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What’s new for filing 2018 tax returns - California State non conformity with Federal Tax Reform (TCJA)

Posted by Admin Posted on Feb 01 2019

Tax News - California Franchise Tax Board

Federal Tax Reform

The Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, made changes to the Internal Revenue Code (IRC). In general, California Revenue and Taxation Code does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015, with modifications. The IRS issued Notice 2019-11 to provide for a waiver of the estimated tax penalty for taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the TCJA, the far-reaching tax reform law enacted in December 2017. For California purposes, the TJCA had no general impact to the amount of state income tax an individual California state income taxpayer would owe. Thus, it is not necessary for California provide a similar waiver as described in IRS Notice 2019-11.

Like-Kind Exchanges

California does not conform to the amendments under the TCJA. The TCJA amended IRC Section 1031 limiting its application to real property that is not primarily held for sale. Additionally, under the TCJA, exchanges of personal property and intangible property do not qualify for non-recognition of gain or loss as like-kind exchanges. Get Instructions for Sales of Business Property (Schedule D-1) for more information.

IRC Section 965 Deferred Foreign Income

California does not conform. Under federal law, if a taxpayer owns (directly or indirectly) certain foreign corporations, they may now have to include certain deferred foreign income on their return.

Global Intangible Low-Taxed Income (GILTI) Under IRC Section 951A

California does not conform. Under federal law, if a taxpayer is a U.S. shareholder of a controlled foreign corporation, they must include their GILTI in their income.

New Deduction for Pass-Through Income

California does not conform to the TCJA additions of the IRC Section 199A, Qualified Business Income, for tax years beginning after December 31, 2017, and before January 1, 2026.

Qualified Opportunity Zone Funds

California does not conform to the deferral and exclusion of capital gains reinvested or invested in federal opportunity zone funds under IRC Sections 1400Z-1 and 1400Z-2, and has no similar provisions. The TCJA established Opportunity Zones. IRC Sections 1400Z-1 and 1400Z-2 provide a temporary deferral of inclusion of gross income for capital gains reinvested in a qualified opportunity fund, and exclude capital gains from the sale or exchange of an investment in such funds.

Technical Terminations

California law does not conform to the federal repeal of the technical terminations of a partnership. The TCJA repealed the IRC Section 708(b)(1)(B) rule providing for technical terminations of partnerships. For California purposes, 2 short period returns are still required.

Depreciation Limitation

California does not conform to the federal modification to depreciation limitations on luxury automobiles (IRC Section 280F).

Net Operating Losses (NOLs)

California law does not conform to the TCJA changes to the rules for NOLs. California taxpayers continue to compute NOLs in conformity to federal rules as of the specified date of January 1, 2015, with modifications.

Capital Assets

California does not conform to the amendment under the TCJA. The TCJA amended IRC Section 1221 excluding a patent, invention, model or design (whether or not patented), and a secret formula or process held by the taxpayer who created the property (and certain other taxpayers) from the definition of a capital asset. For California purposes, IRC Section 1221 as of January 1, 2015, applies.

Importance of Monthly Bookkeeping

Posted by Admin Posted on Oct 05 2017

Every business should keep their books updated on a regular basis. However, many business owners do not have enough time to actually keep their books current. Instead, they wait until the end of the year to pull their records together to give to their tax accountant. This is a mistake. It is essential that businesses update their books at least monthly. There are several reasons for keeping the company books updated throughout the year.


For a business to deduct its expenses in full, it must carry on operations with the intent to make a profit. This is true even if the business is operated through certain legal entities. The intent to make a profit sounds like an easy test to pass because everyone who owns a business wants to make a profit. However, just having the intent is not good enough. You must prove to the IRS that you have a profit motive. The IRS looks at many factors when determining whether a business is legitimately seeking a profit. One factor that the IRS looks at is whether the business operates in a businesslike manner. In a recent court case the tax court stated that the business did not operate in a businesslike manner because the owner didn’t maintain complete books and records. In another similar case, the court of appeals stated that the “most persuasive reason” for determining that the business was not engaged in for profit, is that the books were updated on an annual basis instead of monthly. As you can see, keeping the books updated on a monthly basis is essential to establishing the profit motive for your business.

In addition to showing the profit motive behind business deductions, the business must have documentation to prove the amount of its expenses. If a business is audited and it does not have proper documentation, the expenses will be disallowed, leading to interest and penalties. It has been our experience that business owners who keep their books at least monthly are more likely, than business owners who keep their books on an annual basis, to have the documentation necessary to backup their expenses in an audit. This forces them to gather all of their documentation, such as receipts, at the end of every month when expenses are still fresh in their minds. Waiting until the end of the year to gather information, makes it much more likely that you will not be able to find all of the required documentation. In total, searching for a year’s worth of information can be more time consuming than keeping the books monthly.

In addition to making it much more likely that the business owner will not be able to find documentation to prove the expenses, it makes it much more likely that legitimate business expenses will be forgotten entirely. Missing business expenses causes you pay more tax than you otherwise would. If you find the missing expenses later, after the return has been filed, it is possible to amend the return. However, if you use a tax professional to prepare the amended return, they will charge for the amendment which will reduce the benefit of deducting the expenses. Also, amended returns go through a screening process that originally filed returns are not subject to which may increase the audit risk. So, it is important to make sure all deductions are on the original return to make sure you get the full benefit of the deductions.

While you want to make sure you deduct all of the business expenses you pay, there may be a point where you will want to reduce your overall expenses. For instance, you may want to have additional funds available to trade with. Updating the business’s books every month can help with this as well. Keeping your books up to date every month allows you to see what your largest expenses will be by year-end. With this information you can focus your efforts on those expenses before they get unmanageable. If you wait until the end of the year to update the books, the damage will already have been done. One situation where we have seen this issue is with subscriptions that renew automatically.

The business owners subscribed to a service which they later decided they did not need. They forgot to cancel the automatic renewal. Since they didn’t review their records regularly, they didn’t realize the expense was still coming out of their account until they had paid for it for several months. In this situation it is difficult to get any of the charges reversed.

Related to reducing the business expenses, keeping your books updated can help reduce unauthorized charges on the business credit card. This can include being double charged for a legitimate expense or fraudulent charges after the business card has been compromised. If you are in the habit of paying the amount due without reviewing the statement, it is easy to miss unauthorized charges. However, if the books are kept monthly, you will review every statement which will help you notice unauthorized charges and have the charges reversed.

In addition to audits and internal management, updating the books at least monthly has tax planning benefits. If your entity is a standalone entity, such as a C Corporation, it will owe tax at the end of the year, if there is a net profit. If you expect to make a profit you will want to engage in tax planning so that you pay the lowest amount of tax possible. Tax planning is best done throughout the year and not just in December when it may be too late to take advantage of certain tax saving strategies. Having your books up to date every month makes it easier to understand your business and determine what strategies would be most beneficial to your business. Also, if you own a flow through entity, such as a partnership, having the books updated is important for your personal tax planning. When designing an appropriate tax planning strategy you will need to know all aspects of income or loss that will impact your personal return. Having a gain or loss flow through from your partnership can significantly impact your personal income tax. Therefore, it is imperative to have the business books up to date so you have a clear picture of the impact it will have on your personal return. This holds true even if you are using a tax professional for your tax planning.

If, after the tax planning strategy is implemented, the business is still expected to owe tax, quarterly estimated payments may be required. Paying quarterly estimates is essential as penalties will be assessed if the quarterly payments are not paid, or if not enough tax is paid each quarter. Updating the books on a monthly basis is essential for calculating quarterly estimated payments. Having the books updated, will make your estimates more accurate which will make your quarterly payments closer to the actual tax due. This is important because you will avoid underpaying the quarterly tax, saving you from penalties. Conversely, it will help you avoid giving the IRS an interest free loan by significantly overpaying the tax.

Another reason for keeping your books updated at least monthly has nothing to do with financial or tax purposes. By keeping your books up to date, you could be helping your loved ones. In the event something happens to you suddenly, your loved ones will be the ones who will have to close the business. If you have not been keeping the books up to date, instead of being able to use the books as a starting point, your loved ones will have almost no information to start with. This will make it more difficult for them to get the information they need to close the business in an already difficult time.

As you can see, keeping the business books up to date at least monthly is essential. If you do not have the time or knowledge to keep your own books, then hiring a professional to update the books monthly is a must. If done properly, monthly bookkeeping can save you from IRS interest and penalties, reduce your taxes, help with your financial planning, and even help your loved ones.

Beware of tax promoters purporting to save employment taxes on health plans

Posted by Admin Posted on Sept 21 2017

Beware of tax promoters purporting to save employment taxes on health plans

What is the ACA impact on S corporations that do not have a group plan and want to reimburse shareholders and/or employees for their individual health insurance premiums?

Posted by Admin Posted on June 16 2016
What is the ACA impact on S corporations that do not have a group plan and want to reimburse shareholders and/or employees for their individual health insurance premiums?

The real impact of ACA on S corporations comes into play when there is no group plan for the business, but the business wants to pay premiums directly for shareholders or employees for individual policies, or wants to reimburse the shareholders or employees for premiums that they have paid personally.

Generally, under ACA, arrangements that provide reimbursements for medical costs to employees are not allowed. Under ACA, a medical reimbursement plan, or a similar plan that covers employee premiums, is not permitted unless it provides only ancillary benefits (dental, vision, etc.), covers only one participant, or is integrated with a fully qualifying group plan. In essence, an arrangement where an S corporation reimburses individual premiums, even if the premiums are reported as taxable income, is a violation of the ACA market reform rules. While these rules were to be effective beginning in 2014, the IRS issued Notice 2015-17 in February of 2015 which provided some relief. That notice provided that no penalties would be assessed for non-compliant reimbursement arrangements for small employers with less than 50 employees who directly pay or reimburse individual health insurance premiums from 1/1/14 through 6/30/15. It also provided that S corporations that directly pay or reimburse individual premiums for more than 2% shareholders are exempt from any penalties under ACA for such arrangements.

Special note: As indicated in Notice 2015-17, the Departments are contemplating publication of additional guidance on the application of the market reforms to a 2% shareholder-employee healthcare arrangement. Until such guidance is issued, the excise tax will not be asserted for any failure to satisfy the market reforms by a 2% shareholder-employee healthcare arrangement. Further, unless and until further guidance is issued, an S corporation with a 2% shareholder-employee healthcare arrangement will not be required to file Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code, solely as a result of having a 2% shareholder-employee healthcare arrangement. 

Are there any issues for S corporations that have group health insurance plans?

Posted by Admin Posted on June 16 2016
Are there any issues for S corporations that have group health insurance plans?

First, for an S corporation that has a group health insurance plan, there should be no change in the treatment of these benefits under ACA. The group premiums paid for employees, other than the more than 2% shareholder, are deductible by the corporation as fringe benefits, and are not taxable wages to the employee. For an employee who is a more than 2% shareholder (and for any person who owns, or is considered to own within the meaning of Sec. 318, more than 2% of the outstanding stock; see Sec. 1372(b) and 318), report group premiums paid in box 1 of his or her Form W-2. Do not include them in box 3 or 5 for Social Security or Medicare tax purposes. Since a more than 2% shareholder is treated as a partner for the purpose of the self-employed health insurance deduction, the shareholder/employee can deduct the premiums on page one of his or her Form 1040 so that the net effect to his or her income is that the wages are included in income, but the health insurance premiums paid by the company are, in effect, excluded by the netting of the deduction against the same amount included in wages. This is the most straightforward case, and will apply to larger S corporations that have group plans in place and pay reasonable wages to their more than 2% shareholders who work in the business. 

Welcome to Our Blog!

Posted by Admin Posted on Oct 17 2013
This is the home of our new blog. Check back often for updates!