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M A Y 1 9 9 9

State Conforms on Roth IRAs Inside ...


Before Governor Gray Davis signed Senate conversion, or allows them to elect to
Bill 93 into law on April 12, 1999, include the entire amount as 1998 income on 2 ... Tips for Reporting IRA
Contributions
California did not conform to federal law their 1998 return. If a taxpayer made a 1998
2 ... Roth IRAs
regarding how taxpayers report the rollover to a Roth IRA and dies at any time
3 ... Roth IRA: Frequently Asked
conversion of their traditional Individual during the four year spread, the entire Questions
Retirement Arrangement to a Roth IRA. amount not previously included in taxable 3 ... FTB Announces 1998 Tax
For California purposes (prior to the April income is taxable on the return for the year Form Corrections
12, 1999 enactment of SB 93), the taxable of the decedent taxpayer’s death. If a 4 ... Making Payments
taxpayer dies in 1998, all of the income from Electronically
amount of a rollover contribution from an
a 1998 rollover is taxable on the decedent’s 5 ... Verification Process Eases
IRA into a Roth IRA had to be reported Taxpayer Burden
ratably over four tax years, and a surviving tax return for 1998.
5 ... FTB Calendar
spouse beneficiary could not use the four Federal law allows surviving spouse 6 ... Software Woes? Visit an e-File
year spread if a decedent’s spouse made a beneficiaries to elect to defer (up to four Workshop
rollover from a traditional IRA to a Roth years) any remaining deferred taxable 6 ... BOE Implements New Tax
IRA in 1998. income that resulted from a 1998 Practitioner Hotline
conversion. 7 ... HRA Program Increases
Current federal law requires taxpayers to Income Limits
report ratably over four years the taxable (CONTINUED ON PAGE 2) 7 ... HRA Help Available
income that results from a 1998 Roth IRA .7 ... Magnetic Media: Faster, Better
Cheaper
7 ... FTB Calendar
8 ... QSub: A New Tax Planning
Vehicle
AB 1635 (Assembly
8 ... How Much Tax Should
Revenue & Taxation S Corporations Pay?
Committee) would 8 ... Filing Tips For QSubs
clarify that FTB may 9 ... FTB to Contact Tardy
revise the California Corporations
return to reflect the 9 ... Notices to Nonfilers Mailed in
proper filing status May
(even if different from 10...Watch Out for California
federal) when the filing Nonconformity with IRC
Section 469
status used on the
10 ... Basic Steps for Applying IRC 469
taxpayer’s federal Rules
income tax return is 10... Interest Rates
determined to be 11... State Reduces Prepaid
incorrect. Minimum Tax
For a summary of this 11... Tips for Paying, Reporting
Reduced Minimum Tax
and many other
proposed bills, go to 13 ...Proposed Bills
page 13.
Page 2

Tips for Reporting IRA Contributions


Volume 99-3 May 1999
Here are some tips for completing the Subtract the amount on Line 7
TAX NEWS is a bimonthly worksheet on page 3 of the ($7,000) from the amount on Line 6
publication of the Communications FTB Pub 1005A: ($10,000).
Services Bureau, California Franchise
Tax Board. Its primary objective is to Part B, Line 6 • Subtract from the remainder
provide information to income tax ($3,000) the amount of post-1986
professionals about state income tax Enter only the post-1986 contributions
laws, regulations, policies and made to traditional IRAs on Line 6. California basis you recovered in
procedures. DO NOT include 1998 contributions the partial distribution you took in
made to a Roth IRA. 1996 ($1,000). Enter this amount
Members of the Board:
($2,000) on line 8.*
Kathleen Connell, Chair Part B, Line 8 * (If no California post-1986 basis had been
State Controller If your client has recovered any recovered, the amount on line 8 would be
California post-1986 basis in prior $3,000 (10,000 – 7,000). However, since you
Johan Klehs recovered $1,000 of California post-1986 basis
Chair, State Board of Equalization years, subtract it from the total on line 8. in a previous year, the amount on line 8 must be
B. Timothy Gage For example, the client took a partial reduced by the amount of post-1986 basis
Director, Department of Finance previously recovered (3,000 – 1,000 = 2,000).
distribution from his or her traditional
———————— IRA in 1996, and recovered $1,000 of Part B, Line 13
Executive Officer: post-1986 California basis in that When inputting an amount on Line 13,
Gerald H. Goldberg distribution, you would reduce the total carry the decimal to four places.
Editor: on line 8 by the amount of California (_._ _ _ _ ).
Marvin Meek post-1986 basis previously recovered, as
follows: Part C
To update or correct your address or
to subscribe to TAX NEWS (send $12 • Enter the total IRA contributions If your client elects NOT to use the
for a one-year subscription), write: made after 1986 on Line 6. four-year spread and instead wants to
TAX NEWS include the entire amount of taxable
PO Box 2708 (Assume the amount is $10,000)
Rancho Cordova, CA 95741-2708 income on his or her 1998 return, you
or call: (916) 845-7070. • Enter the California deductions must adjust Part C as follows:
claimed after 1986 on Line 7.
To view TAX NEWS on the Internet (Assume the amount is $7,000) Skip line 18; and on line 20, use the
or to request an electronic mail amount from line 17 in each place
subscription, contact FTB on the where the line instructions refer to
Internet:
www.ftb.ca.gov line 18.
For information about a client’s
account, contact:
Tax Practitioner Support Unit
(916) 845-7057 (phone) conversion on his or her 1998 federal
(916) 845-6377 (fax) CA Conforms on Roth return (instead of spreading it over four
For recorded answers to questions on years), he or she must also report all of
California taxes, to order forms or (CONTINUED FROM PAGE 1) the California taxable income that results
check on a refund, call: Here are the answers to some of the from the 1998 Roth IRA conversion on
F.A.S.T. (800) 338-0505
From outside U.S. (916) 845-6600 frequently asked questions about SB 93 his or her 1998 California return.
and Roth IRAs: NOTE: The federal election is made on
To send a facsimile about a client’s
account, transmit to: How does SB 93 affect California federal form 8606, Nondeductible IRAs,
Electronic Correspondence taxpayers filing a 1998 state tax and cannot be made or changed after the
(916) 845-6377 return? filing due date (including extensions) for
—————————-
Information Center: As result of this legislation, California the 1998 return. There is no separate
(800) 852-5711 conforms to current federal law regarding California form to file regarding the
From outside U.S. (916) 845-6500 election.
Roth IRAs, as amended by the IRS
Hearing Impaired: Restructuring and Reform Act of 1998 How does conformity impact
TDD (800) 822-6268 (which allows taxpayers the elections
__________________ FTB Pub. 1005A?
described earlier). Furthermore, The differences relating to Roth IRA
FTB on the Internet California now requires that taxpayers use
www.ftb.ca.gov conversions that are explained in FTB
the same election for California that was Publication 1005A, California Treatment
Printed on recycled paper. elected for federal purposes. Any federal
of Roth IRA, no longer apply.
election made is binding for California.
However, taxpayers may still use the
For example, if a taxpayer elected to
worksheet on page 3 of the publication to
report all of the federal taxable income
that results from a 1998 Roth IRA (CONTINUED ON PAGE 3)

May 1999
Page 3

Example #1
CA Conforms on Roth If the taxpayer:
(CONTINUED FROM PAGE 2) • Filed a 1998 federal return with an
compute their California income adjustment election to include 100 percent of the
if they had a difference between the taxable income that resulted from a
California basis and the federal basis of 1998 Roth IRA conversion, and
their IRA. • Filed a 1998 California return which
What if the California basis of the IRA included only one-fourth of the taxable
converted to a Roth IRA is different than income that resulted from a 1998 Roth
the federal basis? IRA conversion, then; Free
Taxpayers who have a different IRA basis the taxpayer must file a 1998 amended
for California than for federal purposes for California return (Form 540X) to include Tax News
tax year 1998(on the traditional IRA that the remaining three-fourths of the California
was converted to a Roth IRA) will need to taxable income that resulted from the Roth
IRA conversion. There are a number of ways
make an adjustment on their 1998 you can get your Tax News
California return. Although the differences Example #2 free of charge.
explained on pages 1 and 2 of FTB The taxpayer is a surviving spouse and the
Publication 1005A no longer apply, To download, view and print
sole beneficiary of a Roth IRA and he or Tax News from the Internet,
taxpayers may still use the worksheet on she:
page 3 to compute the California contact the Franchise Tax
adjustment. • Filed a 1998 federal return in which he Board at its
or she elected to use the four-year www.ftb.ca.gov
NOTE: Taxpayers who elect not to use the spread of the taxable income that Web site.
four-year spread and instead want to include resulted from the decedent spouse’s
the entire amount of taxable income in their To subscribe to Tax News by
Roth IRA conversion in 1998, and E-mail, also contact the FTB
1998 return must adjust the amounts on Part
C of the worksheet as follows: • Filed a 1998 California return in which Web site. Access the
he or she reported all the deferred Education and Outreach page.
Skip line 18; and on line 20, use the amount taxable income that resulted from the Click on the Tax News logo
from line 17 in each place the line decedent spouse’s Roth IRA and then on
instructions refer to line 18. conversion in 1998, then; “Tax News by E-Mail.”
When is an amended return required for the taxpayer must file an amended Insert your E-mail and other
the 1998 tax year? California return (Form 540X) for 1998 and address information in the
Taxpayers must file an amended California adjust the reported amount of taxable fields provided. Click on
return for the 1998 tax year if the 1998 income that resulted from the 1998 Roth “subscribe” and then on
California return was filed reflecting a tax IRA conversion to one-fourth of the “submit” to record your
treatment different than the federal tax remaining deferred taxable income. subscription.
treatment that was elected for federal
purposes for the 1998 tax year. Here are
two examples.

FTB 3805Z, Enterprise Zone Business


1998 Tax Form Corrections Booklet, Worksheet VI, Section B, line 1
Tax practitioners should note the reads: “Net loss for state purposes…; or
following corrections to the 1998 tax Form 109, line 1. Apportioning
form information: corporations, enter the amount from
Schedule R, line 13b for corporations doing
Form 541 Credit Chart business in the zone. Enter as a
“Farmworker Housing – Loan, credit positive number...”
code 208”
It should read: “Net loss for state
Delete “Farmworker Housing – Loan, purposes…; or Form 109, line 1. Enter as a
credit code 208” and its description from positive number. Note: Apportioning
the chart. (Estates and Trusts do not corporations, enter the amount from
qualify to take the “loan” credit, it Schedule R, line 12 for the corporations
applies to corporations.) doing business within the zone.”
The Internet version is correct. Package The Internet version is correct. Package X,
X, paper and CD-ROM (release 98.1 and paper and CD-ROM (release 98.1 and 98.2)
98.2) and Form 541 Booklet are and FTB 3805Z Business Booklet are
incorrect. incorrect.

(CONTINUED ON PAGE 19)


Page 4

Making Payments Electronically


Frequently Asked Questions About e-Pay
The Franchise Tax Board now allows statement.
e-file balance due taxpayers the option of How will taxpayers be notified if their
having their payment debited directly e-pay request is not honored by their
from their bank accounts. financial institution?
Taxpayers that elect to e-pay have the If the e-pay request is returned from the
option of choosing the date to have FTB taxpayer’s bank for insufficient funds,
Need e-Filing deduct their payment from their bank
account. For the 1998 tax year, taxpayers
account closed, invalid account number or
any other reason, the taxpayer will be
Assistance? can select any day between January 15 issued a Notice of State Income Tax Due
and October 15, 1999. stating that the taxpayer’s payment has
If you need assistance or have As is the case with paper payments, late been returned by his or her bank.
questions about FTB’s e-file payment penalties and interest will apply
or e-pay programs, you can If the taxpayer receives a return
to e-pay payments made after information notice from FTB advising
get the information you need April 15, 1999.
either by phone or on the of a change to the tax due, will the
Internet. e-pay request be changed?
To talk to someone at the No. If the taxpayer receives a notice from
e-file Help Desk, call (916)
“Taxpayers can request to FTB showing an increase in liability, the
taxpayer can remit the difference by
845-0353. Or visit the FTB stop an e-pay transaction check or the taxpayer can cancel the e-pay
Web site at www.ftb.ca.gov/
elecserv. by calling the e-file Help request and mail a check for the revised
liability. If the liability decreases, the
Desk.” taxpayer can cancel the e-pay request and
mail a check. If the e-pay occurs and the
liability has decreased, the taxpayer will
Here are some of the most frequently receive a refund of the overpayment.
asked questions about FTB’s e-pay
program: Can any date between January 15 and
October 15, 1999, be chosen as the
Can an e-pay request be cancelled? debit date?
Yes. Taxpayers can request to stop an e- Yes. However, for the payment to be
pay transaction by calling the e-file Help considered timely, the e-pay date must be
Desk at (916) 845-0353 at least two on or before April 15, 1999. If the
business days prior to the chosen e-pay taxpayer chooses a nonbanking day as the
debit date. debit date, the e-pay request will occur on
Can e-pay information be changed the first possible business day following
after FTB has accepted the e-file the debit request date. If a return is
return? transmitted with a debit request date that
No. e-pay information cannot be is prior to the actual date the return is
changed. If a taxpayer determines that filed, the e-pay request will occur on the
the banking information provided was first possible business day and the
invalid, he or she can call to have the e- payment received date will be considered
pay cancelled. The taxpayer will then the return filed date.
have to mail in the payment in the For more information regarding e-pay or
traditional manner. the e-file program, please visit the FTB
Will the taxpayer receive anything Web site at www.ftb.ca.gov or contact the
from FTB confirming the e-pay e-file Help Desk at (916) 845-0353. The
payment has been received? Help Desk’s hours are 8 a.m. until 5p.m.,
Monday through Friday.
No. FTB does not issue a statement
confirming withdrawal of an e-pay
payment. Confirmation of withdrawal
will be reflected on the taxpayer’s bank

May 1999
Page 5

FTB Calendar
May
Wage
• Requests for Tax Return
are mailed to individuals
who have not filed their
9HULILFDWLRQ3URFHVV(DVHV 1997 personal income tax
return.
7D[SD\HU%XUGHQ • Notices of Proposed
Assessment are mailed to
individuals who have not
filed their 1997 tax

1
ot so long ago, when the withholding information from EDD on a returns.
Franchise Tax Board received a daily basis, compare the information to 20 Previous month
tax return that lacked the proper the wage and withholding amounts nonresident withholding
Form W-2, our only option was to claimed on the taxpayer’s personal payments are due if total
disallow the taxpayer’s income tax return and resolve withholding exceeded
withholding claim. discrepancies in the reported amounts by $2,500.
Today we can verify a claim for contacting the taxpayer’s employer June
instead of the taxpayer.
withholding with or without the • Requests for Tax Return
taxpayer’s Form W-2. We now resolve The new process has been a success. are mailed to individuals
discrepancies with a telephone call to the During 1998, the first full year of who have not filed their
taxpayer’s employer instead of a notice to implementation, we performed 450,000 1997 personal income tax
the taxpayer. fewer manual withholding verifications on return.
tax returns than in the previous year. • Notices of Proposed
Assessment are mailed to
In addition, the number of adjustments we
“Best of all, we sent performed that resulted in an increase to
individuals who have not
filed their 1997 tax
fewer withholding the taxpayer’s withholding claim grew
under the new process.
returns.
• Requests for Tax Return
adjustment notices Best of all, we sent fewer withholding are mailed to
adjustment notices to taxpayers. corporations who have
to taxpayers.” not filed their 1997
In 1999 we have turned our focus to corporate tax return.
verifying wage information. We are
These are just a few of the benefits of • Demands to file 1997
Assembly Bill 3086 and our new wage evaluating the accuracy of the wage corporate tax returns are
and withholding verification process. information received from employers as mailed to nonqualified
well as the accuracy of the adjustments and qualified
AB 3086, which was enacted in 1994, we make to taxpayers’ returns when the corporations.
made two significant changes to the filing information does not match.
requirements for California’s employers. 15 Second quarter 1999
It reduced the number of payroll tax As we continue to improve the wage and personal income tax
withholding verification process, there is estimate payments are
returns that employers were required to due.
file and it required employers to report one thing you can do to help reduce the
personal income tax withholding amounts, chance of one of your clients being 20 See May 20.
personal income tax wages and each contacted during the process. July
employee’s full first name to the Make sure that we have all the proper • Requests for Tax Return
Employment Development Department on information about your clients’ wages, by are mailed to individuals
a quarterly basis. attaching or transmitting copies of all the who have not filed their
appropriate state and federal schedules 1997 personal income tax
The new law also gave us an opportunity return.
to improve the way we exchanged and attachments that document
information with employers and EDD. adjustments to their adjusted gross • Notices of Proposed
income based on wages. For example, if Assessment are mailed to
Big changes occurred in 1997. First, one of your clients has treated any wages individuals who have not
EDD implemented a new automated included on a Form W-2 as business filed their 1997 tax
system that allowed it to pass on returns.
income, attach or transmit a copy of his or
information it received from employers her federal Schedule C, “Profit or Loss (CONTINUED ON PAGE 7)
directly to us on a daily basis. From Business,” with the return.
At the same time, we developed a new
wage and withholding verification process
that allowed us to receive the wage and
Page 6

Software Woes? Visit an e-file Workshop


For more information about workshops in
your area, contact the FTB e-file Help
Desk at (916) 845-0353. Help Desk
Wanted: hours are 8 a.m. until 5 p.m., Monday
through Friday. Beginning May 11, you
New can register on line at www.ftb.ca.gov.
Listed below are the confirmed dates and
FTB e-filers The Franchise Tax Board and the
locations of the workshops:
California Districts of the Internal Tuesday, June 22, in Oceanside at
More and more practitioners Revenue Service are sponsoring a series Mission San Luis Rey Parish
are joining the FTB e-file of free e-file software workshops 4070 Mission Avenue
program. beginning in June. Oceanside, CA
To join the FTB e-file program, The e-file Software Workshop and Wednesday, June 23, in Riverside/Inland
access form FTB 8633, Exhibit series will provide tax Empire at
“California Application to practitioners an opportunity to learn first- Jack Kramer's Los Serranos
Participate in the e-file hand about the various FTB and Golf and Country Club
Program,” from the FTB Web IRS accepted e-file software packages. 15656 Yorba Avenue
site at www.ftb.ca.gov/forms. Chino Hills, CA
Experts from major software companies
Download the form, complete it will be available to discuss their Thursday, June 24, in Los Angeles at
and send it by fax to FTB at software’s features, technical The Holiday Inn
(916) 845-0287. requirements, compatibility with the 150 East Angeleno
For more information, call the California e-file program, required forms, Burbank, CA
FTB e-file Help Desk at costs and customer support services. Tuesday, June 29, at
(916) 845-0353. The workshops run from 9 a.m. until The Four Points Sheraton Hotel
Help Desk hours are Monday 4 p.m. and are divided into morning and 5115 Hopyard Road
through Friday, 8 a.m. afternoon sessions. Pleasanton, CA
until 5 p.m.
During the morning session, practitioners Wednesday, June 30, in Fresno at
can ask questions during a panel Pardini’s
discussion with e-file software vendors. 2257 West Shaw Avenue
Fresno, CA
In the afternoon session, practitioners will
have an opportunity to visit the individual Thursday, July 1 in Sacramento at
exhibits and see demonstrations of The Holiday Inn
software programs. 5321 Date Avenue
Sacramento, CA
Practitioners are encouraged to bring their
laptop computers and try out some of the
software packages.

BOE Implements New Tax Practitioner Hotline


News From the other forms and publications. Customer
service representatives and tax opinion
State Board of experts are available to answer your
questions from 8 a.m. to 5 p.m., Monday
Equalization through Friday, except on state holidays.
Duplicate tax returns, forms and
publications can be requested through
The Board of Equalization has announced automated services 24 hours a day, seven
a new toll free tax practitioner hotline to days a week. Tax practitioners are
offer practitioners faster access to encouraged to call the hotline at
information, duplicate tax returns and (800) 401-3661.

May 1999
Page 7

HRA Program Increases Income Limits HRA Help


Available
California has increased the income limits December 31, 1998. For renter
for Homeowner and Renter Assistance assistance, claimants must have lived in a The Franchise Tax Board
claimants. qualified rented residence in California has made it easier for eligible
Chaptered on August 20, 1998, Assembly and paid $50 or more per month for rent individuals to make a claim
Bill 2797 (Cardoza) increased the income during 1998. For either kind of for Homeowner and Renter
limits for HRA claimants from $13,200 to assistance, claimants also must: Assistance.
$33,132 for total household income and • Have been age 62 or older, blind or In accordance with the
from $24,000 to $60,240 for gross disabled on December 31, 1998. Americans with Disabilities
household income. • Have had a total household income Act, FTB provides the FTB
The income limits will be adjusted of $33,132 or less in 1998. 9000, “Homeowner
annually for inflation. The inflation Assistance Claim Booklet”
• Have had a gross total household and the FTB 9000R, “Renter
factor used in determining the income income of $60,240 or less in 1998.
amounts for the 1999 claim year is 2.51 Assistance Claim Booklet,”
(The inflation factor is 2.51 because the • Be a citizen or designated alien, in large print and on
bill adjusts for all prior years when there including a qualified alien, of the audiocassette. To order a
was no adjustment for inflation). This United States when the claim is filed. booklet or audiocassette, call
factor will be adjusted each year on or FTB will mail claim booklets to last FTB at (800)-822-5711.
before February 1. year’s claimants no later than May 15, TDD users call 800-822-
1999. After that date, other claimants 6268.
The assistance is available to qualifying
senior, blind or disabled individuals as a may obtain forms from the FTB Web site FTB also provides fillable
once-a-year payment from the State of at www.ftb.ca.gov, by calling (800) 338- forms on its Web site so
California based on a portion of the 0505 and selecting “Personal Income Tax eligible individuals who
property taxes paid by a homeowner or Forms” at the voice prompt or by visiting prefer to use the Internet can
paid indirectly by a renter. an FTB district office. complete a form on-line.
Claimants also may obtain a booklet by The Internet Web site
Homeowner and Renter Assistance claims
writing to: address is www.ftb.ca.gov.
may be filed any time after May 15, 1999,
and on or before August 31, 1999. Tax Forms Request Free assistance is also
PO Box 307 available from the
To qualify for homeowner assistance,
Franchise Tax Board Homeowner and Renter
claimants must have owned and lived in
Rancho Cordova, CA 95741-0307. Assistance Volunteer
their own homes in California on
Program. For information on
program sites, call FTB at
(800) 852-5711, contact a
Magnetic Media: Faster, Better, Cheaper local Senior Citizen
An enhanced version of FTB’s K-1 Information and Referral
Four Options, TestWare TestWare is also available. K-1 Service or visit an FTB
TestWare edits the records before district office.
Makes Filing a Breeze for submitting them to FTB, allowing the
Schedule K-1 (565) Filers transmitter to file error free records.
FTB Calendar
The improved version also can expand
If you have been filing Schedule K-1s on files from a delimited format to one that (CONTINUED FROM PAGE 5)
paper, stop! It is time to enter the meets FTB’s requirements (standard • Requests for Tax Return
electronic era and file via magnetic fixed length). are mailed to
A year ago, one transmitter spent several corporations who have
media. not filed their 1997
Last year the number of partnerships that months submitting and re-submitting corporate tax return.
180,000 K-1 records due to errors in the
filed Schedule K-1s (565) by magnetic
record layout. This year, that same • Demands to file 1997
media increased by almost 60 percent. corporate tax returns are
Today, filing K-1s (565) on magnetic transmitter used our new K-1 TestWare mailed to nonqualified
media has never been easier. You now for their Schedules 1997 K-1 and every and qualified
have a choice of four types of media to one of their files passed the FTB edit corporations
use: CD, diskette, cartridge or tape reel. program on the first attempt. 15 Second quarter 1999
In addition to current year K-1 The K-1 TestWare is available to personal income tax
information, FTB also accepts amended download from the FTB Electronic estimate payments are
current year Schedules K-1 and K-1 data Services Web site located at due.
for short period participants. www.ftb.ca.gov/elecserv. 20 See May 20.
Page 8

QSub: A New Tax Planning Vehicle


Filing Tips The passage of the Small Business Job corporation include accumulated earnings
for Protection Act provides for the tax
treatment of a Qualified Subchapter
and profits, passive investment income
and built-in gains. Transactions between
QSubs S Subsidiary (QSub, a.k.a. QSSS) for the parent S corporation and the QSub are
taxable years beginning after 1996. The not taken into account. The tax treatment
Will your Form 100S include House Ways and Means Committee of the liquidation or of a larger
one or more QSubs? If so, understood that there are situations where transaction that includes the liquidation
here are some tips for taxpayers may wish to separate different will be determined under the IRC and
completing Form 100S. trades or businesses in different corporate general principles of tax law, including
entities. The Committee believes that, in the step transaction doctrine.
Tip #1 such situations, shareholders should be For a valid QSub election, the parent must
Form 100S (Side 1), Question allowed to arrange these separate be a qualified S corporation (IRC Section
D, should be checked "Yes" corporate entities under parent-subsidiary 1362(a)), the QSub must meet the
to indicate that the return arrangements as well as brother-sister standards for qualification under IRC
includes one or more QSubs. arrangements. Section 1361(b), and the S corporation
Tip #2 Under the proposed regulations, the QSub must make the QSub election for federal
election’s effect is that the existing purposes. Note: an election made by the
Per Form 100S, Section DD
subsidiary is not to be treated as a S corporation to treat its subsidiary
instructions, California
separate corporation. The QSub is corporation as a QSub for federal
requires that the parent
deemed to have liquidated under IRC purposes is a binding election for
S corporation attach a copy of
Sections 332 and 337. All assets, California. An election different from the
the federal Form 966 for each
liabilities, and items of income, federal QSub election may not be filed for
QSub doing business or
deduction, and credit of a QSub are to be California. California follows the federal
qualified to do business in
treated as those of the parent S transitional relief procedures for
California to the return for the
corporation. Items of the QSub that perfecting a QSub election.
income year during which the
become attributable to the parent S
QSub election was made.
Tip # 3
Form 966 should also be How Much Tax Should S Corporations Pay?
attached to Form 100S for
any subsequent year that there The S corporation parent is required to of Vanilla’s and Chocolate's business
is any QSub addition or pay an $800 annual tax for each QSub it activities in California and is subject to
termination owns. If the S corporation parent is not California franchise tax, in an amount at
doing business in California and is not a least equal to the minimum franchise tax.
Tip #4 qualified corporation in California, but the For income year 1998, Scoop is
The S corporation parent QSub is, then the S corporation parent is responsible for its own franchise tax (the
should include Schedule QS deemed to be qualified and/or doing greater of the minimum franchise tax or
(Qualified Subchapter S business in California as well. This 1.5 percent of net income for tax
Subsidiary Information situation then subjects the S corporation purposes) plus two annual taxes for the
Worksheet) with Form 100S parent to the minimum franchise tax, as QSubs Vanilla and Chocolate.
each year that a QSub well as the commencing tax due to the The QSub annual tax is due and payable
election is in effect. Franchise Tax Board. when the S corporation's first estimated
Example: tax payment is due. If a QSub election is
Scoop, an S corporation parent, owns made during the income year, the QSub
three QSubs (Vanilla, Chocolate and annual tax is due with the S corporation's
Strawberry). Scoop began business as an next estimated tax installment. The QSub
S corporation in 1997. It made valid annual tax is subject to estimated tax rules
QSub elections for Vanilla, Chocolate and and penalties, and is the liability of the
Strawberry in 1998. Vanilla and parent S corporation.
Chocolate are qualified and doing An amount equal to the greater of the
business in California, Scoop and minimum franchise tax or 1.5 percent of
Strawberry are not. net income for tax purposes for the parent
For income year 1998, Scoop is deemed S corporation plus the QSub(s) annual
to be doing business in California because tax(es) is to be reflected on Form 100S,
line 22, Tax.

May 1999
Page 9

FTB to Contact Nonfiler Corporations


In June, the Franchise Tax Board will shareholders and are still in business as
mail notices to corporations that have yet sole proprietors or partnerships.
to file their 1997 California corporate If you have clients that fall into this
tax return. category, they can avoid receiving these
If you have clients who fall into this notices by ensuring that the dissolving
category, file the delinquent returns as corporations contact the Employment
soon as possible. Development Department and the State
All of the corporation accounts go Board of Equalization to update their
through a rigorous review process prior to entity status and change their
the issuance of notices, however, some classification.
notices are sent to corporations that do Once the corporation’s classification is
not have a filing requirement with us changed, FTB will no longer send out
because they were dissolved by notices requesting that a corporate tax
return be filed.
Collection
Queries?
Notices to Nonfilers Mailed in May Send Us a Fax
Phone Service Can Assist contacted during the months of
You can send a fax with your
January and February of this year,
questions about personal
Individuals Seeking to File and in the first 30 days after the
income tax collection to the
notices were mailed, more than
Delinquent Returns 1,000 tax returns were received.
Franchise Tax Board.
The fax number, which is for
Now that you’ve finished preparing your • A new FTB form was developed tax professionals only, is
clients’ 1998 personal income tax returns, and mailed out with every nonfiler
(916) 845-0494.
you may want to make sure they’ve filed Notice of Proposed Assessment.
their 1997 returns. This “Quick Resolution/Protest
Worksheet” is a check-the-box type
The Franchise Tax Board has been form and covers the most common
sending notices to nonfilers over the last responses to FTB’s Notice of
few months, reminding them of their Proposed Assessment.
requirement to file a return.
The Nonfiler Program’s Interactive
During the month of May, approximately Voice Response applications are
70,000 of those individuals will receive a available 24 hours a day, seven days a
Notice of Proposed Assessment from week. This means that an individual
FTB. can, at their own convenience:
More proposed assessments will be 1) order forms,
mailed during the coming months, as well
as more requests for tax returns, and it’s 2) get answers to commonly asked
always best to file the return before the questions, and
reminders come. 3) resolve their own account (in cases
Even if you’ve dealt with these issues in where they had already filed the
the past, there are some new aspects to required return under a social
FTB’s Nonfiler Program that you may security number other than the one
encounter. For example, this year: shown on FTB’s notice).
• Individuals were contacted who had The IVR telephone numbers for the
paid a substantial amount of Nonfiler Program are shown below.
mortgage interest during the 1997 tax When responding to a:
year (which would imply that they • Request for tax return, call
had income), but who had gone (800) 545-5009.
undetected by the current Nonfiler
Program. Approximately 24,000 • Notice of proposed assessment, call
individuals meeting this criteria were (800) 895-5440.
Page 10

Watch Out for California Nonconformity


with Internal Revenue Code Section 469
Basic Steps California conforms to Internal Revenue The Internal Revenue Service does not
for Applying Code (IRC) Section 469 with certain apply the passive loss limitation rules to
exceptions (California Revenue and S corporations because an S corporation
IRC 469 Rules Taxation Code Sections 17551, 17561 is generally exempt from federal income
and 24642). taxes (IRC Section 1363(a)).
Here are the basic steps for But, California has never conformed to
applying the passive activity the special rules for qualified real estate
loss limitation rules: professionals provided under IRC Section
Step 1 469(c)(7).
Additionally, for purposes of the
Interest Rates
Identify the activities. See For the period of July 1, 1999, through
Treasury Regulation 1.469-4 S corporation franchise or income tax,
California law applies the rules for December 31, 1999, the interest rate on
for the definition of activity. underpayments and overpayments of
Treasury Regulation Section limitations and material participation
differently for California S corporation California income taxes will be seven
469-4(c) provides the general percent. The following table lists
rules for grouping activities. taxpayers (CRTC Section
23802(f)(3)(A)). interest rates since 1988.
Treas. Reg. §1.469-4(d)
explains the limitation on Rental Real Estate Effective Date Rate
grouping rental activities with IRC Section 469(c)(7) provides special 1 Apr. 1988 - 30 Sept. 1988 10%
trade or business activities. rules for qualified real estate 1 Oct. 1988 - 30 June 1989 11%
Step 2 professionals. For federal purposes, these
1 July 1989 - 31 Dec. 1989 12%
Separate activities into rental special rules provide that rental real estate
activities of a qualified real estate 1 Jan. 1990 - 30 June 1990 11%
activities and trade/business
activities. See Internal professional are not presumed passive. 1 July 1990 - 31 Dec. 1990 11%
Revenue Code §469(j)(8) and To apply these special rules, more than
half the taxpayer's personal services in all 1 Jan. 1991 - 30 June 1991 11%
Treas. Reg. §1.469-1T(e)(3)
for the definition of rental businesses must be in real property 1 July 1991 - 31 Dec. 1991 10%
activities and Treas. Reg. businesses in which the taxpayer 1 Jan. 1992 - 30 June 1992 10%
§1.469-4(b) for the definition materially participates and the taxpayer
must spend more than 750 hours in such 1 July 1992 - 31 Dec. 1992 9%
of trade or business activities.
real property trades and businesses. If a 1 Jan. 1993 - 30 June 1993 8%
Step 3 taxpayer satisfies both of these
1 July 1993 - 31 Dec. 1993 7%
For each rental activity, requirements, each rental real estate
determine whether the activity activity in which the taxpayer materially 1 Jan. 1994 - 30 June 1994 7%
meets one of the six participates is treated as nonpassive. 1 July 1994 - 31 Dec. 1994 7%
exceptions to rental activity. California, however, has never conformed
to these special rules; therefore, for 1 Jan. 1995 - 30 June 1995 8%
If the rental activity does not
meet an exception, the California purposes, any rental activity is 1 July 1995 - 31 Dec. 1995 9%
activity is a passive rental a passive activity. 1 Jan. 1996 - 30 June 1996 9%
activity. If the activity meets S Corporation and Passive Activity
one of the six exceptions, 1 July 1996 - 31 Dec. 1996 9%
then treat as a trade/business For purposes of the California S 1 Jan. 1997 - 30 June 1997 9%
activity or as part of a trade/ corporation franchise or income tax, the
passive loss limitation rules apply to 1 July 1997 - 31 Dec. 1997 9%
business activity. See Treas.
Reg. 1.469-1T(e)(3)(ii) for S corporations as if the S corporation 1 Jan. 1998 - 30 June 1998 9%
the six exceptions to rental were an individual. Material participation
1 July 1998 - 31 Dec. 1998 9%
activity. of an S corporation in its activities is
determined as if the S corporation was a 1 Jan. 1999 - 30 June 1999 8%
(CONTINUED ON PAGE 11) closely held C corporation (CRTC 1 July 1999 - 31 Dec. 1999 7%
Section 23802(f)(3)(A)). These passive
loss limitation rules apply only for
purposes of the S corporation franchise or
income tax. The passive loss limitation
rules do not affect the amounts passed
through to shareholders.

May 1999
Page 11

State Reduces Prepaid Minimum Tax


The corporation must meet two conditions Basic Steps
AB 2798 Also Shrinks to qualify for the reduced payment. First, for Applying
50 percent or more of the corporation’s
2nd Year Minimum Tax stock cannot or will not be owned by IRC 469 Rules
for Eligible Entities another corporation. Secondly, the
(CONTINUED FROM PAGE 10)
corporation must meet the definition of a
Beginning this year, eligible foreign and qualified new corporation. Step 4
domestic corporations will pay less If a corporation’s income year began For each trade/business
prepaid minimum taxes. Some during 1999 or later and it: activity for which income is
corporations may be eligible for a not specifically excluded
reduced second year minimum franchise • Began operations at or after the time from passive activity,
tax as well. of incorporation, determine whether the
Enacted in August 1998, Assembly Bill • Estimates its gross receipts (less taxpayer's participation meets
2798 (Machado), reduced the prepaid returns and allowances) to be one of the seven tests for
minimum tax amount from $600 to $300 $1,000,000 or less on its first Form material participation. If the
for an income year that begins during 100 tax return, taxpayer meets any one of the
1999 or later. Before AB 2798, certain • Estimates its tax liability to be $800 seven tests, the activity is
corporations were already eligible for a or less on its first Form 100 tax nonpassive. If the taxpayer
reduced prepaid minimum tax of $600 return, and does not meet any one of the
for income years beginning on or after seven tests, the activity is
January 1, 1997. • Did not begin business operations as passive. See Treas. Reg.
a single proprietorship, partnership or §1.469-5T(a) and (b) for the
The prepaid minimum tax is payment for other business entity prior to seven tests to determine
the corporation’s first taxable year and is incorporation, material participation in trade
due on the day that the corporation or business activity.
registers or qualifies with the Secretary then it meets the definition of a qualified
new corporation and should pay the [Note: For items of income
of State or begins to do business specifically excluded from
in California. reduced prepaid minimum tax of $300.
passive activity, see IRC
(CONTINUED ON PAGE 12) Section 469(e); Treas. Reg.
1.469-1T(e)(4), (5) and (6);
and Treas. Reg. §1.469-
2T(c)(3), (4), (5), (6)
Tips for Paying, Reporting Reduced Minimum Tax and (7).]
Here are three scenarios (each Example 1 Step 5
involving the fictitious Alpha The Alpha Corporation filed its first For each passive activity that
Corporation) that describe how to pay Form 100 tax return timely and has net income, determine
and report the reduced minimum tax reported gross receipts (less returns whether the income is subject
and the second taxable year minimum and allowances) of $945,000. to recharacterization. See
franchise tax. For each of the Treas. Reg. §§1.469-2(f) and
scenarios, assume that: The corporation reported a loss of 1.469-2T(f) for six situations
$8,500 on the “net income for tax in which income (but not
• The Alpha Corporation purposes” line and the reduced
incorporated with the California loss) is subject to
minimum franchise tax of $500 on the recharacterization.
Secretary of State on next line of the Form 100. The Alpha
January 12, 1999, and paid a Corporation does not enter any amount
reduced prepaid minimum tax of on the “Additional SOS prepayment
$300. tax” line of its Form 100.
• On April 15, 1999, the Alpha Since the Alpha Corporation did not
Corporation made its first and have any credits or Alternative
only estimate payment of $500 Minimum Tax, it reported $500 on the
for income year ending “Adjusted Total Tax” line of Form
December 1999. 100. The corporation entered $500 on
• The corporation filed a return for the “1999 estimated tax payments…”
income year ending December line, and no amount on the
1999 on March 15, 2000. “Tax due” line.
(CONTINUED ON PAGE 12)
Page 12

Prepaid Minimum Tax Drops to $300


(CONTINUED FROM PAGE 11) This additional tax must be paid by the
If a corporation’s income year began due date of the corporation’s first Form
during 1997 or 1998 and: 100 tax return (without regard to
• It estimates its gross receipts (less extension).
returns and allowances) to be AB 2798 also reduced the second taxable
$1,000,000 or less on its first Form year minimum franchise tax to $500 for
100 tax return, and eligible corporations. This provision is
• It estimates its tax liability to be $800 also effective for income years beginning
or less on its first Form 100 tax on or after January 1, 1999.
return, In order to pay the reduced second
Keep then it meets the definition of a qualified taxable year minimum franchise tax, a
new corporation and should pay the corporation must meet the following
Tax News reduced prepaid minimum tax of $600. criteria:
Coming If a qualified new corporation pays a 1 It must be a qualified new
corporation. To be considered a
reduced prepaid minimum tax and
afterwards it exceeds the allowable gross qualified new corporation, the
Is your Tax News receipts (less returns and allowances) of corporation must:
subscription about to expire? $1 million or the allowable tax amount of (a) Begin operations at or after the time
If so, the Franchise Tax $800 on its first Form 100 tax return, it of incorporation,
Board will send you a must pay an additional tax of: (b) Estimate its gross receipts (less
renewal form by mail. Be • $200 for an income year that began returns and allowances) to be
sure to return the form in 1997 or 1998, or $1,000,000 or less on its first Form
immediately so that you will
not miss any upcoming issues. • $500 for an income year that began 100 tax return, and
in 1999 or later. (CONTINUED ON PAGE 20)
Remember: Tax News is also
available by e-mail at no
charge and it can be viewed
on FTB’s Web site at Tips for Paying, Reporting Reduced Minimum Tax
www.ftb.ca.gov.
If you have any questions
Example 3
about your Tax News (CONTINUED FROM PAGE 11)
subscription, call Example 2 The corporation’s first Form 100
(916) 845-7070. The Alpha Corporation filed its first tax return reports gross receipts
Form 100 tax return timely and (less returns and allowances) of
reported gross receipts (less returns $1,100,000. The corporation reports
and allowances) of $945,000. The $6,300 on the “Net income for tax
corporation reported $6,300 on the purposes” line and the minimum
“Net income for tax purposes” line franchise tax of $800 (on the next
and measured tax of $557 on the next line) of Form 100. The corporation
line of the Form 100. The enters $500 on the “Additional SOS
corporation does not enter any prepayment tax” line of the Form
amount on the “Additional SOS 100 because it did not meet the
prepayment tax” line of its Form 100. gross receipts requirements.
Since the corporation had no credits Since the corporation had no credits
or Alternative Minimum Tax, it or Alternative Minimum Tax, it
reports $557 on the “Adjusted Total reports $1,300 on the “Adjusted
Tax” line of Form 100. The Total Tax” line of Form 100. The
corporation enters $500 on the “1999 corporation enters $500 on the
estimated tax payments…” line, and “1999 estimated tax payments…”
$57 on the “Tax due” line. line, and $800 on the
“Tax due” line.

May 1999
Page 13

PROPOSED BILLS
It would delete obsolete refund provisions
relating to the renter’s credit that are no
longer necessary because the reinstated
renter’s credit is not refundable. This bill
would provide relief to an employee
whose employer withheld delinquent
Among the measures being considered by taxes from the employee’s pay, pursuant
the California Legislature are several that to an earnings withholding order from the
would affect capital gain taxes. Franchise Tax Board (FTB), but failed to Interested in
AB 7 (Campbell) and SB 34 (Brulte) remit the amounts to FTB.
would exclude from gross income any Proposed Law?
gain from the sale or exchange of a
capital asset held by the taxpayer for five Would you like to know more
or more years. about a legislative measure
SB 30 (Peace) would extend, and in covered in this issue of
certain cases, increase the exclusion Tax News?
percentage for gain from the sale or For a copy of any legislative
exchange of small business stock. Among the measures being considered by bill, write the Legislative Bill
the Legislature are some that would either Room, Room B-32, State
create new tax credits or modify existing Capitol, Sacramento, CA
ones. They include bills dealing with 95814. Or call the Bill Room
these subjects: at (916) 445-2323.
Agriculture. On the Internet, you will find
AB 287 (Strickland) would allow a credit legislative measures at
equal to the fair market value at wholesale www.leginfo.ca.gov, which is
Among the measures being considered by of agricultural products donated by a the Official California
the California Legislature are some that taxpayer during the taxable or income Legislation Information
involve conformity with the Internal year to a nonprofit charitable organization Web site address.
Revenue Code or the Internal Revenue or food bank.
Service Reform Act. At-risk youths.
SB 94 (Chesbro) would make a number of
AB 203 (Washington) would establish the
conformity and other tax changes. This Second Chance Youth Employment Act
bill would conform to the Internal of 1999 and would create credits equal to:
Revenue Service Restructuring and
One-third of the amount paid or incurred
Reform Act of 1998 technical changes by a qualified employer as wages to a
relating to the exclusion of capital gains qualified at-risk youth during the first
on the sale of a principal residence. It year of employment, and the amount paid
would expand innocent spouse or incurred for the county probation
protections by conforming to the IRS officer fee, not to exceed $300, for each
Reform Act provisions relating to qualified at-risk youth.
innocent spouses and conform to the IRS Child care.
Reform Act provision to suspend the AB 149 (Leach) would create the Family
statute of limitations for certain refund Choice Child Care Act of 1999. The bill
claims for periods during which the would allow a credit equal to 30 percent
taxpayer is “financially disabled.” This of the federal credit for household and
bill would provide FTB administrative dependent care services necessary for
authority to compromise a tax debt gainful employment or $150 per
similar to the IRS’s current offers in qualifying individual.
compromise authority. AB 401 (Strickland) would remove the
This bill also would eliminate the January 1, 2003, sunset date for the
tentative minimum tax limitation on Employer Child Care Contribution Credit.
personal exemption credits by allowing In addition, this bill would allow a credit
the personal exemption credits to reduce (CONTINUED ON PAGE 14)
regular tax below tentative minimum tax.
Page 14

PROPOSED BILLS
California public school or vocational
institution for teaching math or science.
The second credit would be equal to 50
percent of the amount paid or incurred
during the taxable or income year for
qualified expenses in connection with
Moving? (CONTINUED FROM PAGE 13)
equal to the amount paid or incurred for
allowing a public school teacher to attend
an employer-sponsored education class.
Take Tax News child care for any child of the taxpayer
AB 122 (Kaloogian) would allow a credit
who is under 13 years of age. The credit
With You could not exceed $300 per child per equal to any fees, not to exceed $500 per
taxable year. taxpayer, paid to a public school in
If you plan to move your California for the support of a school-
AB 763 (Bates) which would allow a sponsored activity.
office, be sure to alert 50 percent credit for certain costs paid or
Tax News. incurred during the taxable year for the ABX 34 (Kaloogian) would provide a
Make sure the newsletter adoption of any minor child. credit equal to a qualified fee paid by the
continues to reach you taxpayer to a qualified school for a
SB 549 (Ortiz) would permit the school-sponsored activity. The credit
without delay. Send your Employer Child Care Program Credit to
new address and telephone could not exceed $500 per taxable or
reduce tax below the tentative minimum income year. For a husband and wife
number to: tax for purposes of alternative minimum who file separately, the credit would be
Tax News, tax. The bill also would increase from 30 equally divided between them.
PO Box 520, percent to 70 percent the percentage of
Rancho Cordova, CA costs eligible for the credit for facilities Enterprise zone.
95741-0520. serving low-income children. This bill SB 403 (Kelley) would amend the
Also include the account also would create a new credit for loans existing enterprise zone sales and use tax
number that is printed above made by a bank or financial corporation credit for the purchase of qualified
your name and address on the to purchase, construct, expand or property to include agricultural drain
last page of this issue. rehabilitate a qualified child care facility. water treatment facilities in the definition
Corporate headquarters. of qualifying water pollution control
mechanisms.
AB 490 (Ducheny) would create a new
headquarters credit equal to six percent of Exploration.
the eligible costs paid or incurred by a SB 85 (Knight) would establish a credit
qualified taxpayer that either locates a equal to 10 percent of wages paid by the
new corporate headquarters in this state or taxpayer to employees performing
maintains or expands an existing services related to a resuable launch
corporate headquarters in this state. vehicle.
Custodial/Noncustodial parents. Family member care.
AB 53 (Pacheco) would allow a AB 408 (Correa) would allow a credit to
noncustodial parent of a child to deduct a taxpayer who maintains a home for an
from gross income all child support immediate elderly family member. The
payments, provided the parent pays all amount of the credit in any one taxable
court-ordered child support by year would be limited to $250 for each
December 31 of the year for which the taxpayer.
child support is owed.
Firearms.
Education.
AB 9 (Cardoza) would establish a credit
AB 49 (House) would establish a credit of $150 each for the purchase of up to
equal to $500 for each child of the two gun safes during the taxable year.
taxpayer that attends a California private
AB 156 (Strickland) would create a credit
school.
equal to the amount paid or incurred, not
AB 81 (Cunneen) would establish two to exceed $75, for the purchase of each
credits. The first credit would equal 50 locking device on a firearm. The amount
percent of the amount paid or incurred of the credit allowed in any one taxable
during the taxable or income year for year could not exceed $225.
qualified expenses in connection with
lending a qualified employee to a (CONTINUED ON PAGE 15)

May 1999
Page 15

PROPOSED BILLS
Public transit passes.
SB 17 (Figueroa) would reinstate the
credit for employer provided public
transit passes. The credit would equal 40
percent of the cost paid or incurred by an
employer for providing subsidized public
(CONTINUED FROM PAGE 14) transit passes to an employee.
Inventory storage expenses.
Research expenses.
AB 462 (Briggs) would establish a six Package X
percent credit similar to the AB 68 (Cunneen) would increase from 11
Manufacturers’ Investment Credit for the percent to 15 percent the California credit Still
construction, reconstruction or acquisition percentage for qualified research. In
of qualified property that is primarily addition, this bill would decrease the Available
used for the handling, movement and minimum threshold for the taxpayer’s
base amount in computing the research The 1998 Package X is still
storage of inventory in a qualified facility available.
(warehouse). expenses credit from not less than 50
percent to not less than 35 percent of the There are three versions to
Low-income housing. taxpayer’s current year qualified research choose from. The bound and
AB 97 (Torlakson) would provide that the expenditures. loose-leaf paper versions cost
credit for the costs of constructing or AB 465 (Nakano) would increase the $12 plus sales tax.
rehabilitating low-income housing shall California alternative incremental credit The best value, however, is
be in effect so long as the federal low- (research and development credit) by the CD-ROM for Windows
income housing credit is in effect; and it fully conforming to the federal credit version. It costs $19, plus
would permanently increase the maximum percentages for the alternative sales tax and comes with:
aggregate housing credit dollar amount incremental credit.
allocated annually by the California Tax • 1998 California
Credit Allocation Committee from $35 SB 495 (Figueroa) would allow a credit Package X forms;
million to $50 million for years beginning equal to $1,000 for each qualified • 1998 Internal Revenue
in the year 2000 or later. employee who is engaged in activities Service Package X
related to space vehicles and parts and has forms;
Manufacturers’ Investment Credit. been employed by the taxpayer for more
AB 473 (Hertzberg) would remove the than six months but less than three years • Several fillable forms;
January 1, 2001, sunset date and the during the taxable or income year. • California Package X
related job creation requirement for the Seed and venture capital investments. forms for the four
Manufacturers’ Investment Credit. The previous years; and
MIC would become a permanent credit. AB 482 (Davis) would establish the
California Seed Capital and Early Stage • Information on electronic
Motion picture and television program Corporation (the Corporation) to generate filing (e-file).
expenses. investment in private seed and venture If you would like to have a
AB 358 (Wildman) would allow a credit capital partnerships or entities through a copy, call the Franchise Tax
equal to 10 percent of the amount paid or single designated for-profit investment Board at (916) 845-7070 and
incurred for qualified wages and salaries fund. ask for a Package X order
to employees and contractors in Unemployment insurance / form.
connection with the production of a Employment training.
qualified television program or qualified
motion picture. AB 489 (Ducheny) would create a credit
equal to the costs paid or incurred during
AB 484 (Kuehl) would allow taxpayers the taxable or income year for
engaged in the production, development unemployment insurance and employment
or distribution of motion picture and training taxes on tips reported by the
television production to claim a taxpayer’s employees pursuant to the
refundable credit equal to 6% of specified Unemployment Insurance Code.
production labor contract costs of
qualified property.
(CONTINUED ON PAGE 16)
Page 16

PROPOSED BILLS

(CONTINUED FROM PAGE 15) There are also measures being considered
The California Legislature is considering by the California Legislature that would
a variety of tax deduction measures and affect economic development areas:
Sign up proposals on topics ranging from AB 51 (Briggs) would allow the
adoption to Year 2000. governing body of a city, county, or city
For Among the measures that would give and county to apply to the Trade and
taxpayers additional or expanded Commerce Agency to reconfigure the
Tax e-News deductions are: geographic boundaries of an existing
enterprise zone within its jurisdiction.
AB 130 (Kaloogian) which would
The Franchise Tax Board has AB 356 (Washington) would require the
conform the deduction allowed for
an electronic information Trade and Commerce Agency to
medical insurance for a self-employed
service exclusively for tax designate one city within the Los Angeles
individual to the percentages allowed
practitioners. The service is County as a new enterprise zone based on
under federal law.
called Tax e-News and it is a ranking of applicant cities. The new
designed to provide current AB 579 (Honda) which would allow a zone would be required to meet specified
news and information taxpayer to claim a section 179 deduction criteria related to the city unemployment,
affecting tax professionals. for the cost of items placed in service median annual household income, and
during 1998 or 1999 for modifying or population. Businesses operating within
To sign up for the service,
purchasing computer software that is year the new zone would receive the same tax
simply send an e-mail
2000 compliant. incentives as those received by businesses
message to
SB 109 (Knight) which would allow as a operating in existing enterprise zones.
Tax_e-News@ftb.ca.gov. deduction an amount equal to the amount
If you have questions about SB 84 (Costa) would modify the rules
paid or incurred during the taxable year regarding expansion of enterprise zones.
the service, call: for private mortgage insurance for the
(916) 845-7070. It would:
first five years that the home is owned by
a first-time home buyer. • Delete the requirement that the
proposed expansion area meet the
SB 493 (Figueroa) which would create general enterprise zone designation
and place the California Birth Defects criteria that currently requires that the
Research Fund on the individual income designation application propose
tax return and permit taxpayers to effective, innovative and
designate contributions to the fund for comprehensive regulatory, tax,
taxable years beginning on or after program and other incentives in
January 1, 2000, and before January 1, attracting private sector investment in
2005. A deduction would be allowed for the enterprise zone.
any contribution made to the fund. For
taxable years beginning in 2000, the fund • Allow expansion into adjacent
would be required to receive unincorporated areas of the county as
contributions of $250,000 (or the indexed well as into an adjacent city or cities.
amount) to remain on the tax return. • Allow expansion into noncommercial
or nonindustrial land if that land is
needed as a right-of-way and is
needed for contiguous expansion.
• Specify that expansion into an
adjacent city or cities, or
unincorporated area of the county,
must be into an area contiguous to
the existing enterprise zone.
(CONTINUED ON PAGE 17)

May 1999
Page 17

PROPOSED BILLS
This bill would allow FTB to abate
interest for the same period as the Internal
Revenue Service for delays resulting from
an error or delay in the performance of a
ministerial or managerial act by an IRS
officer or employee that occurred on or
(CONTINUED FROM PAGE 16) before the final federal determination was
Under this bill, any businesses located in made.
or that move to areas in which an Filing status.
enterprise zone is expanded would be
eligible for the enterprise zone tax AB 1635 (Assembly Revenue & Taxation
incentives. Committee) would make the following
changes:
SB 511 (Alarcon) would permit an
Allow FTB to revise the California return
Request a
enterprise zone to also expand into an
adjacent unincorporated area of the to reflect the proper filing status (even if
different from federal) when the filing
Head of
county.
status used on the taxpayer’s federal
income tax return is determined to be
Household
incorrect. Presentation
Allow taxpayers who are not required to
file a federal income tax return to select Franchise Tax Board
any filing status that could have been conducts informative
claimed on the federal return. presentations on the head of
household filing status at
Among the measures being considered by Permit taxpayers who file a joint return locations throughout the state.
the legislature are several Franchise Tax for federal purposes and are allowed to
Board sponsored bills. They include bills file either married filing single or joint for The presentations are geared
dealing with these subjects: California purposes to change their filing towards helping practitioners
status to married filing single after the due better understand the head of
Appeals. household filing status. A
date for filing the return has passed.
AB 1636 (Assembly Revenue & Taxation typical presentation includes a
Committee) would specify that the 90-day Limited Liability Corporations. head of household program
period for filing an action in court begins AB 189 (Ackerman) would clarify the overview, an explanation of
on the date the State Board of Franchise Tax Board’s authority to the qualification criteria for
Equalization determination becomes final, suspend a disregarded limited liability using the head of household
clarifying that the taxpayer would have corporation by eliminating an erroneous filing status and a discussion
120 days to file an action. reference to LLCs classified as a about important questions that
partnership. practitioners should ask their
Corporation elections. clients who file head of
SB 184 (Kelley) would allow a top tier AB 190 (Ackerman) would make the household.
corporation to elect, on the behalf of all annual tax of an LLC (whether classified
as a partnership or disregarded) due and For information on how to get
qualified extractive apportioning trades or a head of household
businesses within the commonly payable on the due date of the LLC
return, rather than by the 15th day of the presentation conducted in
controlled group, whether the members of your area, contact FTB’s
its group would apportion using the fourth month after the beginning of the
taxable year. This change would be Head of Household Unit at
single- or double-weighted sales factor. (916) 845-6265.
consistent with the annual tax due date for
Credit cards/Interest abatement. limited partnerships and limited liability
SB 603 (Speier) would allow the partnerships.
Government Code provisions to control Multistate tax compact.
FTB’s credit card program by removing
the current Revenue and Taxation Code AB 753 (Kaloogian) would repeal all
references. This bill would require FTB provisions related to the Multistate
and any other state agency accepting Tax Compact.
credit cards for payment to notify each
eligible payer and to provide the payer (CONTINUED ON PAGE 18)
either a space on the billing statement or
complete instructions on how to pay the
agency by credit card.
Page 18

PROPOSED BILLS
• Clarify that substandard housing
could be housing that is either
occupied or abandoned.
• Eliminate obsolete language
regarding pending litigation on
intercompany dividends from the
(CONTINUED FROM PAGE 17)
provisions regarding dividends paid
Tax Agencies Penalties.
between members of a unitary group.
AB 296 (Strickland) would amend the
Offer demand penalty when an individual fails
• Specify that for purposes of
determining the correct amount of tax
or refuses to make and file a return (and
Educational the failure is not due to reasonable cause),
for water’s-edge electors, the
presumption of correctness attaches
so that the 25 percent penalty would be
Opportunities calculated after allowing for credits and
to all federal audit determinations
including determinations made by the
withholding. Thus, a taxpayer who would
audit, appeals and/or Competent
The Franchise Tax Board, have been entitled to a refund would not
Authority Levels.
along with the State Board of owe a penalty.
Equalization, Internal SB 1230 (Senate Revenue & Taxation
Tax Brackets.
Revenue Service, Committee) would:
Employment Development AB 1140 (Villaraigosa) would increase • Delete language that would require
Department and a host of the income filing thresholds for taxpayers the payment of estimated tax as a
state, local and federal eligible to claim the senior exemption prerequisite for receiving an
organizations, routinely offer credit or the dependent exemption credit, extension of time to file a return.
eliminating the need for certain taxpayers
free seminars for business
owners and individual to file an income tax return. • Delete the separate exempt
organization provision for the
taxpayers. Tax credits and/or refunds. automatic extension of time to file.
For information about FTB’s
participation in these events,
AB 463 (Maldonado) would provide that • Eliminate the $10 fee for the revivor
the statute of limitations for claims for of an exempt organization; and
contact Alvaro Hernandez, refunds or credits is the four-year period
FTB Small Business Tax that begins on the date the return was
• Permit FTB to require, as a condition
Education Coordinator, at of revivor, an exempt organization to
actually filed, if the return was timely
(916) 845-5257. submit a new exempt application, if
filed by the extended due date. Thus, for
requested by FTB.
Also visit the BOE Web site timely filed returns, this bill would
at www.boe.ca.gov eliminate the difference in the SOL
and click on “Taxpayer applicable to proposed deficiency
Education.” assessments and overpayments.
Wage Reporting.
AB 1634 (Assembly Revenue & Taxation
Committee) would change the definition
of wages for the purpose of the quarterly Among the measures being considered by
report to include all renumeration the California Legislature are several that
includible in gross income for services would either change or eliminate the
paid by an employer engaged in a trade or minimum franchise tax for some
business “to all employees,” while corporations.
maintaining the current definition of
wages for withholding purposes to AB 10 (Correa) would provide that for
preserve the current exception to income years beginning on or after
withholding. January 1, 2000, and before
January 1, 2003, a qualified new
In addition, here are the highlights of corporation would not be subject to the
some other FTB-sponsored proposals: prepayment of minimum franchise tax to
SB 1229 (Senate Revenue & Taxation the Secretary of State. For income years
Committee) would make the following beginning on or after January 1, 2003, the
changes: prepayment to the SOS for qualified new
corporations would return to $300.
(CONTINUED ON PAGE 19)
May 1999
Page 19

PROPOSED BILLS
or incurred by the employer for
“educational assistance” to include
graduate level courses beginning after
June 30, 1999 and before July 1, 2007.
Payment methods.
(CONTINUED FROM PAGE 18) AB 41 (Wesson) would allow a taxpayer
AB 19 (Leach) would exempt from the to make a payment of taxes with a
minimum franchise tax every corporation “deposit in the nature of a cash bond” to You Can Get
that has been incorporated for less than stop the running of interest and still
five years. preserve the taxpayer’s right to file a There from
subsequent claim for refund.
SB 40 (Brulte) would eliminate the
Disasters.
FTB’s Web Site
minimum franchise tax and the related
prepayment of the minimum franchise tax AB 114 (Florez) would allow special You are browsing the
to the Secretary of State. disaster treatment of losses sustained as a Franchise Tax Board’s Web
result of a freeze or any related casualty site. You discover that you
that occurred during the winter of need information from
1998-99 in any county of California that another tax agency. Do you
was declared a disaster. start your Internet surfing all
over again?
Voter Registration.
No. From FTB’s Web site
SB 86 (Murray) would require the you can link to the home
In addition, here are the highlights of
some miscellaneous measures being Secretary of State to provide voter pages of the Internal Revenue
considered: registration information to the FTB for Service, the State Board of
inclusion in the income tax instructions Equalization, the
Education. Employment Development
pamphlet.
AB 2 (Alquist) would expand the current Department, the Controller
gross income exclusion for amounts paid and the Secretary of State.
You also can reach the
copy are incorrect. California Home Page from
Tax Form Corrections Schedule K-1 (541), Beneficiary’s
the FTB site.
Share of Income, Deductions, Credit, The FTB Web Site Address is
(CONTINUED FROM PAGE 3)
etc. Beneficiary’s instructions, line 10a www.ftb.ca.gov.
Schedule CA (540NR), California
reads: “Report any amount in column (c).
Adjustments - Nonresidents or Part-
Then enter the adjustment on Schedule
Year Residents, Instructions, for
Column E, line 7, Wages, Salaries, CA (540 or 540NR), line 37,
Tips, Etc. reads: as…appropriate.”
"Enter all wages, salaries, tips and other It should read: “Report any adjustment on
compensation you earned while you were line 10a, column(c). Then enter the
a California resident. And, if you adjustment on Schedule CA (540 or
performed work in California while you 540NR), line 38, as…appropriate.”
were a nonresident, include the portion of The Internet version is correct. Package
wages or other compensation earned in X, paper and CD-ROM (release 98.1 and
California. Include moving expense 98.2), Form 541 Booklet and single copy
reimbursement for moves into California. are incorrect.
Airline employees and Interstate Rail and Schedule P (541), Alternative
Motor Carrier employees, get FTB Pub. Minimum Tax and Credit Limitations–
1031, for more information." Fiduciaries, Instructions, Credit Table
Delete this sentence: “Include moving Delete the Credit Code 170, Joint
expense reimbursement for moves into Custody Head of Household; and Credit
California.” Code 163, Senior Head of Household
The Internet version is correct. Package from the Credit Table.
X, paper and CD-ROM (release 98.1 and Note: The instructions were revised
98.2), Form 540NR Booklet and single because a trust cannot meet the definition
(CONTINUED ON PAGE 20)
Page 20

(CONTINUED FROM PAGE 12) 4 It cannot be a limited partnership,


State Also (c) Not begin business operations as a limited liability company, limited
Shrinks single proprietorship, partnership or liability partnership, charitable
other business entity prior to organization, RIC, REIT, REMIC,
2nd Year incorporation. FASIT, qualified Subchapter
S subsidiary or any other subsidiary
2 It must have incorporated on or after
Minimum Tax January 1, 1999, corporation.
3 It cannot be a corporation that For additional information regarding the
reorganized solely for the purpose of reduced prepaid minimum tax refer to
reducing the minimum franchise tax; Revenue and Taxation Code (R&TC)
and Section 23221.

(CONTINUED FROM PAGE 19) General Information, 4th paragraph reads:


Tax Form of qualified taxpayer under these credits, “No addition to tax…increased by the
Corrections nor can these credits be carried over (they provisions of Assembly Bill 2797
would be applicable only up to the date of a (Ch. 98-322).”
taxpayer’s death). It should read: “No addition to
The Internet version is correct. Package X, tax…increased by the provisions of Senate
paper and CD-ROM (release 98.1 and 98.2) Bill 519 (Ch. 7, Stats. 1998) or Assembly
and single copy are incorrect. Bill 2797 (Ch. 322, Stats. 1998).”
FTB 5806, Underpayment of Estimated The Internet version is correct. Package X,
Tax by Corporations, Instructions, Page 1, paper and CD-ROM (release 98.1 and 98.2)
and single copy version are incorrect.

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