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Governor Signs Tax Conformity as Part of State Budget.

With the passage of the California budget in June, Gov. Newsom also signed Assembly Bill 91 into law. The Loophole Closure and Small Business and Working Families Tax Relief Act of 2019 selectively conforms to provisions of the 2018 Tax Cuts and Jobs Act and expands the current California Earned Income Tax Credit (EITC). The expanded credit increases the income range for those that qualify for the EITC and the credit amount available for certain taxpayers. To offset the expanded credit, the bill selectively conformed parts of the state tax code to recent federal tax code changes, which is anticipated to increase revenues by approximately $1.6 billion. Outlined below are the areas of conformity:

* Achieving a Better Life Experience (ABLE) Accounts: Eliminates differences in qualification criteria for ABLE accounts between federal and California tax law to increase contribution limits and allow taxpayers to roll-over Section 529 plans to ABLE accounts.

* Student Loan Debt: Excludes from an individual's gross income the amount of student loan indebtedness discharged after Dec. 31, 2017, due to death or disability of the student.

* Federal Deposit Insurance Corporation (FDIC) Premiums: Limits the amount banks may deduct for FDIC premiums paid by disallowing deductions entirely for depository banks with assets above $50 billion, and limits them for banks with assets between $10 billion and $50 billion.

* Excess Employee Compensation: With respect to compensation in excess of $1 million, revises the definition of covered employee and publicly held corporation to limit the amount that may be deducted for ordinary and necessary expenses. Additionally, disallows the performance-based compensation and commission exceptions with respect to the deduction limitation.

* Net Operation Loss (NOL) Carrybacks: Repeals the ability for taxpayers to carry back NOLs to previous taxable years.

* Small-Business Accounting Simplification: Increases the following thresholds to conform with federal law:

1. From $5 million to $25 million the amount of average annual gross receipts of a small business to be allowed to use the cash method of accounting;

2. From $10 million to $25 million the average annual gross receipts of a taxpayer exempt from provisions precluding the deductibility of certain property costs and determining whether those costs are inventory costs or are capitalized; and

3. Exempts a small business with average annual gross receipts not exceeding $25 million from provisions that require a taxpayer to take inventories to clearly determine their income.

* Non-Corporate Business Loss Limits: Disallows deductions under the Personal Income Tax Law for excess business losses over $250,000 for a single filer and $500,000 for joint filers. Establishes these limits in perpetuity (the federal change expires in 2026), and also provides that losses cannot be carried forward as a NOL at an amount greater than the limits listed above (which they can under federal law).

* Technical Termination of a Partnership: Repeals provisions that allow for the termination of a partnership within a 12-month period and allows a partnership to elect to have this change apply to partnership taxable years beginning in 2018.

* Like-kind Exchange Rules: Eliminates like-kind exchanges of personal property, limiting these exchanges only to real property, except for personal income taxpayers with less than $250,000 for a single file and $500,000 for a joint filer.

* Elimination of Section 338 Election: Provides that if an election to treat a qualified stock purchase from a target corporation as an asset acquisition is made by a purchasing corporation for federal tax purposes, a separate state election shall not be allowed.

In a separate budget trailer bill signed by the governor, SB 92 made a number of other tax related changes, First, it created a streamlined appeals process for specified taxpayers with appeals under a certain threshold at the Office of Tax Appeals by allowing those appeals to be heard by one administrative law judge rather than the current three-ALJ panel. Second, the trailer bill contains "Wayfair cleanup" language (clarifying that a delivery network company may be deemed a marketplace facilitator). Finally, it created a two-year sales and use tax exemption for feminine hygiene products and diapers used by small children.
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Publication:California CPA
Geographic Code:1U9CA
Date:Aug 1, 2019
Words:675
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