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For the first time in five years, California adopted an omnibus federal tax conformity bill that will ease the job of taxpayers, tax preparers and the Franchise Tax Board. California’s tax laws have been out of sync with federal law since 2009 as the last comprehensive conformity measure was enacted in 2010 by SB 401 by Senator Lois Wolk. Because of substantial differences between state and federal tax laws, the Franchise Tax Board’s administration and enforcement work is unnecessarily complicated and costly, and has made the lives of taxpayers and those who prepare their returns much more difficult. With this in mind, the Legislature unanimously adopted Assembly Bill 154, by Assembly Member Phil Ting (D-San Francisco) during the last week of the 2015 Session.
By way of background, the two most recent omnibus federal tax conformity bills in California have been enacted in five-year increments. SB 401 (Wolk, Chapter 14, Statutes of 2010) changed California’s specified date of conformity to federal income tax law from January 1, 2005, to January 1, 2009, for taxable years beginning on and after January 1, 2010. Prior to the enactment of SB 401 five years earlier, AB 115 (Klehs, Chapter 691, Statutes of 2005) changed California’s specified date of conformity to federal income tax law from January 1, 2001, to January 1, 2005, for taxable years beginning on and after January 1, 2005.
Governor Brown signed AB 154 on September 30, 2015 as Chapter 359. The first major provision of AB 154 changed California’s “specified date” of conformity to federal income tax laws from January 1, 2009, to January 1, 2015, for taxable years beginning on and after January 1, 2015. As a result, AB 154 generally conforms to the numerous changes that were made to federal income tax laws during that six-year period, except as otherwise provided in the bill. The second major provision of AB 154 generally conforms to the federal net operating loss (NOL) rules that allow corporations expecting an NOL carryback to extend the time for payment of taxes for the preceding taxable year.
Among the provisions of AB 154 are those dealing with certain tax credits, the tax on specified distributions from Archer MSAs, income exclusions, reporting requirements, qualified tuition program investment direction, disclosure of information with respect to foreign financial assets, redemptions by foreign subsidiaries, listed property, extension of time for the payment of taxes, deductions for annual fees on branded prescription pharmaceutical manufacturers and importers, and penalty amounts related to understatements of tax or the failure to file specified returns or include specified information on returns.
AB 154 also specifies various dates on which certain provisions of federal tax laws apply and repeals certain obsolete provisions contained in state laws. Because AB 154 contains an urgency clause, it took effect upon the date the bill was chaptered, which is September 30, 2015.
The federal tax laws to which California has partially or fully conformed due to the enactment of AB 154 include:
• American Recovery and Reinvestment Act of 2009 (ARRA) (Public Law 111-5)
• Worker, Homeowner, and Business Assistance Act of 2009 (WHBAA) (Public Law 111-92)
• Hiring Incentives to Restore Employment (HIRE) Act (Public Law 111-147)
• Patient Protection and Affordable Care Act (Public Law 111-148)
• Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203)
• State Fiscal Relief and Other Provisions; Revenue Offsets (Public Law 111-226)
• Small Business Jobs Act of 2010 (Public Law 111-240)
• FAA Modernization and Reform Act of 2012 (Public Law 112-95, Title XI)
• Moving Ahead for Progress in the 21st Century Act (MAP-21) (Public Law 112-141)
• American Taxpayer Relief Act of 2012 (ATRA) (Public Law 112-240)
• Tribal General Welfare Act of 2014 (Public Law 113-168)
• Tax Increase Prevention Act of 2014 (Title I of Division A of Public Law 113-295)
• Tax Technical Corrections Act of 2014 (Title II of Division A of Public Law 113-295)
• The Achieving a Better Life Experience Act of 2014 (Division B of Public Law 113-295)
According to the legislative committee analyses, among the major provisions contained in AB 154 are:
• The exclusion from gross income for the qualified military base realignment and closure fringe benefit enacted by the Worker, Homeowner, and Business Assistance Act of 2009;
• The disclosure of information with respect to foreign financial assets in the Hiring Incentives to Restore Employment Act;
• Not treating certain swaps as Section 1256 contracts under the Dodd-Frank Wall Street Reform and Consumer Protection Act;
• The special rule with respect to certain redemptions by foreign subsidiaries in the State Fiscal Relief and Other Provisions Revenue Offsets;
• The modification of the definition of "control" for purposes of Section 249 in the FAA Modernization and Reform Act of 2012;
• Treatment for transfers of excess pension assets in the Moving Ahead for Progress in the 21st Century Act;
• Modifications to acquisitions, dispositions, and aggregation of expenditures in the research and development credit in the American Taxpayer Relief Act of 2012;
• Treatment of Indian general welfare benefits in the Tribal General Welfare Act of 2014,
• Various technical changes in the Tax Technical Corrections Act of 2014;
• The Investment Direction Rule for 529 Education Savings accounts in the Achieving a Better Life Experience Act;
• In the Small Business Jobs Act of 2010, the limitation on penalty for failure to disclose reportable transactions based on resulting tax benefits, removal of cell phones and similar technology from listed property, increase in information return penalties, and special rules for annuities received from only a portion of a contract;
• A lower state excise tax of 12.5% on nonqualified Archer Medical Savings Account distribution, instead of 20% at federal; and
• Disconnection of inflation adjustments to penalty amounts.
In addition, AB 154 makes certain legislative findings and declarations stating that SB 401 (Wolk, Chapter 14, Statutes of 2010) is valid. There has been lingering concerns that some of the provisions of SB 401 may not survive a legal challenge due to the potential retroactive application of Prop. 26 that was enacted by the voters in November 2010, months after the enactment of SB 401. In Section 42 of AB 154, there is the following statement: “It is the intent of the Legislature to confirm the validity and ongoing effect of Senate Bill No. 401 of the 2009-10 Regular Session.”
Finally, AB 154 makes changes to the large corporate understatement penalty (LCUP) by providing that any amount of tax reflecting a proper election under Internal Revenue Code Section 338 does not count towards the understatement amount for purposes of the LCUP. And the bill states that the LCUP does not apply when the FTB imposes an alternative apportionment formula under Revenue and Taxation Code Section 25137, or as a result of a change in the taxpayer's federal accounting method where the due date of the return is before the Secretary of the Treasury's determination to change the accounting method.
As a result of the enactment of AB 154, the following sections of the California Revenue & Taxation Code have been amended: 17024.5, 17053.46, 17053.47, 17053.74, 17088, 17144, 17215, 18155, 19138, 19141.5, 19164, 19167, 19183, 19772, 23622.7, 23622.8, 23646, 23701i, 24307, 24427, 24439, 24870, 24871, and 24990.5. The following sections have been added to the Revenue & Taxation Code: 17240, 17241, 17323, 19131.5, 24345.5, 24454, and 24459. The following Revenue & Taxation Code sections have been repealed: 17131.7, 17131.12, 17131.14, 17134.1, 17201.1, 17280.1, 17322.1, 24452.1, and 24871.1.
Chris Micheli is a Principal with the Sacramento governmental relations firm of Aprea & Micheli, Inc. and serves as a lobbyist for CompTIA in California. He can be contacted at email@example.com or (916) 448-3075.