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