California Trailer Bill Impacts Several Key Areas!

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Recent legislation (SB 858) signed by the Governor of California impacts the following items:

  1. Net Operating Loss Suspension
  2. NOL Carrybacks
  3. Sourcing Rules for Services and Intangibles
  4. Large Corporation Understatement Penalty
  5. Use Tax Reporting

Go to the BILL for all of the details.  The following is a brief synopsis:

Net Operating Loss Suspension

This bill extends the disallowance of the net operating loss deduction and carryovers, and the carryover extension, to the 2010 and 2011 taxable years for a taxpayer with income of $300,000 or more.

NOL Carrybacks

This bill disallows net operating loss carrybacks for any net operating losses attributable to taxable years beginning before January 1, 2013, but allows net operating losses attributable to taxable years beginning on or after January 1, 2013, to be carrybacks to each of the preceding 2 taxable years.  The NOL carryback for 2013 will be limited to 50% of the NOL.  The NOL carryback for 2014 will be limited to 75% of the NOL.  After 2014, 100% of NOLs will be allowed to be carried-back.

Sourcing Rules for Services and Intangibles

For taxable years beginning on or after January 1, 2011, taxpayers who elect NOT to use the single sales factor apportionment formula to apportion their business income, must continue to apportion sales, other than sales of tangible personal property as follows:

(1) The income-producing activity is performed in this state; or

(2) The income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.

If a taxpayer does elect to use the single sales factor apportionment formula for taxable years beginning on or after January 1, 2011, then sales from services are in this state to the extent the purchaser of the service received the benefit of the service in this state.  Sales from intangible property are in this state to the extent the property is used in this state. In the case of marketable securities, sales are in this state if the customer is in this state.

If the single sales factor apportionment formula is not allowed as an option due to further legislation, then all taxpayers will be required to use the cost-of-performance method instead of market-based sourcing.

Large Corporation Understatement Penalty

Existing law imposes a penalty on a taxpayer subject to the Corporation Tax Law with an understatement of tax, as defined, in excess of $1,000,000 in an amount equal to 20% of that understatement, except as specified. For each taxable year beginning on or after January 1, 2010, this bill revises those provisions to impose a penalty for understatement of tax for each taxable year that exceeds the greater of $1,000,000 or 20% of the tax shown on an original return or shown on an amended return filed on or before the original or extended due date of the return for the taxable year.

Use Tax Reporting

This bill authorizes an eligible person to make an irrevocable election to report qualified use tax, as defined, on that person’s income tax return, for taxable years beginning on and after January 1, 2010, and requires the Franchise Tax Board to allow a person to report and remit qualified use taxes to it and to remit the qualified use taxes collected to the board.

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