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MARCH/APRIL 2001

JANUARY/FEBRUARY 2000

Legislation puts ‘tax year’


in place of ‘income year’
Change implemented to simplify tax law
2001 FTB
Assembly Bill 1843, sponsored by the revised to replace the term income year Information
Franchise Tax Board, replaces the with taxable year.
references to income year with taxable Directory
As a result of this statutory change, the
year in all provisions of the Bank and
franchise tax is computed based on the
Corporation Law (B&CTL), the
net income of the taxable year instead
Administration of the Franchise and
of on the net income of the preceding
FTB sponsors
Income Tax Law (AFITL), and the audit procedure
income year, which no longer exists.
Personal Income Tax Law (PITL).
To the extent a provision refers to a tax meetings
This bill is operative for all years
beginning on or after January 1, 2001.
measurement period beginning prior to Page 2
All affected forms and instructions were Continued on page 3

Corrections to
tax forms
FLEX YOUR POWER Page 6
Dear Readers: The energy reduce our demand for electricity
challenge facing California is real and use energy more efficiently. E-Government
and it could not have come at a News
The Governor and leaders of the
worse time -- the filing season!
California Legislature are working Page 7
Governor Gray Davis’ office has with utility companies, generators,
asked us to help by getting the and consumer groups to fashion
word out to all our customers long-term solutions for reliable and
about the importance of affordable electricity.
And on the Web
conserving energy. The following at www.ftb.ca.gov:
The state has already implemented
article contains some simple
things that you can do right now
a plan to reduce consumption by a • Help with SDI
minimum of eight percent across • New interest
to reduce demand and cut your
the board.
own energy costs. abatement rules
California continues to experience We in California have the power of • Helping teachers
electrical shortages and rolling nearly 35 million people and are the claim retention credit
blackouts throughout the state. To sixth largest economy in the world.
reduce the risk, the most important By reducing our electricity demand
thing we can do in the short term is
Continued on page 8
Page 2

FTB’s ‘best audit practices’


Volume 00-2 March/April 2001
subject of town hall meetings
TAX NEWS is a bimonthly publication of Our Audit Division is conducting a March 5
the Communications Services Bureau, series of town hall meetings on the Los Angeles, CA
California Franchise Tax Board. Its
primary objective is to provide information to subject of “best audit practices.” Los Angeles Marriott
income tax practitioners about state income 5855 West Century Blvd.
tax laws, regulations, policies and We are interested in hearing from
(310) 641-5700
procedures. taxpayers and tax practitioners involved
in the income tax audit process. March 7
Members of the Board:
Rancho Cordova, CA
The focus of the meetings will be on
Kathleen Connell, Chair Sun Center – Room 1180A
State Controller
what is working, what can be improved
10961 Sun Center Drive
Claude Parrish and what can be done differently in our
(No telephone number)
Chair, State Board of Equalization audit process.
B. Timothy Gage March 12
The town hall meetings will be held
Director, Department of Finance Oakland, CA
————————
from 9:30 a.m. until 3 p.m. with a lunch
Oakland Marriott
break from 11:45 a.m. until 1 p.m. If you
Executive Officer:
1001 Broadway
plan to attend, please let us know by
Gerald H. Goldberg (510) 451-4000
contacting Ed Campion at
Editor: Edwin_Campion @ ftb.ca.gov. If you have any questions about the
Marvin Meek
town hall meetings, contact Ed
Town hall meetings have already been
To update or correct your address or to Campion, Multistate Specialist, at the
held in Houston, New York City and
subscribe to TAX NEWS (send $12 for a above email address or you can call him
one-year subscription), write: Chicago. The remaining town hall
at (916) 845-4189.
TAX NEWS meetings will be held at the following
PO Box 2708 locations and dates:
Rancho Cordova, CA 95741-2708
or call: (916) 845-7070.

To view TAX NEWS on the Internet or to


Symposium on draft regulation set for April
request an electronic mail subscription,
contact FTB on the Internet: The second symposium concerning PO Box 1720
www.ftb.ca.gov draft Audit Procedures Regulation Rancho Cordova CA 95741-1720
For information about a client’s 19032 has been scheduled for April 23,
account, contact: 2001, in Room 1040, Building 2, of the You can send her a fax at (916) 845-3648
Tax Practitioner Support Unit Franchise Tax Board’s central offices
(916) 845-7057 (phone) or send her an email at
(916) 845-6377 (fax) located at 9645 Butterfield Way, colleen_berwick@ftb.ca.gov.
Sacramento, CA, beginning at 10 a.m.
For recorded answers to questions on
California taxes, to order forms or to Draft Regulation 19032 can be located The hearing officer for this symposium
check on a refund, call: on our website at: is Edwin Campion of the Franchise Tax
(800) 338-0505 Board’s Audit Division. He can be
From outside U.S. (916) 845-6600 www.ftb.ca.gov/legal/regs/
19032_draft.pdf. contacted at:
To send a facsimile about a client’s The first symposium concerning the
account, transmit to: Franchise Tax Board
Electronic Correspondence draft regulation was held on December
(916) 845-6377 1, 2000. For further information Multistate Audit Program Bureau
—————————- regarding this notice please contact PO Box 1779
Information Center: Rancho Cordova CA 95741-1779
(800) 852-5711 Colleen Berwick at:
From outside U.S. (916) 845-6500
Franchise Tax Board Or you can send him an e-mail at
Hearing Impaired: Legal Branch edwin_campion@ftb.ca.gov.
TDD (800) 822-6268
__________________

FTB on the Internet


www.ftb.ca.gov
Printed on recycled paper.

March/April 2001
Page 3

Change simplifies tax law Ask the Advocate


Continued from page 1 of the franchise tax for federal pur-
poses.
the operative date of this bill, the term This legislation also amended the
taxable year means income year under provision that exempts new corpora-
prior law whenever applicable. tions from payment of the minimum
The sole purpose of this change was franchise tax at the time of incorpora- Debbie Newcomb
to simplify the law. It will not cause tion and for its first year. Taxpayer
Advocate
any additional payments of tax or any
This change preserved the exemption
acceleration of any tax payment from
from the minimum franchise tax for the
taxpayers. Also, there is no reason to
first tax return. My limited liability company (LLC)
believe this change in California law
will change the timing of the deduction wants to change its status, for tax
purposes only, from a partnership to a
corporation. For federal purposes it’s

Seasons change, so do forms quite easy, the LLC simply checks a


box on federal Form 8832, Entity
Classification Election, and elects to
Amazingly, we are still receiving 1999 may occur during processing if these be treated like a corporation for tax
forms masquerading as tax year 2000 requirements are not met. In some cases, purposes.
forms. we may not be able to process your
In addition, it must recognize and
clients’ forms and will have to contact
Remember, the 2000 version of all our report the tax consequences resulting
them directly. have questions about our
forms are accessible on our website. To from that change in tax classification.
forms contact Hector Lopez, Substitute
access them go to our home page at (Note: Under proposed federal
Forms Program Co-Administrator at (916)
www.ftb.ca.gov and select Forms and regulations, if a partnership elects to
845-3553. His email address is
Publications. be taxed as an association that is
Hector_Lopez@ftb.ca.gov.
taxable as a corporation, the
If you are using substitute or scannable
Or contact Joyce Goin at (916) 845-3194. partnership would be deemed to
2000 California tax forms, please ensure
Her email address is contribute all its assets and
that the tax forms meet our Substitute
Joyce_Goin@ftb.ca.gov. liabilities to the association in return
Forms Program requirements. Delays
for stock in the association. The
partnership would then be deemed to
liquidate by distributing the stock in
Tax Practitioner Services
FTB joins IRS the association to its partners.)

Need answers fast? Call any one of


at field offices My question is: What do I need to do
for the state?
our Tax Practitioner Services during filing season The election the LLC made on its
Hotline telephone numbers.
federal Form 8832, Entity
January 15 through April 16, 2001, we
Classification Election, automatically
Tax Practitioner Hotline will offer customer services at selected
applies for state tax purposes. Under
Telephone (916) 845-7057 Internal Revenue Service offices
California law the tax classification of
Fax (916) 845-6377 providing extended hours.
an entity for federal tax purposes
Personal Income Tax Collection
Since hours and locations are subject to applies for state income and franchise
Fax (916) 845-0494
change, check our website before you tax purposes. Of course, the tax
Business Entities Collection
visit. Go to www.ftb.ca.gov and click consequences resulting from that
Fax (916) 845-0145
on the Tax Assistance button. Look for change in classification would also
FTB e-file Help Desk
FTB Field Offices, and IRS Field have to be reported for California
Telephone (916) 845-0353
Offices with Extended Hours.
Continued on page 5
Page 4

INCreasing customer service


In May, our new nonfiler system, the the correct taxpayer. The new system
Integrated Nonfiler Compliance (INC) will include many features, some of
system will begin issuing Request for which are:
Tax Return notices to individuals who
have been identified as nonfilers for the • Tailored request letters and notice
Visit our 1999 tax year. of proposed assessments.
Our notices have a new look. They
What is INC? are developed to clearly explain the
new Tax News The current filing enforcement (FE or
Nonfiler) system is made up of two
specific reason why we are
contacting the taxpayer and the date
webpage separate systems: personal income tax
(PIT FE) and corporation tax (CFE).
a reply is due.

INC combines these into one system. • E government services for


We’ve redesigned our Tax nonfilers. Taxpayers can go to our
INC is a more versatile and efficient website at www.ftb.ca.gov/inc and
News webpage to meet nonfiler system because it improves the
your need for timely download forms, obtain additional
way we use the information we receive time to file or reply to a notice,
information. from banks, financial institutions, the obtain additional information on why
Go to Tax News Online Internal Revenue Service and other a return is required, or tell us if a
(www.ftb.ca.gov/education/ information reporters. return has already been filed.
taxnews/Index) to get the INC enables us to use more of the
most current information Visit our website (www.ftb.ca.gov) and
information we receive and more read Tax News (both in print and online)
affecting tax professionals. accurately link income information with for news and updates about INC.
Tax News Online is
updated biweekly. For that
reason, we recommend you Address error found on FTB envelopes
visit the webpage often.
The Franchise Tax Board mailing Franchise Tax Board
If you have questions address printed on some of our PO Box 942867
about any of our Tax News commercially pre-printed tax return Sacramento 94267-0001
products or services, call envelopes is incorrect.
If you have computer -prepared
the Tax News Help Desk at Here are the correct mailing (showing a scan band) Forms 540 and
(916) 845-7070. addresses. 540A, and you are requesting a refund
or claiming no amount due, send your
If you have a manually prepared
return to:
Form 540, 540A, 540 2EZ, 540NR, or
540X; and you are requesting a Image Processing
refund or claiming no amount due, Franchise Tax Board
send your return to: PO Box 942840
Franchise Tax Board Sacramento, CA 94240-0009
PO Box 942840
If you have computer -prepared Forms
Sacramento 94240-0000
540 and 540A, and you are including a
If you have a manually prepared payment, send it to:
Form 540, 540A, 540 2EZ, 540NR, or
Franchise Tax Board
540X; and you are including a
PO Box 942867
payment, send your return to:
Sacramento, CA 94267-0001

March/April 2001
Page 5

Tips for LLCs filing Form(s) 100/100S


A small but growing number of California S corporations are entered on question I (Form 100),
limited liability companies are applicable. or question N (Form 100S).
electing to be taxed as
Questions have arisen as to how to • We will issue the LLC a new
corporations.
answer several questions on the seven digit FTB entity I.D.
The process is generally Form 100 or Form 100S. number. Please use this number
straightforward; the LLC must file as the California corporation
The following procedures will
federal Form 8832, Entity number on future filings and
ensure problem-free processing:
Classification Election, with the include on all correspondence.
Internal Revenue Service in order • On the initial corporate return
to make the election. leave the California corporation • If convenient, please manually
number field blank, and, write the file number issued by
The election is binding for the SOS above the form title on
California purposes and no • Use the full legal name as the first page of the return.
separate election is allowed. If the recorded with the California
LLC also elects S corporation Example: SOS # 200033310099.
office of the Secretary of State
status, the usual rules applicable to (SOS). The DBA name should be

Ask the Advocate Here’s another question about LLCs: California Corporation Franchise
or Income Tax Return; or a Form
Continued from page 3 The 2000 Instructions Form 568,
100S, California S Corporation
Limited Liability Company Return
Franchise or Income Tax Return
of Income state, “Every LLC that is
income and franchise tax purposes, just as the case may be.
doing business in California... must
as they were for federal tax purposes.
file Form 568 unless the LLC: 1) has LLCs that elect to be taxed as a
If you want the LLC to become a elected to be taxed as a corporation general corporation should file a
corporation for other than federal and for federal tax purposes.... .” Form 100; those that elect to be
state tax filings, you would need to taxed as an S corporation should
Although I couldn’t find it in the
dissolve the LLC and go through the file Form 100S. We will include this
Form 568 instructions, I believe
general incorporation steps for a new information in the instructions for
entities making this election must
corporation with the Secretary of State. Forms 100, 100S and 568 next year.
bounce from Form 568 to Form 100,

Manufacturers’ investment credit lives on


The Manufacturers’ Investment Credit (EDD) determines that employment 1994 figure by 204,000 jobs.
(MIC) did not expire on January 1, in the manufacturing sector does not Accordingly, the job growth figure
2001. exceed the 1994 figure by 100,000 substantially exceeds the 1994 level and
jobs. the MIC will continue to be available.
The MIC expires on January 1, 2001, or
on the January 1 of the first year As of April 2000, EDD determined Refer to California Revenue and
thereafter that the California that employment in the Taxation Code sections 17053.49(i) and
Employment Development Department manufacturing sector exceeded the 23649(i)for more information.
Page 6

Corrections to tax year 2000 forms, instructions


Please note the following corrections to • Page 10, Do I Have to File? Single filing status with two dependents,
tax year 2000 California tax forms and Requirements for Most People, and with an income of at least $23,862,
instructions. Should you have any Instructions but not over $23,961. The tax liability
questions about these corrections, • Page 18, Form 540A, Line 9, for this income level as published is one
contact our Tax Forms Development Instructions – Senior Exemptions dollar ($1). The correct tax liability
and Distribution Section at (916) 845- • Page 25, Step 7, Contributions, 51 – should be zero ($0).
3442. Contribution to California Seniors Correction
Correction Specialist Fund We made the following correction to
We added the following footnote to 2000 California 540 2EZ Tax Booklet, Form FTB 3885A, Depreciation and
several of our forms and instructions: Instructions Amortization Adjustments
If your 65th birthday is on January 1, • Page 13, Qualifying to use Form 540
2001, you are considered to be age 65 Part II, Election to Expense Certain
2EZ Residency Table, Filing Status – Tangible Property (IRC Section 179), Line
on 12/31/00. • Page 30, Filing Requirements for
Most People, Instructions – The 2, should read:
The new statement appears in the column that reads and on 12/31/00,
following forms and instructions: my age was… Enter the amount from line 12 of the
worksheet in the instructions.
California 540, 540A, Personal Income • California 540NR 2000 Nonresident
Tax Booklet Instructions or Part Year Booklet, Instructions The error is in the 2000 California Package
• Page 4, Do I Have to File? - X (paper and the CD-ROM, first release)
• Page 4: Do I Have to File? Require- and the California 540NR 2000
Requirements for Most People
ments for Most People. The new Nonresident or Part Year Booklet. The
statement was added to the column • Page 9, Additional Information,
Columns 1 and 2, Homeowners and Internet version is correct.
that reads: and on 12/31/00 my age
was... Renters Assistance Section - Correction
Homeowner Assistance We made the following correction to
• Page 8: Column 1, Line 9 – Senior • Page 15, Form 540NR, Line 9, Senior Form FTB 5805F, Underpayment of
Exemptions Exemptions Estimated Tax by Farmers and
• Page 13, Column 2, Line 9, Senior • Page 18, Line 33, Credit for Senior Fishermen, Instructions.
Exemptions Head of Household – Code 163 Column 2, Section D, Item 3 should read:
• Page 17, Column 1, Credit for Senior
• Page 13, Instructions for Form 540
Head of Household – Code 163 The tax for 2000 (from line 6 8) is less
2EZ, Column 1, Law Changes for
• Page 20, Voluntary Contribution 2000 than $200 ($100 if married filling a
Fund Descriptions, Column 1, Code separate return); or…
51, California Seniors Special Fund Correction
The error appears in the 2000 Package X
We removed the following section from
• Page 60, Additional Information (paper and CD-ROM, first release). The
page 13 of the instructions for Form
Page, Columns 1 and 2, Homeowners Internet version is correct.
540 2EZ:
and Renters Assistance Section
Correction
The Exclusion of Compensation for
California 540A, Special Edition for Schedule P (541), Alternative Minimum
Erroneous Convictions. Note: This
Seniors Tax Booklet Instructions Tax and Credit Limitations Fiduciaries,
income exclusion is effective for tax
Side 3, Section B2, should read:
• Page 5, Tax Information for Seniors, years beginning on or after January 1,
Benefits for Senior Taxpayers 2001. B2 Credits that reduce net tax and have
Instructions no carryover provisions.
Correction
• Page 9, Homeowner And Renter We made the following correction to The error appears in the 2000 Package X
Assistance Section, Homeowner Form 540 2EZ, Page 16, 2000 Califor- (paper and CD-ROM, first release). The
Assistance Instructions nia 540 2EZ Table, Single – Column 2: Internet version is correct.

March/April 2001
Page 7

E-Government News
State portal opens at www.ftb.ca.gov. We welcome e-File numbers are going up!
www.my.ca.gov yourcomments and input. e-file numbers are up even though
Have you checked out the new Email Linda Bunker at: filing for all personal income tax
California portal, at www.my.ca.gov? linda_bunker@ftb.ca.gov returns is down by about 13 percent,
We were involved in its development year-to-date. . In fact, 58% of all
and we’ve already seen brisk traffic Pub 1345 available on the Web personal income tax returns filed so
between the website and us - - 23,888 Publication 1345, 2000 e-file far were e-filed.
as of February 15, 2001. This Handbook for Authorized e-file
4th Annual e-file Software Work-
attractive, user-friendly site brings the Providers of California Individual
shops and Exhibits
one-stop-shopping concept to Income Tax Returns, is now available
These joint events we conduct with the
government! From this single location, on our Website at http://
Internal Revenue Service generate
visitors can buy a fishing license, www.ftb.ca.gov/elecserv/efile/
more and more interest each year
check on the status of an income tax efile_forms.htm
among tax professionals who are
refund, find out about e-file, make an
serious about joining the e-file
appointment with the Department of Customer Service Number (CSN) program and want to find out more
Motor Vehicles, check code violations As planned, our CSN authentication about e-file software. In fact, we had so
at a nursing home, look up a state program is up and running for online much demand for the Burbank location
phone number and more. e-file and TeleFile…165,509 last summer that we had to book a
inquiries as of February 16, 2001. second session to accommodate
e-Biz center And taxpayers seem to approve. The everyone.
One of the portal features in CSN postcard we mailed in
development is the eBusiness Center. December to 400,000 taxpayers who If you haven’t participated in prior
The concept is to provide access to a e-filed online last year included an years, now is the time to get on board
wide range of business oriented state optional three-question survey for 2001! We plan to offer eight one-
information and services 24 hours a designed to gather taxpayer reaction day sessions in seven California
day, seven days a week, from one to the CSN concept. To our surprise, locations during June. The typical
location. To make sure that the site is within days of the mailing, several schedule for the day is 9am - 4pm. The
developed as an effective, useful tool thousand people expressed their first half of the day is filled with
for business, we need to hear from opinions by filling out the survey, information about the IRS and FTB e-
you. You can provide input by putting a stamp on the postcard and file programs - news, changes, require-
completing a predevelopment survey mailing it back. In fact, cards are still ments, etc. The second half of the day
located at www.ebizcenter.ca.gov/ arriving. Here are the unscientific, is all yours and features a panel of
business-survey.html. but interesting, results: software industry experts. This is where
you get a chance to describe your
How will filing change by 2010? • Ninety-eight percent said they product directly to tax professionals.
In 1995 we published our first look appreciated the added security to
into the future of state income tax the e-file program. Here’s the proposed schedule. Check
filing, Filing 2010, The Future of back at our website at www.ftb.ca.gov
• Forty-two percent said in future
State Income Tax Filing. Since that for information about where the events
years they would like to choose
time we have seen more technological will be held.
their own CSN
change and greater public acceptance
than we could have anticipated from • Ninety-one percent said they June 13 Burbank
our 1995 vantage point. These changes would like to use my CSN to do all June 14 Burbank
are so significant that we felt of their electronic transactions June 15 Riverside
compelled to revisit our 1995 with us. June 16 Escondido
assumptions. The result is the 2nd June 19 Sacramento
Edition of Filing 2010, The Future of Key telephone numbers June 20 San Francisco
State Income Tax Filing. You can get The phone number for getting an June 21 San Jose
your copy from our website at CSN is (800) 338-0505 June 22 Oxnard
e-file Help Desk is (916) 845-0353
Flex your power • Avoid running large appliances such equipment to their energy-saving
as washers, dryers, and electric feature, and turn them off at the
Continued from page 1 ovens during peak demand hours end of the day.
we can help avoid shortages and from 5 a.m. to 9 a.m. and 4 p.m. to 7 • Minimize energy usage during
lower energy bills.All you have to do p.m. peak demand hours from 5 a.m. to
is • Close shades and blinds at night to 9 a.m. and 4 p.m. to 7 p.m.
reduce the amount of heat lost • Buy Energy Star appliances,
FLEX YOUR POWER. through windows. products, and lights.
• Buy Energy Star appliances,
Here are simple things that you can If you’re interested in the legislation
products, and lights.
do right now to reduce demand and involving California energy, the
cut your own energy costs: In the office: California Energy Commission’s
• Turn thermostats down to 68 Office of Governmental Affairs
At home:
degrees or below. Reduce settings to tracks all legislation that affects
• Turn thermostats down to 68
55 degrees at the end of the day. (For energy production and
degrees or below. Reduce settings
each 1 degree, you’ll save up to 5 consumption, the energy industry,
to 55 degrees before going to
percent on your heating costs.) energy consumers and the structure
sleep or when away for the day.
• Turn off all unnecessary lights, of energy regulatory agencies.
(For each one degree, you’ll save
especially in unused offices and Their website address is:
up to five percent on your heating
conference rooms and turn down www.energy.ca.gov/commission/
costs.)
remaining lighting levels where legislation.html.
• Turn off non-essential lights and
possible.
appliances. If you’d like more information about
• Set computers, monitors, printers,
California’s energy situation or more
copiers, and other business
conservation tips, visit the Official
California Website at my.ca.gov.

Address Service Requested

Permit No. 312


RANCHO CORDOVA CA 95741-2708
Sacramento, CA
PO BOX 2708
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