Gov. Brown Signs AB 1412: Reinstating QSBS Exclusion
Oct. 4, 2013—Due to a great response from you and your colleagues, CalCPA has experienced another major legislative success. Gov. Brown has signed AB 1412 (Bocanegra & Gatto)—an important solution that corrects an unfair retroactive tax change by reinstating the long-standing Qualified Small Business Stock (QSBS) exclusion for Californians who reasonably relied on the law at the time they filed their tax return. More importantly, this legislative solution gives Californians peace of mind that reliance on our tax code is the rule, not the exception.
Following the governor's signing of the bill, the Franchise Tax Board has released QSBS guidance in the form of FAQs.
Gov. Brown Signs SB 823: License Requirements Extended
Oct. 2, 2013 — SB 823, the California Board of Accountancy sponsored bill that CalCPA supported, has been signed by Gov. Brown. As an urgency measure, this bill will take effect immediately. SB 823 extends the current licensure requirements for those who have passed all parts of the Uniform CPA Exam by the end of this year. The two-year grace period will assist candidates by allowing additional time to wrap up any additional licensure requirements they may need.
After the two-year grace period, the candidate would have to satisfy the new licensure requirements that take effect Jan. 1, 2014. The bill also allows student-candidates enrolled in a five-year, combined master’s (or certificate)/bachelor’s program to sit for the Uniform CPA Exam prior to official receipt of the bachelor’s degree—as long as they have completed all the necessary requirements for the degree and the school is able to certify the student’s status.
CalCPA Asks Members of Congress to Co-sponsor Tax Due Date Reform Bill
May 2, 2013— CalCPA joins other state CPA societies in urging
members of Congress to co-sponsor H.R. 901 (and companion S. 420) Tax
Reform Due Date Simplification Act of 2013. The proposal creates a
logical set of due dates focused on allowing a more timely flow of
information from pass-through entities to their owners. It also would
promote the early filing of more business and personal returns and
relieve some of the workload compression surrounding the Sept. 15
business return deadline. AICPA, CalCPA and other state societies have
pushed for this legislation since 2008.
Franchise Tax Board's Major Shift on Qualified Small Business Stock Issue: Will Hold Retroactive Tax Bills in Abeyance if Taxpayers Request
March 4, 2013—The Franchise Tax Board has made two significant updates to its FAQs about the retroactive cancellation of the Qualified Small Business Stock exclusion after the decision in Cutler v. California Franchise Tax Board, No. B233773 (Cal. Ct. App.):
Instead of mailing retroactive tax bills immediately for the 2008 tax year, the FTB instead will hold those bills until April 2013.
The FTB indicated that the bills will not be sent at all while other potential resolutions of the QSBS matter are being considered if the taxpayer contacts the FTB and completes a waiver of the statute of limitations for that year.
Entrepreneur/investors who received letters from the FTB regarding retroactive assessments of tax for 2008–11 on the so-called “Cutler issue” are strongly encouraged to review the FTB's new Notice and FAQs (Nos. 2-3 under “Audit, protest and settlement issues”), and contact the FTB as soon as possible to arrange a waiver to delay issuance of the retroactive tax bills.
CalCPA continues to work on resolving the retroactive tax impacts upon taxpayers who were simply following the law as it existed at the time. CalCPA is working with interested parties to resolve this issue, including the California Business Defense, led by Brian Overstreet. The CBD can be reached online or contact Eric Miethke, CBD’s lobbyist, (916) 446-6752.
CalCPA Sends Letter to Legislature on the Retroactive Denial of the QSB Tax Incentive
Feb. 11, 2013— In August 2012, a decision in a court case, Cutler v. Franchise Tax Board, overturned a long standing tax break for small business. The California Court of Appeals ruled that the Qualified Small Business Tax Incentive that the Legislature had granted to California taxpayers violated the U.S. Constitution by interfering with interstate commerce. The tax break had allowed individual taxpayers to exclude half of the profits from their income taxes when they sold their interest in small business with at least 80% of its payroll and assets located in California.
CalCPA has since learned that the FTB is retroactively pursuing the recalculated back taxes and interest of individuals who benefited from the tax break dating back to 2008. This means that many taxpayers, who in good faith have followed the law and invested in California small businesses, recently received a notice from the FTB informing them that they now owe a significant amount of back taxes.
CalCPA believes that it is crucial that the legislature take action to resolve this situation without penalizing taxpayers that were simply following the law. The below letter was sent to all members of the Legislature, the elected members of the FTB, and other interested parties.
Sept. 24, 2012—You will have a lot of important decisions to make this election. In addition to voting for the president, and your representatives in Congress and the state Legislature, you will be voting on 11 initiatives. These initiatives will have immense political and policy implications that range from considerable tax policy changes, to significant government structural reforms to sharp policy changes. This guide will help provide you with the essentials of each initiative so that you can make the most informed decision possible.
Sept. 20, 2012—Gov. Brown has signed SB 1405 (DeLeon) to allow CPAs from outside California to have an easier time serving their clients living or doing business in California. In addition, the new law will bring California into conformance with the laws of 48 other states and the District of Columbia. It will take effect July 1, 2013.
“The change in the law makes the playing field even for California CPAs and eliminates the possibility of retaliatory action by other states that could reduce opportunities outside our state for California CPAs,” said CalCPA Chair, Johanna Sweaney Salt.
Under the new law, out-of-state CPAs may provide many services to their California clients without having to obtain a license or pay a fee to the California Board of Accountancy. Most other states have similar laws, and California CPAs have been able to provide most services to their clients in those states without registering with the appropriate board of accountancy. Currently, however, CPAs from other states need permission from the CBA to practice here.
The new law retains strong consumer protection as out-of-state CPAs practicing in this state still will be subject to the jurisdiction of the CBA, and California CPAs will be subject to the jurisdiction of the accountancy boards in other states when representing clients there. CPA firms from outside the state still must register with the CBA before they may provide audit services to businesses or individuals headquartered in California. Such firms also will need to register with the CBA to provide compilations and reviews of entities headquartered in California. Additionally, consumers will be able to access licensing information for out-of-state CPAs through the California Board of Accountancy.
“This legislation has been a long-term goal of CalCPA,” noted Salt. “Nowadays even relatively small businesses may have offices or representatives in other states, let alone in other nations. With passage of this law, California CPAs will be better able to serve clients with multi-state locations.”
Hawaii is the only state that has not passed legislation that provides similar privileges to out-of-state CPAs.
Interstate Practice Bill Goes to Governor
Aug. 30, 2012—Legislation, SB 1405 (DeLeon), to bring California into conformity with the interstate practice laws of 48 other states was passed by the California State Senate on a unanimous vote. This has been a long-term goal of CalCPA and was accomplished due to the collaborative efforts of the large accounting firms, the Center for Public Interest Law, the California Board of Accountancy and CalCPA members who spent time in Sacramento meeting with their Legislators. This consensus legislation represents years of negotiation with all stakeholders and we are pleased with this outcome.
CalCPA is a co-sponsor of SB 1405. When this bill is signed, California will be in major conformity with the provisions of the Uniform Accountancy Act.
The Governor has until September 30th to take action on this measure.
July 5, 2012—As the Legislature completed its budget work, CalCPA and a coalition of other business groups were successful in having a harmful and costly taxpayer penalty provision removed from budget language. As introduced, budget trailer bill SB 1015 had a provision that authorized the Franchise Tax Board to impose a 20 percent penalty on taxpayers seeking an erroneous tax refund claim. Specifically, the proposal would have allowed the FTB to penalize any refund claim it thought lacked a reasonable basis—and would have prohibited any appeal or protest from the taxpayer.
CalCPA opposed this proposal arguing that it is unreasonable to penalize taxpayers who have simply overestimated and overpaid their taxes. California law currently has a 20 percent underpayment penalty for understatements in excess of $1 million, which in many cases results in taxpayers overpaying their taxes to avoid the underpayment penalty. This proposal would have left taxpayers caught in the middle trying to not overpay or underpay their taxes for fear of being hit with a penalty by the FTB. Additionally, the proposal would not have allowed taxpayers to protest the penalty to the Board of Equalization, leaving a legal suit as their only course of action. The proposal would have been the subject of litigation over the undefined “reasonable basis” by which the FTB would subjectively determine whether a refund claim was erroneous or not. As a result of the opposition, the provision was amended out of the budget language.
Another provision in the same budget trailer bill required taxpayers to retain the election chosen on their original tax return. The issue was aimed at addressing multistate tax filers, but CalCPA was concerned that the way the language was written, the changes could have applied to all amended tax returns and all tax elections in California. CalCPA raised this concern to the Legislature and was assured that the provision would only apply to multistate filers and the author pledged to supply follow-up legislation if necessary to clarify the limited application.
CalCPA’s Interstate Practice Legislation Passes First Step
June 28, 2012—CalCPA-sponsored interstate practice legislation, Senate Bill 1405 (De León), received unanimous support June 26 in the Assembly Committee on Business, Professions, and Consumer Protection.
California is one of two states that have not passed interstate practice legislation, which is the ability for a CPA to practice across state lines without providing a notification or a license from each state where incidental services may be provided. SB 1405 seeks to change this by removing some of the burdens of licensed CPAs to provide timely services across state lines and, in turn, help CPAs more effectively represent their clients.
The bill also contains provisions to exempt CPAs serving in the military from the biannual license renewal fee while they are in full-time training or active service. This provision is designed to provide some peace of mind and professional security to the men and women in the CPA profession who are serving our country. The committee praised the bill for helping improve California’s business climate while maintaining a strong commitment to consumer protection. SB 1405 is the result of hard work and extensive negotiations between CalCPA and stakeholders.
SB 1405 will next be heard in the Assembly Committee on Veterans Affairs.
May 16, 2012—CalCPA has written a letter to all 53 California Congressional representatives urging them to support House Resolution 1864, the Mobile Workforce State Income Tax Simplification Act of 2011. This important bill would create a uniform standard for determining when an employee’s earnings would be subject to state income tax and withholding, reducing the complexity of tracking varying state requirements.
CPAs in public and private practice often perform services and calculate state income tax withholding for clients that have employees working in different states for short periods of time. Additionally, CPAs working for multi-state firms often travel to and work in various states and must calculate the state income tax withholding for each state they work. However, the complexity arises because of the numerous state income tax withholding laws, and varying de minimis periods for each state. The variations make compliance difficult and time consuming as CPAs must determine the different state laws.
HR 1864 simplifies this issue by using a uniform threshold for when an employee’s earnings would be subject to state income tax and withholding when the employee performs work in a state for more than 30 days during the calendar year. Specifically the bill will limit state taxation of the compensation of any employee who performs duties in more than one state to the state of the employee’s residence and the state in which the employee is physically performing duties for more than 30 days.
CalCPA believes the 30-day de minimis threshold will help reduce the confusion of varying state requirements and significantly simplify compliance for all taxpayers, including CPAs. Enacting HR 1864 will ease regulatory burdens by allowing employers to better evaluate which employees will need to withhold income taxes in states outside of their residence. Additionally, the change will have a negligible impact on state revenues. CalCPA will be urging support for this important bill as it continues through the legislative process.
HR 1864 has passed out of the House of Representative and is awaiting hearing in the Senate.
Sales Tax on Services Avoided for Now … But for How Much Longer?
May 11, 2012—CalCPA’s advocacy team opposed two serious proposals to extend sales tax on services that were introduced in the Legislature this year. AB 2540 (Gatto) and AB 1963 (Huber) have both been significantly amended to remove any serious and immediate threat.
As introduced, AB 2540 would have applied the current level of sales tax to a select list of services designed to target high-income earners. Instead of moving forward with this provision, the author, Assembly Member Mike Gatto, amended the bill into an unrelated subject that no longer extends the sales tax to services.
As introduced, AB 1963 would have lowered the overall sales tax rate from 6.25 percent to 4 percent and extended the 4 percent tax rate to virtually all services, including many services CPAs regularly provide to clients. This bill was also amended by the author, Assembly Member Alyson Huber, to remove the immediate implementation of sales tax on services. The bill now directs the nonpartisan Legislative Analyst’s Office to study the effects of extending sales taxes to services as a way to stabilize California’s volatile revenue and report back by July 1, 2013.
While sales taxes on the services of CPAs and other professionals may have been avoided for now, the threat still remains. California’s budget deficit continues to grow despite years of cuts and onetime solutions. Revenues for this fiscal year are about $5 billion below expectations and this budget gap is expected to continue into the next fiscal year. The governor is banking on voters passing his tax increase initiative that will be placed on the November ballot; however, its passage is still uncertain. If the governor’s strategy fails and no workable long-term budget solution takes shape in the coming months, then it is expected that all options will be on the table, including more aggressive efforts to extend the sales tax to professional services.
CalCPA continues to oppose any proposal for sales tax on professional services that is not applied evenly and fairly to all professions and providers of similar services. A tax on services should not lead to a competitive advantage for one profession over another when they both provide the same service. Additionally, it’s unreasonable to enforce a tax on many of these services that are required by law. Businesses, nonprofits, state and local governments, school districts and other entities mandated to undergo audits and reviews should not be taxed for complying with the law. The cost of compliance alone would have a profound impact on these entities that already have tight budget constraints.
Major Changes to Income Tax Appeals Process Inserted into Budget Process
Mar. 28, 2012—Legislators have slipped a major policy change relating to income tax appeals into Assembly Budget trailer bill language. The provision would grant the Franchise Tax Board (FTB) the power to appeal income tax decisions by the California State Board of Equalization (BOE) to county superior courts on a de novo basis.
Despite being a major policy amendment, the issue was presented as a budget item and heard on March 20 in a meeting of Assembly Budget Subcommittee No. 4 on State Administration. The committee approved the measure (3-2) with Democrat Assembly Members Joan Buchanan, Michael Allen and Roger Dickinson supporting the change and Republican Assembly Members Don Wagner and Dan Logue opposing. The policy issue is a revival of previous legislation, SB 1113, authored by Senator Wolk in 2010. At the time SB 1113 failed passage on the Senate floor due to strong bipartisan opposition.
CalCPA opposed SB 1113 in 2010, arguing that allowing the FTB to bring a trial de novo proceeding in superior court after the BOE had already ruled in the taxpayer’s favor would be an unnecessary burden to taxpayers. Since the burden of proof is always on the taxpayer, an FTB appeal of a BOE decision would again subject the taxpayer to the costs of having to produce all the necessary documentation and evidence a second time. This repetitive and expensive process would also render the current BOE appeals process meaningless, as the FTB would be motivated to disregard a BOE decision and open the whole case again. Individual taxpayers and small businesses would particularly be affected; the costs of an appeal would be extensive, which may compel some taxpayers into a settlement despite having a meritorious claim.
Additionally, a budget hearing—focused largely on state revenues and expenditures—is not the proper place for such a large tax policy change. Instead, it should be properly vetted in a policy committee to properly analyze and debate the policy implications.
The full Assembly Budget Committee is expected to review the subcommittee actions and this proposal in the coming weeks. Senate Budget Subcommittee No.4 on State Administration and General Government is also expected to hear this proposal in early May, and the Senate Budget and Fiscal Review Committee will review it sometime after that.
CalCPA is actively working with a coalition of business and taxpayer groups to thwart this proposal before it advances too far in the budget process.
Legislation to Extend Sales Tax to Services Introduced
Mar. 13, 2012—The Think Long group bowed to political pressure from Governor Jerry Brown and agreed to postpone its effort to qualify a ballot initiative that included a tax on services; however, other proposals to impose additional services taxes have come forward. Assembly Member Alyson Huber (D-El Dorado Hills) introduced Assembly Bill 1963, which would impose a sales tax on services. The bill will lower the overall sales tax rate from 6.25 percent to 4 percent, and extend the 4 percent tax rate to virtually all services. The only exceptions being “necessary medical services, services related to education, automotive repair services, tax preparation and filing services, licensed legal services, services relating to agriculture and livestock.” Additionally, the bill makes changes to the personal income tax by increasing the standard income tax deduction for individuals and for those filing as a head of household or as a married couple filing a joint return. The personal income tax brackets are also adjusted. Should this bill be signed into law, it will take effect beginning Jan. 1, 2013.
Historically, CalCPA has maintained that sales taxes on professional services must be applied evenly and fairly to all professions and providers of similar services in order to prevent any competitive advantages. AB 1963 exempts from the new 4 percent tax rate—“tax preparation and filing services” which are just a small fraction of the compliance related services that CPAs provide. Audits, compilations, and other financial services, would also become taxable under this bill, driving up costs to California taxpayers and compliance costs for CPAs.
It’s unreasonable to enforce a tax on many of these services that are required by law. Businesses, non-profits, state and local governments, school districts and other entities mandated to undergo audits and reviews should not be taxed for complying with the law. The compliance costs alone would have a profound impact on these clients that already have tight budget constraints. For state and local governments there will be additional costs—at a time of extreme deficits.
Additional legislation has been introduced to extend the sales tax to services by Assembly Member Mike Gatto (D-Burbank). Assembly Bill 2540 would apply the current level of sales tax to a select list of services designed to target high-income earners in order to offset a tax exemption for the first 20 percent of business income to a maximum of $10,000. Among the list of services is “high net-worth estate planning.” In the Senate, Senator Sam Blakeslee (R-San Luis Obispo) has introduced Senate Bill 1412. Currently, this bill makes no substantive changes and is a spot holder that could develop into another vehicle to impose a sales tax on services.
CalCPA will be following these bills and will work with the authors and the California Legislature to address these concerns.
Mar. 16, 2012—Currently, California and Hawaii are the only two states that have not passed interstate commerce legislation for CPAs. This is a CPA’s ability to practice across state lines without obtaining a notification—or a license—from each state where incidental services may be provided.
Interstate commerce is essential to conduct business in today’s global economy not only in California, but also in the United States and across the world. Consequently, the practice of CPAs can extend across state lines where license certification, reciprocity, temporary practice and other accountancy issues may differ depending on the various state licensing jurisdictions. A uniform system removes some of the burdens of licensed CPAs to provide services across state lines and, in turn, helps CPAs more effectively represent their clients.
CalCPA has been working with stakeholders to conform cross-border practice privileges with the rest of the nation by following the provisions of the Uniform Accountancy Act—legislation that has been adopted by 48 other states. To lay the foundation for the interstate commerce discussion, the topic was a talking point at 2012’s CPA Day at the Capitol, held every year at the end of January. Currently discussions are ongoing with all stakeholders in hopes that a consensus and a strategy for implementation can be agreed upon in the near future.
Redevelopment Agency Agreed Upon Procedures Changed at CalCPA’s Request
Feb. 29, 2012—The CalCPA Government Accounting and Auditing Committee reviewed the state Controller's proposals on Agreed upon Procedures for the wrap-up of Redevelopment Agencies Feb. 9. The committee determined that CPAs would be in jeopardy if they agreed to perform those procedures, as the procedures were in some instances unclear and in others called upon CPAs to certify things beyond the scope of the CPA profession. The Controller’s Office, Department of Finance and county auditors from throughout California developed the proposed procedures. Controller’s Office representatives met with members of the GA&A Committee and agreed to consider suggestions to improve the procedures as long as the committee’s input was received by Feb. 15. With herculean effort, the committee was able to work through the weekend and provide the Controller with suggested revisions.
The revisions were then incorporated into a new document that was the subject of a Feb. 24 meeting with representatives of the CPA profession, county auditors, the Department of Finance and the Controller’s Office. Additional clarifying amendments were provided at that meeting.
A revised suggested minimum procedures package will be posted on the State Controllers website very shortly. This is a big win for CalCPA’s advocacy efforts on behalf of the CPA profession in California. The cooperation of the Controller’s staff and Department of Finance along with the county auditors should be commended as well.
March 12, 2012—The FTB announced March 3 that self-employed individuals who have already filed 2011 taxes using the higher federal tax deduction instead of California’s 50 percent deduction would not be required to file amended tax forms. Rather, the FTB is proposing to contact those individuals, provide them with an explanation of the issue, supply a revised calculation and offer the opportunity to respond, prior to a bill being sent to the taxpayer. The FTB had initially planned to require these taxpayers to file an amended return, but after conversations with the CalCPA Committee on Taxation and other tax practitioner groups, the FTB decided that sending a notice to those taxpayers affected would be good public policy and reduce taxpayer burden.
The issue arose because California does not conform to the federal 2010 Tax Relief Act. The FTB staff should be commended for doing the right thing.
The COT continuously works with the FTB, IRS and other taxing agencies to facilitate tax policy that is effective for taxpayers and tax practitioners.
You can find more information on the taxpayer advisory online.
What's so important about CPA Day at the Capitol? It's an opportunity to "influence the future of the profession in California," says Bruce Allen, CalCPA director of government relations.
More than 200 CalCPA members converged on Sacramento Jan. 18, 2012 for the seventh annual CPA Day at the Capitol. They mingled with colleagues from across the state and met with their elected legislators. The event allowed CalCPA members to meet and educate those responsible for key policy decisions about issues important to the future of the profession. Specifically, participants discussed sales tax on services, CalCPA’s financial literacy program and the importance of conforming California’s interstate practice laws to those of the rest of the nation. In addition, participants were able to network with other CPAs who share the same passion for advocating for accounting profession.
This year’s event was unique in that it coincided with Gov. Jerry Brown’s annual State of the State address. In his speech, he laid out his vision and objectives for the next year, including budgetary cuts and increased taxes to address the state’s ongoing structural deficit, while advocating for increased investments into public works. The added significance of the day brought extra energy to the event as groups of CalCPA members walked the halls proudly displaying blue CalCPA buttons. The experience gave CPA Day participants a distinctive taste of the importance of taking a proactive role in advocacy efforts to ensure that the interests of CPAs and their clients are represented.
The California Board of Accountancy discussed three regulatory hearings on proposed changes to regulations governing California CPAs during its Jan. 28-29 meeting, its first meeting of 2012.
Retired License: The first proposal outlined regulatory changes necessary to implement CalCPA supported legislation AB 431, which allows the CBA to create a “retired” status designation for CPAs. The language adopted by the CBA creates the requirements and process for licensees to use the term “retired” once they have retired. Licenses of retired CPAs are now shown as delinquent or cancelled when they are not renewed.
Unlicensed Accountant Safe Harbor Language: The CBA also held a regulatory hearing on proposed amendments to the safe harbor language for non-CPAs who prepare financial statements. The proposed changes would have added the following lines.
I [We] am [are] not licensed, nor required to be licensed, by the California Board of Accountancy for the preparation of these financial statements. If compiled, reviewed, or audited financial statements are desired, the services of someone licensed by the California Board of Accountancy would be required.
The added language is the result of CBA concerns that consumers may not understand the difference between financial statements compiled by a CPA and those prepared by an unlicensed professional. Due to concerns raised by unlicensed accountants that the language might ultimately be deemed unconstitutional, the CBA tabled the proposed change until the language can be further refined.
Fingerprints Required: The CBA held its final regulatory hearing on a proposal to require the fingerprinting of CPAs and public accountants who were licensed before Jan. 1, 1998. Some early licensees were not required to submit fingerprints to the CBA, and other fingerprints were lost during a change in the computer system used by the Department of Consumer Affairs. The change would require licensees who do not have a fingerprint record with the CBA to submit their fingerprints during their next license renewal. The CBA adopted the proposal and it will continue through the regulatory process. This regulation is a result of recent legislation requiring that all licensing boards have fingerprints on file.
Read the postings of these pending regulations on the CBA website.
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Stepping up for the Profession
Several California Congressional representatives, including CalCPA member John Campbell, co-signed a letter to U.S. Treasury Secretary Timothy Geithner expressing their concerns with the IRS tax return preparer registration proposal. Read their letter.