiration date of the enterprise zone. Qualified assets purchased
and placed in service on or before October 14, 2001 are eligible for computing
The enterprise zone net operating loss is allowed for
the loss incurred by the taxpayer that is attributed to their activities
in the enterprise zone prior to the expiration of the
Any taxable year-end net operating loss that is attributed to the enterprise zone activities will be eligible for the enterprise zone net operating loss. This loss is computed by computing the enterprise zone net operating loss as if the enterprise zone had remained in existence the entire year, and then this full year loss is prorated based on the number of days the taxpayer operated in the enterprise zone for the tax year, as compared to the total number of days in the tax year.
The net interest deduction is available to taxpayers (creditors) for qualified interest payments received before the expiration date of the enterprise zone. Thus, qualified interest payments received on or before October 14, 2001 are eligible for computing the net interest deduction.
Credits and net operating loss deductions incurred before the expiration of the enterprise zone and subject to carryover will continue to be allowed after the expiration of the enterprise zone.
The limitation on the use of the credit (limited to tax on income attributed to the zone) and net operating loss deduction (limited to income attributed to the zone) will also remain in effect.
For more information, obtain FTB 3805Z Booklet, Enterprise Zone Business Booklet.
Ask the Advocate
Q: Will my clients' estimated tax penalty be reduced if I file an amended return reducing their tax liability?
A: It depends. The penalty will be reduced if the amended return is filed before the extended due date of the return. The penalty is based on the tax shown on the original return. The courts have held that an amended return is deemed an original return if filed before the extended due date. Conversely, if the amended return is filed after the extended due date the estimated tax penalty will not be reduced.
Research and Development Credit
Pay attention to California's definition of gross receipts. California allows a credit for qualified expenses your clients incur while conducting research in California. However, California also has several exceptions to federal law that can affect your computations for the credit. When computing the amount of your clients' research and development credit, pay particular attention to how California defines gross receipts.
Revenue and Taxation Code Section 23609(h)(4), which defines the term gross receipts for the purpose of determining the California credit for research expenses, modifies the federal law relating to gross receipts (Section 41(c)(6) of the Internal Revenue Code) to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of taxpayer's trade or business that is delivered or shipped to a purchaser within this state, regardless of the freight on board point or any other condition of sale.
This particular California law affects taxable years beginning on or after January 1, 1993 and allows for two differences from federal law. 1) Gross receipts for California purposes are more limited than what's allowed under federal law, and 2) they must be from the sale of property delivered or shipped to a purchaser within this state.
This amount may be different than the amount used for the California sales factor numerator on Schedule R-1, Apportionment and Allocation of Income.
Calculating base amount
Internal Revenue Code Section 41(c)(1) defines base amount as the product of the fixed-base percentage and the taxpayer's average annual gross receipts for the four taxable years preceding the taxable year for which the credit is being determined.
When performing this calculation you must use the California gross receipts to correctly determine the Research and Development Credit.
What to include in gross receipts
California gross receipts should include receipts from the sale of real, tangible, or intangible property held for sale to customers in the ordinary course of the taxpayer's trade or business that is delivered or shipped to a purchaser in California. This would include sales to the U.S. government, which could be identified as delivered in California.
What to exclude in gross receipts
Exclude items such as throwback sales, as well as, receipts from services, rents, operating leases, and interest. Generally speaking you should also exclude items such as royalties and license payments. Evaluate transactions that operate as a combined sale of property and services on a case-by-case basis, based on the terms of the contract.
When to file an amended return
You may file an amended return to correct the computation for any tax years open under the statute of limitations. In addition, carryovers from closed years may need to be revised as well. If we're conducting an ongoing audit, provide the auditor with the revised gross receipts, if they are material. In some situations, changes resulting from this interpretation might not result in any change to the credit amount if the credit is already limited to 50 percent of research and development expenditures. Changes made to gross receipts apply to the average annual gross receipts and to the base years (1984-1988). This provides consistency to the gross receipts calculation.
If you have questions or need assistance computing the research and development credit, call our Tax Practitioner Hotline at (916) 845-7057 or refer to Form FTB 1082 - Research & Development Credit: Frequently Asked Questions available on our forms and publications webpage at /forms/misc/1082.pdf.
Manufacturers' Investment Credit
We now provide comprehensive information about the Manufacturers' Investment Credit (MIC) on our website. Go to www.ftb.ca.gov/businesses/credits/mic/references/index.shtml to access FTB manuals, publications, codes, regulations, notices, and rulings, and several non-Franchise Tax Board MIC reference materials. If you need additional assistance with the MIC, call us, from within the United States, at 1.800.852.5711. From outside the United States, call 1.916.845.6500 (not toll-free). For the hearing impaired with TDD, call 1.800.822.6268 and follow the text prompts.
Corrections to tax forms, publications, instructions
Please note the following corrections for some of our 2001 California tax forms, instructions, and booklets. If you have any questions about these or any other forms, contact our Tax Forms Development and Distribution Section at (916) 845-3442. Click here for more.
Check out our improved FTB website
How's our website? To better serve you, we recently changed our website, www.ftb.ca.gov. We based our changes on input from you and your clients-both informally via e-mail and phone calls, and formally through a series of focus group interviews we conducted in November. So, visit our website and let us know what you think. Send your suggestions and comments to email@example.com.