CATax: New Regs

CATax: Tax Update

Bob Reynolds, CPA
None of the various California tax law changes put into place by state legislation were enacted to commence in 2010; instead, they were either immediately effective in 2009 or deferred to 2011.

Changes Effective in 2009
Sales and Use Tax Rate Increased
Beginning April 1, 2009, and effective through June 30, 2011, the state sales and use tax rate is increased by 1 percent. The increase is extended through June 30, 2012, if an amendment to the California Constitution related to certain budget matters was approved in the statewide election May 19.

Vehicle License Fee Increase
Effective May 19, 2009, the state Vehicle License Fee increased from 0.65 percent to 1.15 percent. The increase does not apply to certain truck trailers, semitrailers and other commercial vehicles. The rate increase is effective through June 30, 2011, and will be extended to June 30, 2013, if voters approved a Constitutional amendment related to budget matters in the statewide election May 19.

Individual Income Tax Rates Increased
For tax years beginning on or after Jan. 1, 2009, the individual tax rates are increased by 0.25 percent. The rate increase applies to resident and nonresident individuals, to taxable estates and trusts, and to regular and alternative minimum tax rates.

The rate increase is effective through Dec. 31, 2010, and will be extended through Dec. 31, 2012, if the California Constitution amendment related to certain budget matters was approved in the statewide election May 19.

Corporate tax rates (including S corporations) remain unchanged.

Dependent Credit Reduced by $210
For tax years beginning on or after Jan. 1, 2009, the dependent credit is reduced to an amount equal to the individual personal exemption credit. Actual 2009 credit amounts are not yet determined, as the amounts are adjusted annually for inflation. The 2008 amounts in effect are $309 for dependent credit and $99 for the personal credit. Based on these 2008 amounts, the 2009 dependent credit would be reduced by $210 per dependent.

The dependent credit reduction is effective through Dec. 31, 2010, and extended through Dec. 31, 2012, if the California Constitution amendment related to certain budget matters was approved in the statewide election May 19.

New Home Purchase Tax Credit
Individuals who purchase a new, never previously occupied, single-family residence between March 1, 2009–March 1, 2010, will be eligible for a credit equal to the lesser of 5 percent of the purchase price or $10,000 against their California personal income tax. The credit must be claimed in equal amounts over three successive tax years, beginning with the tax year in which the purchase is made.

Credits must be preapproved before a taxpayer claims it on their tax return. The Legislature has limited available credits for all taxpayers to $100 million. As such, new home purchase credits will be approved on a first-come, first-serve basis. To apply for the credit, an application must be filed by the escrow company within seven calendar days after closing.

Small-Business Hiring Tax Credit
For taxable years beginning on or after Jan. 1, 2009, a credit against individual and corporate income/franchise tax is granted in an amount equal to $3,000, prorated as provided, for each qualified full-time employee hired during the taxable year by a qualified employer.

A “qualified employer” must have 20 or fewer employees on the last day of the preceding tax year and may only claim a credit on the net increase in “qualified employees” for the current year in comparison to last year. New businesses reflect all qualified employees as net increases. Credits will cease to be granted in the calendar quarter when the total credits claimed on all state returns for all eligible years under this statute cumulatively total $400 million.

Changes Effective in 2011
Economic Nexus Defined
For taxable years beginning on or after Jan. 1, 2011, “doing business” for purposes of whether taxpayers have economic nexus, and are thereby subject to corporate income tax, is redefined to include any of the following:

• Organized or commercially domiciled in California.
• In-state sales exceed the lesser of $500,000 or 25 percent of total sales.
• In-state real and tangible personal property exceeds the lesser of $50,000 or 25 percent of total property.
• In-state payroll exceeds the lesser of $50,000 or 25 percent of total payroll.

In-state sales, property and payroll are determined by application of the corporate apportionment rules, including alternate apportionment rules.

Definition of “Gross Receipts” Codified
For taxable years beginning on or after Jan. 1, 2011, “gross receipts” for purposes of income tax apportionment is redefined to codify recent court decisions. Gross receipts include all gross amounts realized, except for:

• Repayment/redemptions of loans, bonds, etc.
• Amounts received from repurchase agreements.
• Amounts from stock issuance or sale of treasury shares.
• Damages and other amounts resulting from litigation.
• Property acquired by agent on behalf of another.
• Tax refunds and other tax benefit recoveries.
• Pension reversions.
• Contributions to capital.
• Income from discharge of indebtedness.
• Amounts realized from exchanges of inventory not recognized for Internal Revenue Code purposes.
• Amounts received from intangibles in connection with “Treasury Functions,” except for broker dealers.
• Amounts received from hedging transactions.

This revised definition of gross receipts is effective for tax years beginning on or after Jan. 1, 2011.

Expanded Sales Factor “Finnigan” Again
The FTB treats each corporation in a combined return group as a separate taxpayer for purposes of the sales factor sourcing and throwback rules. For tax years beginning on or after Jan. 1, 2011, the Finnigan rule is adopted. Accordingly, all sales of a combined reporting group are included in the numerator of the sales factor if any member of the combined reporting group is subject to tax in California.

Similarly, sales shipped or delivered outside California are not included (i.e., “thrown back”) in the sales factor numerator if any member of the combined reporting group is taxable in the state of the purchaser.

Sourcing for Sales
For tax years beginning on or after Jan. 1, 2011, gross receipts from various revenue-generating activities will be sourced using a “market” or “customer location” sourcing rule. Sales of items other than tangible personal property are sourced as follows:

• Services are in California to the extent the purchaser receives benefits in California.
• Sales from intangible property are sourced to California to the extent the property is used in California.
• Sales from licensing, leasing, or renting real or tangible personal property are in California if the property is located in California.

Motion Picture Tax Credits
For taxable years beginning on or after Jan. 1, 2011, a credit against individual and corporate income tax is granted in an amount equal to a specified percentage of the qualified expenditures attributable to the production of a qualified motion picture in California. Credits must be certified in advance by the California Film Commission, are limited in total and are granted on a first-come, first-serve basis. The credits can be assigned to a member of the unitary group, and in some cases, sold to third parties. Elections are available to convert the credits for use against California sales or use tax in lieu of the income tax credit. The motion picture tax credit may present opportunities for some taxpayers.
Bob Reynolds, CPA is a partner at Moss Adams LLP. This article was previously published by Moss Adams LLP.