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Tax Conformity? State May Get in Line with Parts of TCJA Changes.

The Newsom administration indicated in January that it would pursue tax conformity as part of the state budget process. The plan outlined conforming California tax laws to some provisions of the Tax Guts and Jobs Act (TCJA).

While the specifics of what might be included in a formal proposal are not finalized, CalCPA member leaders took the opportunity to provide input to policy leaders on areas where conformity is needed to alleviate some of the most significant compliance burdens for taxpayers.

Specifically, nonconformity in certain key areas requires CPAs and taxpayers to make numerous adjustments using different state and federal methodologies to accommodate the variances in their state and federal tax returns. This can complicate taxpayer record-keeping and increase the cost of professional reporting assistance.

Among the areas CalCPA encourage policy leaders to pursue conformity are:

Small-Business Accounting Method Simplification: The TCJA raised the threshold to $25 million for when a small business can opt to use the cash basis of accounting over the accrual method. However, California still has the much lower $5 million threshold.

If California does not conform to the new rules, businesses between $5 million and $25 million would in effect be required to maintain two separate accounting records: one for federal purposes and one for California purposes. This will create taxpayer confusion and increase the complexity and cost of preparing and maintaining records.

Repeal of Technical Termination of Partnerships: The TCJA made several changes related to the rules that govern the taxation of partnerships, including simplifying termination rules by repealing the automatic technical termination provisions. Without conformity, California taxpayers involved in a partnership transaction would be faced with two different sets of procedures. This would require separate sets of records, two different tax filing requirements, different elections and other substantial attributes being recorded differently for state and federal purposes.

Like-Kind Exchanges Limited to Real Property: Under the TCJA, like-kind exchange rules were limited to only allow exchanges of real property. Without conformity, California taxpayers who exchange business investment interests or other property will have a like-kind exchange for California purposes, but not for federal purposes. As a result, taxpayers will have to track the difference in the depreciable basis for state and federal purposes, as well as requesting guidance on how to treat a federal income recognition event as an unrecognized income event for California purposes.

Federal Treatment of Alimony: The TCJA changed the treatment of alimony for tax purposes. Since tax implications can be a significant factor in divorce and alimony negotiations, inconsistent state and federal laws can delay the resolution process and create complications for taxpayer returns where alimony payments or receipts are treated differently on state and federal returns. Conformity would simplify returns and allow for consistency.

Other areas of conformity might arise as the tax season unfolds. Based on the size, complexity and multitude of external factors. it will take time to understand the impact of the federal changes on taxpayer liabilities and decisions.

Wayfair Legislation

California legislators have been working to expedite a legislative solution that would address the impacts of the U.S. Supreme Court's Wayfair decision. This landmark decision upheld a South Dakota state law requiring remote sellers to pay sales tax if in the prior calendar year their gross revenue from sales exceeded $100,000 or they made more than 200 separate sales transactions. The decision overturned a long-standing precedent that physical presence was required for sales tax collection.

Absent legislative action, the California Department of Tax and Fee Administration (CDTFA) began notifying remote online retailers that exceeded 200 transactions or $100,000 in sales of tangible goods in California that they would be required to register with the CDTFA to collect and remit sales tax.

In response, the Legislature introduced AB 147 to implement the new interpretation of substantial nexus under Wayfair, but would set a threshold more aligned with California's level of economic activity, rather than mirror the South Dakota law. The bill set a higher threshold of S500,000 for when a retailer is considered engaged in business in the state and would be required to collect and remit sales tax. It also does not include a threshold that includes a number of transactions.

The bill moved quickly through the Legislature with bipartisan support in hopes of setting the new standard for remote sales tax collection prior to the CDTFA pursuing the lower threshold. At press-time the bill was awaiting Gov. Newsom signature.

by Jason Fox

Jason Fox is CalCPA's director of legislation. You can reach him at
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Title Annotation:Capitol Beat
Author:Fox, Jason
Publication:California CPA
Date:May 1, 2019
Previous Article:New Nexus: Wayfair & What It Means for Sales & Use Tax Audits.
Next Article:Q & A CBA President & CalCPA Member George Famalett.

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