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

tax
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.

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