California Tax Law Changes for 2010 and 2011

Greenstein, Rogoff, Olsen & Co., LLP
Posted: 1/3/2011

There are several new changes in the California tax law that may affect 2010 and 2011 income tax returns.

Requirements for Children with Investment Income

For taxable years beginning on or after January 1, 2010, California law conforms to federal law that allows parents’ election to report a child’s interest and dividend income from children under age 19 or a student under age 24 on their tax return.

If qualifying, the parents may elect to report their child’s income of $9,500 or less (but not less than $950) on their tax return by completing form FTB 3803. To make this election, their child’s income must be only for interest and or dividends.

Otherwise, each child under age 19 or student under age 24 who received more than $1,900 of investment income in 2010 should complete form FTB 3800 to figure the tax on his/her own form 540, applying his/her parents tax rate if parents’ rate is higher.

Mortgage Forgiveness Debt Relief

California law conforms, with modification, to federal mortgage forgiveness debt relief for discharges occurring on or after January 1, 2009. Federal law limits the amount of qualified principal residence indebtedness to $2 million ($1 million if MFS). California law limits the amount of qualified principal residence indebtedness to $800,000 ($400,000 if MFS) and debt relief to $500,000 ($250,000 if MFS).

Suspended Net Operating Loss (NOL)

For taxable years beginning 2010 and 2011, California suspended the NOL carryover deduction for individuals with modified AGI (or companies with net income after California adjustment) greater than $300,000. If modified AGI (or company’s net income) is less than $300,000 or taxpayers have disaster loss carryovers, the NOL suspension rules do not apply. Taxpayers may continue to compute and carry over NOL during the suspension period.

Also, California modified the NOL carryback provision. NOLs incurred in taxable years beginning on or after January 1, 2013, instead of January 1, 2011, may be carried back to each of the preceding two taxable years. The allowable NOL carryback percentage varies. For an NOL incurred in a taxable year beginning on or after:

  • Jan. 1, 2013 and before Jan. 1, 2014, the carryback amount shall not exceed 50% of the NOL;
  • Jan. 1, 2014 and before Jan. 1, 2015, the carryback amount shall not exceed 75% of the NOL;
  • Jan. 1, 2015, the carryback amount shall be 100% of the NOL;

Doing Business in California

For taxable years beginning on or after January 1, 2011, a business (e.g., corp., LLC, etc.) is doing business if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or is any of the following conditions is satisfied:

  • The business is organized or commercially domiciled in California;
  • Sales in California (including sales by its agents and independent contractors) exceed the lesser of $500,000 or 25% of the taxpayer’s total sales;
  • Real and tangible personal properties in California exceed the lesser of $50,000 or 25% of the taxpayer’s total real and tangible personal properties; or
  • The amount paid in California for compensation exceeds the lesser of $50,000 or 25% of the total compensations.

Single Sales Factor Apportionment

For taxable years beginning on or after January 1, 2011, most apportioning trade or business may make an irrevocable annual election on an original timely filed return to apportion California business income using the single sales factor. However, income apportioned to the EZ (enterprise zone) continues to be apportioned based on the property and payroll factors.

Business Tax Credits

For taxable years 2008 and 2009, the business tax credits will only be available to offset 50% of the California tax liability (e.g. R&D credit, Enterprise Zone and Low Income Housing Credits). Such limitation was gone for year 2010.

New Job Credit

For taxable year 2009, a new jobs credit in the amount of $3,000 is allowed for a qualified employer for each increase in qualified full-time employee hired in the current taxable year that increases the employer’s number of full-time employees over the previous year. Such credit is still available for year 2010.

Failure to File Penalty

For a conduit entity’s return required to file on or after January 1, 2011, the failure to file penalty has been increased from $10 to $18 multiplied by the number of partners, members or shareholders, but not to exceed 12 months. The maximum number of months has increased form 5 months to 12 months.

California Estimated Tax (Estimated LLC Fee)

For 2011 quarterly estimated tax, California law says that a taxpayer must pay in the following percentages:

  • 30% for 1st quarter,
  • 40% for 2nd quarter,
  • Zero for 3rd quarter, and
  • 30% for 4th quarters

Same as 2010, California individual taxpayers who have or are projected to have adjusted gross income of $1 million or more (or $500K for married filing separately) cannot use the 110% safe harbor for prior years. Therefore, these taxpayers must use the 90% of current year tax.

An LLC must prepay its LLC fee by June 15. The LLC can penalty proof itself by paying in last year’s fee by June 15.

Two-Year Hiatus from Mandatory e-pay Penalty Ending

Starting January 1, 2011, the mandatory e-pay penalty (1% of the amount paid) will be assessed when a person required to make payment electronically pays using any other method.

Electronic payments are required once a person:

  • Makes an estimated tax or extension payment over $20,000
  • Files an original return with a tax liability over $80,000

Taxpayers who were previously notified (in 2009 or 2010) they meet the e-pay requirement must make their payments electronically starting January 1, 2011 to avoid the penalty.

Similarly, corporation remitting an estimated tax payment or extension payment in excess of $20,000 or having a total tax liability over $80,000 must remit all payments through EFT/Web Pay. Otherwise, a 10% non-compliance penalty will be assessed.

We hope you found this information helpful. Please contact us if we can assist in completing your tax return.