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M A Y 1 9 9 8

1998 Law Means Changes Inside ...


2 ... Interest rates
to 1997 Tax Returns 3 ... Balance due electronic filers
received notices in error
A new tax law, enacted in 1998, means that return that one of your clients has already 4 ... SBE opinions
certain California taxpayers must amend their filed, the client must file an amended return. 4 ... Legislature looks at tax credits
returns or calculate their tax liabilities Here, adapted from FTB Publication 1003, 5 ... FTB calendar
differently. “1997 Tax Law Changes Enacted in 1998,” 6 ... Nonresidents choose electronic
filing
Senate Bill 519 – Lockyer (Stats. 1998 – are highlights of the new law and what your
6 ... Direct deposit: The most-asked
Ch. 7) was enacted March 14, 1998, about clients may need to do: questions
two and a half months after California tax Rollover of gain from the sale of California 6 ... Electronic filers like direct
forms were distributed to taxpayers. As a small business stock. California law now deposit
result, California personal income tax law and conforms to federal law by allowing a tax-free 7 ... Electronic filing update
bank and corporation tax law conform to rollover of capital gain from the sale of 7 ... Electronic filing: Two-year
review
certain provisions of the federal Taxpayer California small business stock if all of these 8 ... 1995 corporation tax returns
Relief Act of 1997 (Public Law 105-34) that conditions are met: sought
are effective for 1997. • The sale occurs after August 5, 1997. 8 ... The question column:
If the new law affects the income, deductions, What is wife’s filing status
credits or other information included on a when non-citizen husband lives
CONTINUED ON PAGE 2
outside U.S.?
Does Keogh contribution, made
after leaving state, reduce
Tax Returns by the Truckload California source income?
8 ... California’s tax filing season
9 ... Legislature considers tax
deductions and more
9 ... Keeping in touch with FTB
9 ... Electronic filing calendar
10 ... Forty counties qualify as
El Niño disaster areas
11 ... Interested in proposed law?
12 ... Tax News three ways
13 ... Water’s-edge election problems
move to resolution
14 ... Need a tax form fast?
15 ... Where to find SB 519
information
15 ... You can get there from FTB
Web site
16 ... Planning to move?
16 ... Nonresident withholding:
The rules for partnerships
17 ... FTB notice addresses
S corporation issues
17 ... How to order Package X
18 ... Need electronic filing help?
18 ... Homeowner/renter assistance
season to open
19 ... Some taxpayers need to file
1996 returns

As April 15 approached, tax returns by the millions arrived at FTB’s CONTINUED ON PAGE 3
Sacramento headquarters.
Page 2

1998 Law Means Changes to 1997 Tax Returns


CONTINUED FROM PAGE 1
Volume 98-3 May 1998
• The stock sold is from a small for California purposes. For individual
TAX NEWS is a bimonthly business located in California and
publication of the Taxpayer Advocate clients, disregard the instructions in the
Bureau, California Franchise Tax held for more than six months. 1997 FTB Publication 1001.
Board. Its primary objective is to
provide information to income tax • The proceeds from the sale are used Sale of principal residence. For 1997,
preparers about state income tax within 60 days to purchase the stock SB 519 has reinstated the filing
laws, regulations, policies and of another small business located in requirement for taxpayers who have gain
procedures.
California. from the sale of their principal residence.
Members of the Board:
You do not need to make an adjustment Your individual clients now need to
Kathleen Connell, Chair for California purposes for your consider gain from the sale of a principal
State Controller individual clients who meet these residence as gross income in determining
Dean Andal conditions. So, disregard the related whether they need to file a California
Chair, State Board of Equalization instructions in the 1997 FTB Publication return for 1997. They should check the
Craig L. Brown
1001, “Supplemental Guidelines to filing requirements on page two of the
Director, Department of Finance California Adjustments.” Your clients 1997 personal income tax booklet under
that file business entity returns are not “Do I Have to File?”
———————— affected by this law change.
Executive Officer:
Gerald H. Goldberg Survivor annuity benefits for a public
Editor: safety officer killed in the line of duty. CONTINUED ON PAGE 3
Pat Huberty Previously, survivor benefits received by
a spouse, former spouse or child of a
To update or correct your address or
to subscribe to TAX NEWS (send $12 public safety officer killed in the line of
for a one-year subscription), write:
TAX NEWS
duty on or after January 1, 1997,
generally were includible in income for
Interest Rates
P.O. Box 520
Rancho Cordova, CA 95741-0520 California purposes. Now, California law For the last six months of 1998, the
or call: (916) 845-7070. conforms to federal law providing that interest rate on under- and over-
To view TAX NEWS on the Internet survivor benefits received in taxable years payments of California income taxes
or to request an electronic mail beginning after December 31, 1996, from will continue to be 9 percent. The
subscription, contact FTB on the deaths occurring after that date, are following table lists interest rates
Internet: excluded from gross income. since 1988.
http://www.ftb.ca.gov
For your individual clients who exclude
For information about a client’s Effective date Rate
account, contact: these survivor annuity benefits from the 1 Jan. 1988 - 31 Mar. 1988 11%
Tax Practitioner Support Unit 1997 federal return, disregard the 1997 1 Apr. 1988 - 30 Sept. 1988 10%
(916) 845-7057 (phone) “Instructions for Schedule CA, California
(916) 845-6377 (fax) 1 Oct. 1988 - 30 June 1989 11%
Adjustments (540 and 540NR)” that 1 July 1989 - 31 Dec. 1989 12%
For recorded answers to questions pertain to the California adjustment for 1 Jan. 1990 - 30 June 1990 11%
on California taxes, to order forms survivor annuity benefits.
or check on a refund, call: 1 July 1990 - 31 Dec. 1990 11%
F.A.S.T. (800) 338-0505 Gain on the sale of livestock sold due to 1 Jan. 1991 - 30 June 1991 11%
From outside U.S. (916) 845-6600 1 July 1991 - 31 Dec. 1991 10%
flood or other weather-related
1 Jan. 1992 - 30 June 1992 10%
To send a facsimile about a client’s conditions. Previously, California
account, transmit to: 1 July 1992 - 31 Dec. 1992 9%
allowed special treatment for gains on the
Electronic Correspondence 1 Jan. 1993 - 30 June 1993 8%
(916) 845-6377 sale of livestock after December 31, 1996, 1 July 1993 - 31 Dec. 1993 7%
—————————- due to droughts. Now, California law 1 Jan. 1994 - 30 June 1994 7%
Information Center: conforms to federal law that allows the
(800) 852-5711 1 July 1994 - 31 Dec. 1994 7%
From outside U.S. (916) 845-6500 special treatment for livestock sales due to 1 Jan. 1995 - 30 June 1995 8%
floods and other weather-related 1 July 1995 - 31 Dec. 1995 9%
Hearing Impaired: conditions in addition to droughts.
TDD (800) 822-6268 1 Jan. 1996 - 30 June 1996 9%
__________________ As a result, for both individual and 1 July 1996 - 31 Dec. 1996 9%
business entity clients who make a federal 1 Jan. 1997 - 30 June 1997 9%
FTB on the Internet 1 July 1997 - 31 Dec. 1997 9%
http://www.ftb.ca.gov election to defer recognition of gain or to
1 Jan. 1998 - 30 June 1998 9%
treat the sale as an involuntary
Printed on recycled paper. 1 July 1998 - 31 Dec. 1998 9%
conversion, do not make an adjustment

May 1998
Page 3

1998 Law Means Changes to 1997 Tax Returns Balance Due


CONGINUED FROM PAGE 2 Electronic Filers
Repeal of installment method • Attach a statement to the form Received Notices
alternative minimum tax (AMT) explaining that a waiver is requested
adjustment for farmers. Previously, because of tax law changes made by in Error
California did not allow the installment SB 519.
Some taxpayers who
method of accounting for California AMT • Attach form FTB 5805 or form electronically filed returns
purposes. Now, California conforms to FTB 5805F and the statement, on top
federal law that allows farmers to use the received notices from the
of all other attachments, to the front Franchise Tax Board in error.
installment method for payments received of Form 540 or Form 540A, both of
in taxable or income years beginning on which are a “California Resident FTB’s computer system
or after January 1, 1997, for installment Income Tax Return,” or to Form automatically issues Return
sales related to the sale of farm property 540NR, “California Nonresident or Information Notices (RINs)
made in taxable or income years Part-Year Resident Income Tax when an adjustment is made
beginning after December 31, 1987. Return,” or Form 541, “California on a return or if a tax payment
When you compute California AMT for Fiduciary Income Tax Return.” does not cover the amount
your individual or fiduciary farmer clients due. In the case of electronic
To request the waiver, your business filers, some notices may not
who received qualifying installment sale entity clients should:
payments, disregard the 1997 instructions reflect all payments that the
for line 13e on both Schedule P (540), • Complete form FTB 5806, taxpayers sent separately on
“Alternative Minimum Tax and Credit “Underpayment of Estimated Tax by or before
Limitations – Residents,” and Schedule P Corporations,” to compute the full April 15.
(540NR), “Alternative Minimum Tax and penalty that would ordinarily be due. Any of your clients who filed
Credit Limitations – Nonresidents or Part- • Write “Waiver” in red across the top electronically and received
Year Residents,” and for line 4j on of form FTB 5806. the notices do not need to
Schedule P (541), “Alternative Minimum • Attach a statement to the form respond as long as their tax
Tax and Credit Limitations – Fiduciaries.” explaining that a penalty waiver is payments were mailed no
For your business entity clients, disregard requested because of tax law changes later than April 15. FTB will
the 1997 instructions for line 2f of made by SB 519. mail an explanation to all
Schedule P (100), “Alternative Minimum taxpayers who received the
Tax and Credit Limitations – • Attach form FTB 5806 and the RINs by mistake. FTB also
Corporations.” In all cases, no statement to the front of Form 100, will implement system
adjustment is necessary. “California Corporation Franchise or changes to prevent the errors
Income Tax Return,” or Form 100S, and confusion from occurring
Waiver of estimated tax penalty. “California S Corporation Franchise
SB 519 waives any additions to tax that next year.
or Income Tax Return.”
are due to any underpayment of tax or FTB’s electronic filing
estimated tax for any period before Qualified Funeral Trusts (QFTs). program was very successful
April 15, 1998, and that result from any Previously, in California, trusts created to this year. Tax practitioners’
underpayment for the 1997 or 1998 prepay funeral costs were considered support of the program led to
taxable or income year, as long as the grantor trusts. Trustees were required to a 124 percent increase in the
underpayment was created or increased by issue Schedule K-1s to the beneficiaries, number of electronic returns
any SB 519 provision. and beneficiaries were required to report
their income on their tax returns. Now,
filed.†
To request the waiver, your individual or California law conforms to federal law on
fiduciary clients should: the treatment of QFTs for tax years
• Complete either form FTB 5805, ending after August 5, 1997. The trustee
“Underpayment of Estimated Tax by of a pre-need funeral trust can elect
Individuals and Fiduciaries,” or form special tax treatment for the trust. In such Inside ...
FTB 5805F, “Underpayment of cases, the trust is not treated as a grantor
CONTINUED FROM PAGE 1
Estimated Tax by Farmers and trust and the amount of tax paid on the
Fishermen,” to compute the full annual earnings of the trust is determined 19 ... Partnership Schedule K-1:
Paper-free filing
penalty that would ordinarily be due. under the income tax rate schedule 19 ... Partnership Schedule K-1:
• Check “Yes” on form FTB 5805, Part applicable to trusts. File one way
I, Question 1, or check the box on To make the election for California 20 ... Fax personal income tax
form FTB 5805F, Part II, line 16. collection queries
purposes in 1997:
20 ... Tax Talk: Four hours = four
credits
CONTINUED ON PAGE 15
Page 4

Legislature Looks at Tax Credits


Among the measures being considered by Education.
the Legislature are some that would AB 1662 (Alquist) would create three
provide tax credits. They include bills credits related to donations to California
SBE Opinions dealing with these subjects: community colleges of property,
modifications of facilities and facility
Adoption.
AB 119 (Runner) would repeal the maintenance and upkeep.
Appeal of Zenith National existing state adoption credit. It would AB 1713 (Cuneen) would allow a credit
Insurance Corp., create a new credit by conforming to for lending a qualified employee to a
98-SBE-001, January 8, modifications to the federal credit. public school or vocational institution to
1998. The taxpayer is the Agriculture. teach math or science. It also would
parent of an insurance SB 1402 (McPherson) would allow a tax provide a credit for allowing a public
corporation from which it credit, subject to specified limits, for school teacher to attend an employer-
received substantial dividends purchasing and installing qualified water sponsored education class by using an
that were not included in its application or distribution equipment used open enrollment space.
measure of franchise tax. in a business to produce farm income on AB 1747 (Alquist) would allow an
During the years at issue, the agricultural land that the taxpayer owns or employee to exclude from gross income
taxpayer incurred substantial leases. the amount, not to exceed $5,250 per
interest expense on corporate year, that an employer pays or incurs for
debentures. The taxpayer Child care.
AB 2026 (Leach) would create a credit the employee to take graduate level
used the funds from the courses beginning on or after June 20,
issuance of the debentures to equal to the greater of 30 percent of the
federal child care credit or $150 for child 1998.
acquire a diverse portfolio of
preferred stock. Dividends care expenses. AB 2109 (Kaloogian) would create a
from the preferred stock were SB 1523 (Rainey) would make changes to credit equal to the fees that a taxpayer
included in the measure of the the $50,000 limit of the Child Care pays to a California public school for
taxpayer’s franchise tax. Program Credit and allow this credit to extra curricular activities. The credit
reduce regular tax below tentative would be limited to $500 per taxable or
The State Board of income year or to $250 for a husband and
Equalization concluded that, minimum tax. The bill also would create
a credit for banks and financial wife who file separate returns.
based on the totality of the
facts and circumstances of the corporations based on foregone interest AB 2110 (Kaloogian) would create a
case, the taxpayer, for three of income on loans for child care centers. credit equal to voluntary cash
the four years in issue, SB 1815 (McPherson) expresses the contributions made during the taxable
established a dominant Legislature’s intent to allow a credit year to a school tuition organization.
purpose and a sufficiently against personal income taxes and bank AB 2735 (Cardenas) would create a $100
direct relationship between and corporation taxes for amounts credit for a taxpayer who volunteers a
the interest expense on the incurred for child care programs or minimum of 40 hours in a public school
debentures and the facilities for children of low income that has any grades up to eight and that
investments in preferred stock parents. the taxpayer’s child attends.
to allow for a direct allocation Computer donations. Enterprise zone.
of interest expense against AB 2219 (Battin) would allow a credit SB 1881 (Monteith) would provide
income from preferred stock
investments.† equal, within limits, to the fair market
value of each qualified computer that a
taxpayers operating a trade or business in
a newly designated enterprise zone with a
taxpayer donates to a public school. credit of 80 percent of the amount paid
Economic revitalization. for research and development performed
AB 2458 (Cedillo) would create a credit at the trade or business in the enterprise
equal to the applicable percentage of the zone.
ad valorem property tax paid or incurred Farmworker health.
for real property certified as participating AB 2520 (Prenter) would provide a 25
in the Los Angeles Live/Work Economic percent credit for the costs of preventive
Revitalization Plan. health care for employees who are
qualified farmworkers.

CONTINUED ON PAGE 5

May 1998
Page 5

Legislature Looks at Tax Credits


CONTINUED FROM PAGE 4

Household/dependent care expenses. Newspaper investment. FTB Calendar


AB 1728 (Floyd) would create a credit AB 2370 (House) would create a one-time
equal to a specified percentage of the credit equal to the amount, within limits,
allowable federal credit for employment- of a capital investment in a qualified May
related household and dependent care newspaper during the taxable or income • 100,000 demand to file
expenses. The federal credit varies year. notices are mailed to
according to adjusted gross income (AGI) Property contributions. individuals who failed to
and is not available to taxpayers with an SB 2080 (O’Connell) would allow a file a 1996 tax return.
AGI over $100,000. credit to taxpayers who contribute defined • 30,000 Notices of
Internet. property or money for environmental Proposed Assessment are
AB 2221 (Machado) would allow Internet preservation to certain government bodies issued to individuals who
service providers a credit for the costs of or the nonprofit organizations that they did not respond to
purchasing and installing tiering or designate. demand to file notices
issued in February for
filtering software or gateway scanning Public transit subsidies. 1996 tax returns.
devices. AB 1702 (Figueroa) would give • Notices of Proposed
Jurors. employers a credit equal to 40 percent of Assessment are issued to
SB 14 (Calderon) would create a credit the cost of subsidizing public transit qualified corporations
equal to 50 percent of the compensation passes for California resident employees. that failed to file
paid during the taxable or income year to requested 1995 corporate
Research expense. returns.
an employee serving on a trial jury. AB 1356 (Figueroa) would conform
Manufacturer’s investment. 15 First day to file
California to the federal percentage for Homeowner and Renter
AB 1976 (Campbell) would replace the the alternative incremental research Assistance claims.
existing Manufacturer’s Investment expense credit.
Credit (MIC) carryover provision with a 20 Previous month
Vehicle inspection. nonresident withholding
refundable provision. The excess credit AB 1914 (Ashburn) would create a credit payments are due if total
would be applied first to all other amounts for the costs of purchasing any Bar-97 withholding
due. Any remaining excess would be equipment required for vehicle inspection. exceeded $2,500.
refunded on a pro rata basis over three A second credit would equal $50 for each
years. June
taxpayer vehicle tested by the equipment • Demand to file notices
AB 2441 (Campbell) would include in the during the taxable year. are mailed to individuals
definition of “qualified taxpayer” for the Wage/property. who failed to file a 1996
MIC specific kinds of businesses related AB 1779 (Runner) would establish a tax return.
to computer programming and software. wage credit and a property credit for the • 30,000 Notices of
Military service income. Joint Strike Fighter Program. The credits Proposed Assessment are
AB 1494 (Olberg) would reinstate in would apply to taxpayers under contract issued to individuals who
specified amounts the Military Service or subcontract to manufacture property in did not respond to
demand to file notices
Income Credit that expired on January 1, California for ultimate use in a joint strike issued in February and
1992. fighter program. March for 1996 tax
Mortgage savings accounts. AB 1708 (Leach) would provide returns.
AB 1841 (Baldwin) would allow a employers with a 50 percent credit for 15 Second quarter 1998
qualifying individual a credit of specified qualified wages paid to an employee personal income tax
maximum amounts deposited in a during the qualified time period in a estimate payments are
mortgage savings account for the qualified training program. † due.
purchase of a principal residence in 20 Previous month
California. The individual must be a first- nonresident withholding
home buyer. The bill also would exempt payments are due if total
from taxation all interest earned on the withholding
exceeded $2,500.
mortgage savings account.

CONTINUED ON PAGE 7
Page 6

Direct Deposit:
Nonresidents The Most-Asked Questions
Choose
During the debut this year of a direct (Also, you may not receive a direct
Electronic Filing deposit refund program for taxpayers who deposit or paper check refund if your
file electronically, both tax professionals refund is claimed, according to law, by
This year, for the first time, and taxpayers called with questions. another state agency to which you owe
California nonresidents were money.)
invited to file here Here are the four most-asked questions
electronically. And a good and the Franchise Tax Board’s answers: How will I know when my direct
number have accepted the When I filed, I incorrectly listed the deposit refund is in my bank account?
proposal. Routing Transit Number (RTN) that You should wait seven to 10 banking days
By April 15, 1998, identifies my bank. Can I change it? and then call the bank to verify that the
2,937 nonresidents had filed No. Once your electronic return has funds have been deposited. A bank’s
in California electronically. entered FTB’s system, you cannot make a telephone teller option may not be able to
By the same date, a total of change in the banking information. So provide the information, so you may need
185,514 nonresidents had you should always be sure that you are to speak to a member of the bank’s staff.
FTB does not notify taxpayers that
used all available methods of
filing here.
using the correct RTN, which is the nine-
digit number usually located in the lower refunds have been deposited. †
The Franchise Tax Board left area of a check and also known as an
American Banking Association number.
expects the number of
nonresidents filing Also keep in mind that some banks have Electronic Filers
electronically to grow in the one number for Northern California and a
coming years. So, if your
software provider did not
different one for Southern California.
What does FTB do with my refund
Like Direct
include the Form 540NR,
“California Nonresident or
when I use the wrong RTN?
FTB attempts to deposit the refund based
Deposit
Part-Year Resident Income
Tax Return,” in your software on the banking information that you About a quarter of all taxpayers who file
package, you may want to provide. If the information is incorrect, their returns electronically are asking to
†
request it for next year . the bank returns the money to FTB. FTB
in turn sends the taxpayer a paper refund
have their refunds deposited directly in
their bank accounts.
check. This process means that the
refund will be delayed by up to one week. By April 15, 1998, the Franchise Tax
Board had received requests for direct
I used the correct RTN. Why did I deposit from 181,029 electronic filers.
receive a paper check instead of a The number represents 23 percent of the
direct deposit refund? total returns filed electronically and 28
You may have received a paper check for percent of the electronically filed returns
one of these three reasons: that qualified for refunds.
• As a precaution against fraud, direct The direct deposit program is in its first
deposit is not available to taxpayers year and is attracting taxpayers in greater
who are filing in California for the numbers than anticipated. And electronic
first time. filing generally is drawing more taxpayers
this year.
• Also as a fraud prevention method,
only one direct deposit may be made One reason for the success of the direct
per bank account. Someone else may deposit program may be that many tax
already have requested a direct professionals are using it as a marketing
deposit to the account. However, tool to encourage clients to file
your federal and state refunds may be electronically. Refunds are issued more
deposited in the same account. quickly to taxpayers who file
electronically than to those who file on
• FTB may have changed the amount paper. Direct deposit shaves even more
of a refund because of an error on time off the refund process. And in
your return. addition to speed, direct deposit gives

CONTINUED ON PAGE 7

May 1998
Page 7

Electronic Filing Update


Because taxpayers have until October 15 form on the Internet at FTB’s FTB Calendar
to file their tax returns electronically or in http://www.ftb.ca.gov/elecserv address, or
other ways, Franchise Tax Board call the electronic filing Help Desk at
reminders can help both you and your (916) 845-0353. CONTINUED FROM PAGE 5
clients. Also, you will be offered a wider choice
July
When you file your clients’ returns in the future for the modem transmission
electronically: of electronic returns. FTB will purchase, • 60,000 demand to file
install and test software that will notices are mailed to
• You do not need to follow up an individuals who failed to
accommodate Z as well as X modem
electronically transmitted return with
a paper copy. The electronically filed transmissions. † file 1996 tax returns.
• 45,000 Notices of
return is all that you need to send Proposed Assessment are
FTB. Electronic Filers mailed to nonfilers of
• Remind your clients that the copy of 1996 personal income tax
the return that you give them is for
Like returns.
their files. They should not send it to Direct Deposit 20 Previous month
nonresident withholding
FTB.
CONTINUED FROM PAGE 6 payments are due if total
• Keep the signed copy of form withholding exceeded
FTB 8453, “California Individual clients an easier and safer way to receive $2,500.
Income Tax Declaration for their state tax refunds. August
Electronic Filing,” in your files for
Because of the positive taxpayer reaction • 25,000 demand to file
four years from the later of the due notices are mailed to
date of the return or the date it is to the direct deposit of refunds when
returns are electronically filed, FTB is individuals who failed to
filed. Do not send the form to FTB. file 1996 tax returns.
considering expanding the program to
If you are interested in participating in 1998 tax returns that are TeleFiled and • 15,000 Notices of
FTB’s electronic filing program, you can filed on paper and either image- or Proposed Assessment are
apply any time. Look for an application manually-processed. † mailed to nonfilers of
1996 personal income tax
returns.
20 Previous month
nonresident withholding
Electronic Filing: Two-Year Review payments are due if total
withholding exceeded
$2,500.
1996 tax year 1997 tax year Change
(as of April 15) (as of April 15) 30 Last day to file
†
Homeowner and Renter
Assistance claims.
Returns processed: 355,877 795,982* 124%
Electronic return originators
(EROs) approved by FTB to
produce the returns transmitted: 5,666 6,750 19%
EROs who participated: 3,360 4,056 21%
Transmitters accepted by FTB: 106 120 13%
Transmitters who participated: 97 106 9%
Balance due filers: 28,696 120,250 319%
Help Desk phone calls answered: 4,836 5,669 17%

* Includes 63,138 Transmitter/On-Line Service (TROLS) returns filed from personal


computers via third party transmitters.
Page 8

The Question Column


1995 Corporation What Is Wife’s Filing Status
When Non-Citizen Husband Lives Outside U.S.?
Tax Returns
Sought If an American citizen taxpayer living • She had a qualifying relative and met
in the United States is married to a the other tests for head of household.
What happens when a non-U.S. citizen who does not live in Keep in mind that her spouse cannot
corporation appears to be the United States, does she qualify as be the qualifying relative.
doing business in the state but head of household or should she file If the taxpayer elected to treat her spouse
does not file a California tax married filing joint? as a resident alien, she would be
return? That depends on several other factors. considered married and would be eligible
The Franchise Tax Board The taxpayer could file as head of to file as married filing joint. Once that
sends the corporation a household if: election is made, it applies to all
demand to file based on subsequent years unless it is somehow
• Her spouse was a nonresident alien at suspended, revoked, ended by legal
information it receives from any time during the tax year.
the Internal Revenue Service, separation or otherwise terminated.
the State Board of • She and her husband did not elect to
Equalization and the treat the husband as a resident alien CONTINUED ON PAGE 14
Employment Development during the tax year or in a prior year.
Department.
In April, FTB sent
approximately 4,000 California’s Tax Filing Season
nonqualified corporations a January 2 - April 15
Notice of Proposed
Assessment (NPA) for failing (Watch for an update in the July Tax News)
either to file a 1995 tax return 1997 * 1998*
or to show that they did not
have a filing requirement. A Personal income tax returns processed:
nonqualified corporation has Paper 3,553,170 3,522,520
not registered with the Scannable 2,852,907 2,790,219
California Secretary of State Electronically filed 346,095 795,982
to do business here. TeleFiled 218,955 282,973
Another 10,000 corporations Total 6,971,127 7,391,694
that received a demand to file
a 1995 return in March will Electronic funds transfers:
receive an NPA this month. Amount $866,976,869 $921,856,660
These corporations were Volume 5,768 61,058
registered or qualified with
the Secretary of State to do Amount deposited:
business in California and Personal income taxes $2,996,911,914 $3,746,656,625
failed to file a return or Bank and corporation taxes $522,751,431 $567,567,114
provide proof that a return Partnership taxes $29,410,441 $35,699,506
was already filed. Total $3,549,073,786 $4,349,923,245
The corporation has 60 days
from the date of the notice to Largest daily deposit:
file the requested return or to Personal income taxes — April 15 $231,499,716 $249,826,435
protest the assessment. If the Bank and corporation taxes
corporation does not respond (includes electronic funds
within that time, the transfers) — March 18 $335,708,357 $347,716,085
assessment becomes due and
payable immediately. † Refunds:
Total amount $1,349,442,374 $1,553,341,563
Average amount $343 $359
Volume 3,930,183 $4,328,116

* Current-year returns only; no prior-year returns included.

May 1998
Page 9

Legislature Considers
Tax Deductions and More
The California Legislature is considering expenditures as a deductible expense
a variety of tax deduction measures and for the taxable or income year in
proposals on other topics ranging from which they are paid.
“amnesty” to “voluntary contributions.” • AB 2335 (Poochigian), which would Electronic Filing
Among the measures that would give provide that a taxpayer’s Calendar
taxpayers additional or expanded contributions to a California medical
deductions are: savings account would be deductible
If you offer your clients the
• AB 1218 (Alquist), which would and that the interest and dividends
option of filing electronically,
allow corporations commercially earned would be excludable from
here are the dates to
domiciled in California to deduct gross income.
remember:
interest expense attributable to • SB 1985 (O’Connell), which would
• October 15 - Last day to
dividends that are received from an attempt to conform, with certain
transmit timely filed
insurance company subsidiary and modifications, to the increased
returns.
that are excluded from income. federal deduction for contributions of
computer technology and equipment • October 19 - Last day to
• AB 1618 (Morrissey), which would retransmit returns
provide a $20,000 deduction from to schools.
rejected on October 15 or
gross income to a resident individual
at least 65 years of age.
• SB 1993 (Hurtt), which would allow
a deduction for the amount paid for
†
earlier.

• AB 2092 (Morrissey), which would federal income taxes and federal


allow taxpayers to deduct 100 percent employment taxes.
of the amount they pay or incur for • SB 2096 (Mountjoy), which would
their children’s child care costs. allow a deduction for an amount
• AB 2165 (Bowen), which would equal to any expenditures for free
conform to federal law regarding the agent insurance.
election to treat qualified
environmental remediation
CONTINUED ON PAGE 10

Keeping in Touch with FTB


January 2 - April 15

1997 1998

22,714 39,855 Calls from tax practitioners

1,402 1,585 Faxes from tax practitioners

710,076 999,349 Calls from taxpayers answered by the Taxpayer


Services Center

2,169,004 1,730,352 Tax-related calls to FTB’s automated telephone


service

322,891 526,308 User sessions on FTB’s Internet Web site

475,359 2,017,324 Forms downloaded from FTB’s Internet Web site


Page 10

Legislature Considers Tax Deductions and More


Forty Counties CONTINUED FROM PAGE 9

Qualify as In addition, here are highlights of some of the state to certify that they have
the additional proposals before the complied with all earnings withholding
El Niño Legislature (also see “Legislature Looks orders and notices for the collection of
Disaster Areas at Tax Credits” in this issue): child, family or spousal support and with
Amnesty. state and federal employment reporting
By press time, the President AB 2635 (Martinez) would establish a tax requirements for their employees. The
had declared 40 California penalty amnesty program from May 1, bill also would require that any payments
counties federal disaster areas 1999, to August 31, 1999, for tax due under a state contract would first be
as a result of the 1998 storms liabilities from taxable years beginning paid to FTB to satisfy any delinquent
and floods. before January 1, 1998. child support that the contractor or vendor
owes.
The designation allows storm Appeals.
and flood victims in the AB 2250 (Poochigian) would provide for AB 2094 (Morrissey) would make FTB
40 counties to deduct disaster a hearing for taxpayers who file a claim responsible for administering the state’s
losses on either their 1997 or for reimbursement of fees and expenses delinquent child, spousal and medical
1998 tax returns. related to a State Board of Equalization support collection programs and for
appeal, unless the taxpayer waives the determining paternity. In those roles,
Disaster victims also can treat FTB would replace the Department of
their losses as net operating hearing in writing.
Social Services and county district
losses. As a result, they may SB 1520 (Kopp) would provide that attorney offices.
carry forward 50 percent of ex parte communications shall be
any excess disaster loss to restricted in a petition or appeal that is or AB 2343 (Woods) would change the
future taxable years. Action may come before the State Board of criteria under which the Department of
by the Legislature and Equalization or a hearing officer. Social Services may exempt a county
Governor would permit from making mandatory referrals to
Auto depreciation. FTB’s child support collection program.
taxpayers in disaster areas to AB 2692 (Kuehl) would provide that cars
carry forward 100 percent of A county would be granted an exemption
and light trucks certified as ultra-low if its collection program meets or exceeds
any excess disaster loss to emission would not be subject to the
future taxable years. At press the results of FTB’s child support
depreciation limitations on luxury collection program instead of if its
time, disaster relief vehicles. They also could be depreciated
legislation, AB 2456 technology is similar or identical to
as three-year, rather than five-year, FTB’s.
(Sweeney), had been property.
introduced in the Legislature. SB 1508 (Rainey) would require state and
Burden of proof. local public agencies to notify FTB
The 40 counties designated as AB 1631 (Sweeney) would express the
disaster areas are: Alameda, whenever they receive a claim so that
Legislature’s intent to conform to federal FTB can determine if the claimant owes
Amador, Butte, Calaveras, law related to shifting the burden of proof
Colusa, Contra Costa, Fresno, child, spousal or family support. If an
in tax matters. It would provide that FTB amount is owed, FTB would be required
Glenn, Humboldt, Kern, would have the burden of proof, applying
Lake, Los Angeles, Marin, to issue an order to withhold payment.
the clear and convincing standard, in
Mendocino, Merced, asserting penalties for intent to evade or Disasters.
Monterey, Napa, Orange, commit fraud. AB 2456 (Sweeney) would provide that
Riverside, Sacramento, San losses sustained as a result of the
Benito, San Bernardino, San SB 1425 (Hurtt) would shift the burden of February 1998 storms and flooding are
Diego, San Francisco, San proof from the taxpayer to any state tax eligible for special disaster loss treatment.
Joaquin, San Luis Obispo, collection agency in litigation cases
San Mateo, Santa Barbara, provided the taxpayer shows prima facie Drug abuse education.
justification for the factual or legal AB 1733 (Machado) would extend the
Santa Clara, Santa Cruz,
contention and fully cooperates in sunset date of the California Drug Abuse
Solano, Sonoma, Stanislaus,
disclosing all relevant evidence. Resistance Education (D.A.R.E.) fund
Sutter, Tehama, Trinity,
from January 1, 1999, to January 1, 2004.
Tulare, Ventura, Yolo and Child support.
Yuba. AB 1823 (Cardenas) requires contractors
For more information, see the or vendors who enter into a contract with CONTINUED ON PAGE 11
March 1998 issue of
Tax News. †

May 1998
Page 10

Legislature Considers Tax Deductions and More


Forty Counties CONTINUED FROM PAGE 9

Qualify as the additional proposals before the notices for the collection of child, family
Legislature (also see “Legislature Looks or spousal support and with state and
El Niño at Tax Credits” in this issue): federal employment reporting
Disaster Areas Amnesty. requirements for their employees. The
AB 2635 (Martinez) would establish a tax bill also would require that any payments
By press time, the President penalty amnesty program from May 1, due under a state contract would first be
had declared 40 California 1999, to August 31, 1999, for tax paid to FTB to satisfy any delinquent
counties federal disaster areas liabilities from taxable years beginning child support that the contractor or vendor
as a result of the 1998 storms before January 1, 1998. owes.
and floods. AB 2094 (Morrissey) would make FTB
Appeals.
The designation allows storm AB 2250 (Poochigian) would provide for responsible for administering the state’s
and flood victims in the a hearing for taxpayers who file a claim delinquent child, spousal and medical
40 counties to deduct disaster for reimbursement of fees and expenses support collection programs and for
losses on either their 1997 or related to a State Board of Equalization determining paternity. In those roles,
1998 tax returns. appeal, unless the taxpayer waives the FTB would replace the Department of
hearing in writing. Social Services and county district
Disaster victims also can treat attorney offices.
their losses as net operating SB 1520 (Kopp) would provide that
losses. As a result, they may ex parte communications shall be AB 2343 (Woods) would change the
carry forward 50 percent of restricted in a petition or appeal that is or criteria under which the Department of
any excess disaster loss to may come before the State Board of Social Services may exempt a county
future taxable years. Action Equalization or a hearing officer. from making mandatory referrals to
by the Legislature and FTB’s child support collection program.
Auto depreciation. A county would be granted an exemption
Governor would permit AB 2692 (Kuehl) would provide that cars
taxpayers in disaster areas to if its collection program meets or exceeds
and light trucks certified as ultra-low the results of FTB’s child support
carry forward 100 percent of emission would not be subject to the
any excess disaster loss to collection program instead of if its
depreciation limitations on luxury technology is similar or identical to
future taxable years. At press vehicles. They also could be depreciated
time, disaster relief FTB’s.
as three-year, rather than five-year,
legislation, AB 2456 property. SB 1508 (Rainey) would require state and
(Sweeney), had been local public agencies to notify FTB
introduced in the Legislature. Burden of proof. whenever they receive a claim so that
AB 1631 (Sweeney) would express the FTB can determine if the claimant owes
The 40 counties designated as Legislature’s intent to conform to federal
disaster areas are: Alameda, child, spousal or family support. If an
law related to shifting the burden of proof amount is owed, FTB would be required
Amador, Butte, Calaveras, in tax matters. It would provide that FTB
Colusa, Contra Costa, Fresno, to issue an order to withhold payment.
would have the burden of proof, applying
Glenn, Humboldt, Kern, the clear and convincing standard, in Disasters.
Lake, Los Angeles, Marin, asserting penalties for intent to evade or AB 2456 (Sweeney) would provide that
Mendocino, Merced, commit fraud. losses sustained as a result of the
Monterey, Napa, Orange, February 1998 storms and flooding are
Riverside, Sacramento, San SB 1425 (Hurtt) would shift the burden of eligible for special disaster loss treatment.
Benito, San Bernardino, San proof from the taxpayer to any state tax
Diego, San Francisco, San collection agency in litigation cases Drug abuse education.
provided the taxpayer shows prima facie AB 1733 (Machado) would extend the
Joaquin, San Luis Obispo,
justification for the factual or legal sunset date of the California Drug Abuse
San Mateo, Santa Barbara,
contention and fully cooperates in Resistance Education (D.A.R.E.) fund
Santa Clara, Santa Cruz,
disclosing all relevant evidence. from January 1, 1999, to January 1, 2004.
Solano, Sonoma, Stanislaus,
Sutter, Tehama, Trinity, Child support.
Tulare, Ventura, Yolo and AB 1823 (Cardenas) requires contractors
Yuba. or vendors who enter into a contract with
For more information, see the the state to certify that they have complied CONTINUED ON PAGE 11
March 1998 issue of with all earnings withholding orders and
Tax News. †

May 1998
Page 11

Legislature Considers Tax Deductions and More


CONTINUED FROM PAGE 10

Election fund. AB 2267 (Baugh) would modify


SB 1953 (Vasconcellos) would create the California conformity to federal law by
State Candidate Election Fund. providing that medical expenses do not
Taxpayers would be able to designate a have to exceed 7.5 percent of adjusted Interested in
portion of their tax liabilities to the fund gross income (AGI) to be deductible.
via their tax returns. Proposed Law?
AB 2330 (Poochigian) would reduce the
SB 2106 (Watson) would create a 7.5 percent AGI limitation for medical Would you like to know more
Legislative Election Fund to which deductions to 2 percent over a five-year about a legislative measure
taxpayers could designate a portion of period. covered in this issue of Tax
their tax liabilities when they file tax FTB restructuring. News?
returns. SB 1739 (Kopp) would rename FTB the For a copy of any legislative
Employees. Department of Franchise Tax under the bill, write the Legislative Bill
AB 1630 (Sweeney) would expand the control of a director appointed by the Room, Room B-32, State
state’s new employee registry by requiring Governor and confirmed by the Senate. It Capitol, Sacramento, CA
more people and entities to register. would transfer the Employment 95814. Or call the Bill Room
Recipients of state loans or grants would Development Department’s tax collection at (916) 445-2323.
need to report their social security functions to the new department. Also,
numbers and employers’ names. State the current three-member Franchise Tax On the Internet, you will find
agencies would have to report on each Board would be renamed the Board of legislative measures at
contractor with whom it has a contract. Franchise Tax Review; its role would http://www.leginfo.ca.gov,
Contractors with a state contract would include considering taxpayer appeals of which is the Official
have to register their employees as well as department actions and adopting advisory California Legislation
Information Web site
their subcontractors who will work on a
state contract.
resolutions.
Health care.
address.†
Federal conformity. AB 2257 (Cedillo) would impose certain
SB 1496 (Alpert) would change from disclosure requirements on tax exempt
January 1, 1997, to January 1, 1998, the health care service plans, related to
date from which California’s personal transactions with subsidiary for-profit
income tax law conforms to the Internal corporations.
Revenue Code (IRC). Homeowner assistance.
AB 1613 (Scott) would partially conform SB 1464 (Brulte) would apply inflation
California law to the federal non- adjustments to the gross and total
refundable HOPE and lifetime learning household income amounts used to
credit. It also would conform to federal calculate a homeowner’s claim to the
changes made by the Taxpayer Relief Act Homeowner and Renter Assistance
of 1997 relating to education loan interest program that FTB administers.
deductions. Incentive zones.
AB 2108 (Kaloogian) also would conform SB 1814 (Karnette) would make four
to the federal HOPE credit. changes to the enterprise zone employer
AB 2258 (Cardenas) would conform to hiring credit. It would double the percent
the federal change that eliminated of “qualified wages” that qualify for the
contributions of appreciated property as credit allowed for each taxable or income
an alternative minimum tax adjustment or year. It would increase the amount of
preference item. wages that qualify for the credit by
changing the definition of qualified wages
AB 2266 (Baugh) would express the to the amount of wages paid to qualified
Legislature’s intent to conform to and employees, other than those employed in
expand the availability of the medical the Long Beach Enterprise Zone,
savings account provisions of IRC
Section 220.
CONTINUED ON PAGE 12
Page 12

Legislature Considers Tax Deductions and More


CONTINUED FROM PAGE 11

that exceeds the minimum wage but does the corporation files for dissolution if
Tax News not exceed the “state average hourly FTB’s request for more documentation or
wage.” It would provide that qualified adjustments delayed the dissolution.
Three Ways wages are the wage amounts that are paid SB 1435 (Hayden) would reduce the
to up to 1,350 qualified employees minimum franchise tax for income years
Now you can get your news employed in the Long Beach Enterprise
from Tax News in one of beginning on or after January 1, 1999, for
Zone in aircraft manufacturing activities every bank or corporation that has 25 or
three ways. and that exceed the minimum wage but do fewer employees and gross receipts less
The newsletter is available in not exceed 125 percent of the “state than $1 million and that meets certain
print, on the Internet and by average hourly wage. And it would other specifications.
E-mail. provide that qualified wages include any
amount paid by an employer for a Net operating loss.
To download, view and print SB 1994 (Hurtt) would completely
qualified employee’s health insurance
Tax News from the Internet, replace California’s stand-alone net
premium.
contact the Franchise Tax operating loss (NOL) provisions with
Board at its AB 1937 (Murray) would require the federal NOL law.
http://www.ftb.ca.gov Trade and Commerce Agency to
Web site. designate an additional enterprise zone in Oil well recovery.
a specified area of Los Angeles County. SB 1788 (Karnette) would allow
To subscribe to Tax News by taxpayers to elect either to exclude from
The zone would have to meet certain
E-mail, also contact the FTB gross income any income received from
criteria involving the unemployment rate,
Web site. Access the selling oil from a “recovered inactive
household income, poverty rate and the
Education and Outreach page. well,” which the bill defines, or to claim
decline in new business enterprises. It
Click on the Tax News logo the enhanced oil recovery credit provided
would be entitled to all existing enterprise
and then on “Tax News by under current law.
zone tax incentives.
E-Mail.” Insert your E-mail
and other address information AB 2205 (Washington) would create the Partnerships, limited liability
in the fields provided. Click Compton Economic Development and Job companies, limited partnerships.
on “subscribe” and then on Creation Program offering incentives AB 1694 (Ackerman) would establish the
“submit” to record your similar to those available in the Los due date of returns for partnerships and
subscription.† Angeles Revitalization Zone. limited liability companies as on or before
the 15th day of the fourth month
SB 2079 (Costa) would, among other following the close of their taxable or
things, extend the designation period from income year. It also would clarify FTB’s
15 to 20 years for an enterprise zone right to suspend certain limited liability
designated prior to 1990 and modify the companies that fail to pay tax. FTB is a
method used to determine business sponsor of the bill.
income attributable to a zone.
AB 1828 (Leach) would make minor
In-lieu tax. changes to current law primarily
AB 511 (Migden) would require that a regarding events that trigger the
percentage of the revenues from the in- dissolution of limited liability companies
lieu tax be deposited into a new Financial and limited partnerships and the
Aid to Local Agencies Fund for conditions required for an assignee of a
disbursement to all cities and counties limited partnership interest to become a
according to a specified formula. limited partner. The bill also would allow
Liens. limited liability companies to have only
AB 2450 (Oller) would require FTB to one member.
issue a “notice of expungement” rather AB 2245 (Baldwin) would replace the
than a “release,” if FTB determines it general prohibition against a limited
issued a tax lien notice in error. liability company rendering professional
Minimum franchise tax. services with a list of specific
AB 27 (Bowen) would provide that a professional services that may not be
corporation would not be subject to the rendered.
minimum franchise tax for the income
year following the income year in which
CONTINUED ON PAGE 13

May 1998
Page 13

Legislature Considers Tax Deductions and More Water’s-edge


CONTINUED FROM PAGE 12
Election Problems
SB 1741 (Alpert) would require FTB to sale of the taxpayer’s principal residence
notify a taxpayer that files a limited in California to a person who holds a
Move to Resolution
partnership return designated as its final security interest in the residence. Taxpayers experiencing
return that the minimum franchise tax is Service earnings. water’s-edge election
due annually until the taxpayer files a AB 2014 (Kuehl) would require certain problems recently came closer
certificate of dissolution or certificate of “service recipients” to provide specified to resolution.
cancellation with the California Secretary information to FTB within 20 days of
of State. At a March symposium,
either making or entering into a contract Franchise Tax Board staff and
SB 2234 (Senate Revenue and Taxation for payments of $600 or more in a year. interested taxpayers drafted
Committee) would clarify that FTB may FTB would be authorized to use the proposed amendments to
suspend any limited liability company that information for enforcement purposes or current water’s-edge
is not classified as a corporation for for administering Welfare and Institutions regulations, California Code
California tax purposes and that fails to Code provisions. of Regulations Sections
pay its tax. It would clarify the definition Standard deduction. 25111 and 25111-1. The
of “wages” that must be included in the SB 1526 (Monteith) would double the proposal will be the subject of
Report of Wages. It would provide that standard deduction for each taxable year a regulatory hearing this
nonresidents must prorate the deduction beginning on or after January 1, 1998. Spring.
for alimony payments in the same way
that nonresident tax is prorated. SB 2234 Student loans. Symposium participants
would retain the program to refund excess AB 2004 (Wright) would increase the agreed in concept on the
state disability insurance through the tax notification requirements for the Student proposed amendments, which
return, and it would ensure that taxpayers Aid Commission and private debt presume that the Legislature’s
who fail to claim the credit on their collectors before they refer delinquent intent in formulating the
returns would still be identified as quickly student loans to FTB for collection and water’s-edge statute was to
as possible to receive a refund of their would revise other aspects of current law permit all taxpayers wishing
excess contributions. The bill would relating to student loan collection. to make a water’s-edge
make several changes relating to federal Suspended corporation. election to do so regardless of
adjustments; they deal with the final AB 1950 (Torlakson) would make mechanical election errors.
federal determination date and taxpayers’ changes to the law that imposes a penalty Among other things, the
requirement to notify FTB of any federal on any person attempting to exercise the proposal addresses what
changes to their tax returns. And the bill corporate powers, rights and privileges of constitutes “substantial
would remove the commercial domicile a suspended or foreign corporation whose performance” in making a
restriction, permitting all corporations privileges have been forfeited. The bill water’s-edge election, the
regardless of their commercial domicile to would provide that the penalty does not definition of “original return,”
deduct dividends received from an apply to any insurer or counsel to an implementation of “common
insurance company subsidiary operating insurer who defends the suspended parent elections” and
in California and subject to the gross corporation in a civil action regarding situations where a deemed
premiums tax. FTB is a sponsor of this personal injury, property damage or request to terminate a water’s-
bill. economic loss. edge election will be
automatically granted.
Refund offsets. Tax assessment.
AB 2613 (Pacheco) would require that AB 2678 (Pringle) would allow the Participants also compared
unpaid court-ordered fines, fees and costs taxpayer to use a restraining order or the proposed regulation
be paid from income tax refunds before injunction to stop a tax assessment or amendments to a list of
any other delinquent amounts except for collection if, among other things, the identified invalidated water’s-
child, family or spousal support or taxpayer pays all amounts due or files a edge elections categorized by
overpaid unemployment benefits. bond equal to the amount. reason for invalidation. The
amendments would resolve at
Secured debt. Tax brackets. least 87 percent of these
SB 1499 (Lewis) would exclude from SB 2197 (Rainey) would increase the invalidated elections.
gross income any income from the threshold amounts for each personal
cancellation of a secured debt from the income tax bracket by 10 percent. When the date of the
regulatory hearing is
published, it will be posted on
FTB’s http://www.ftb.ca.gov
†
CONTINUED ON PAGE 14
Internet Web site.
Page 14

Legislature Considers The Question Column


Tax Deductions
Need a and More CONTINUED FROM PAGE 8

Tax Form CONTINUED FROM PAGE 13 Does Keogh Contribution,


Fast? Tax simplification. Made After Leaving State,
AB 1930 (Campbell) expresses the Reduce California
If you need a tax form or Legislature’s intent to examine the Source Income?
publication, you can request a complexities of California tax law and to
copy from the Franchise Tax reduce the need for audits by simplifying A taxpayer is a resident of California
Board, order the Package X the tax code. for the first six months of the tax year.
or visit a library or quick print Tobacco/self-employment He is self-employed and earns $10,000
shop. insurance deduction. while he is in California. After leaving
AB 1991 (Davis) would disallow any the state, he earns another $70,000 in
If you are really in a hurry, self-employment income. Also after
however, the most direct route deduction for amounts paid to the
National Tobacco Settlement Trust Fund leaving the state, he makes an $8,000
from your office to a pension contribution to a federal Self-
California tax form is the pursuant to the federal Universal Tobacco
Settlement Act. The bill also would Employed Retirement Plan (Keogh).
Internet. Just contact FTB at He files his California tax return by the
its http://www.ftb.ca.gov Web increase the deduction for self-employed
†
site. health insurance from 25 percent in 1998
to 80 percent in 2006. However, it would
extended due date in October. Does the
pension contribution reduce his
not increase the deduction to 100 percent California source income?
by 2007, as the federal Tax Relief Act of Yes. An individual has until the due date
1997 did. of the return, including extensions, to
AB 2107 (Kaloogian) would increase the make a contribution to a Keogh or
deduction percentage for self-employed Simplified Employee Pension (SEP) plan.
health insurance from 25 percent to 45 As a part-year resident, the allowable
percent in 1998 up to 80 percent in 2006. amount of the California source income
deduction is computed by multiplying the
AB 2131 (Morrissey) would extend the contribution by the ratio of California
self-employed health insurance deduction self-employment income to total self-
to employees, if the employer does not employment income. In the example
provide health insurance. It also would given, the taxpayer can claim a $1,000
increase from 25 percent to 100 percent deduction from California source income
the deductible percentage of an for the contribution.
employee’s health insurance.
To calculate the deduction, divide the
SB 1928 (Knight) would provide that any $10,000 California self-employment
funds that a state receives from a national income by the $80,000 total self-
tobacco settlement could be deposited employment income. Multiply the result
into a special fund and returned to by the $8,000 Keogh contribution. The
taxpayers as a personal income tax credit. answer is $1,000, the amount of the
deduction that the taxpayer may claim
†
Voluntary contributions.
AB 2366 (Cedillo) would create a new from California source income.
voluntary contribution fund called the
“Emergency Food Assistance Program
Fund.”
AB 2675 (Cardoza) would create a
general voluntary contribution provision
addressing unspecified designees and
insufficient amounts for multiple
designations. FTB is a sponsor of this
†
bill.

May 1998
Page 15

1998 Law Means Changes to 1997 Tax Returns


CONTINUED FROM PAGE 3

First, complete Form 541, “California Suspense accounts established prior to


Fiduciary Income Tax Return,” by doing SB 519’s enactment for your calendar-
the following: year qualified family farm corporation You Can Get
• Enter -0- on lines 3, 5, 6, 7, 10, 13, clients should be recaptured starting in
18, 22 and 26. taxable or income years beginning on or There from FTB
after January 1, 1998. For fiscal year
• Make entries only on lines 1, 2, 4, 8, taxpayers with income years ending on or Web Site
9, 11, 12, 14, 15a, 15b, 15c, 16, 17, after December 31, 1997, suspense
20, 21a, 23, 24, 25 and 27 through accounts should be recaptured starting in You are browsing the
39. taxable or income years beginning on or Franchise Tax Board’s Web
• Sign the form at the bottom of after June 9, 1997. site. You discover that you
Side 2. need information from
Repeal of the 30 percent gross income another tax agency. Do you
• Write “QFT” in red across the top of test for regulated investment start your Internet surfing all
Side 1. companies (RICs). Under SB 519, over again?
Second, attach federal Form 1041-QFT, California also has repealed the 30
percent gross income test for taxable or No. From FTB’s Web site
“U.S. Income Tax Return for Qualified you can link to the home
Funeral Trusts,” to the back of your Form income years beginning after August 5,
1997. pages of the Internal Revenue
541. Service, the State Board of
If you file a composite return for For your business entity clients, follow Equalization, the Employment
California purposes, be sure to attach a the instructions for federal Form 1120- Development Department, the
copy of your federal composite Form RIC, “U. S. Income Tax Return for Controller and the Secretary
1041-QFT and all supporting schedules. Regulated Investment Companies.” of State. You also can reach
A composite return is a single return for Modification of rules for real estate the California Home Page
all QFTs of which you are a trustee. investment trusts (REITs). California from the FTB site.†
Qualified Subchapter S Subsidiary now conforms to the REIT provisions for
(QSSS) tax subject to estimated tax
payments. The new law provides that the CONTINUED ON PAGE 16
QSSS tax is subject to the estimated tax
rules and penalties and that the tax is due
and payable when an S corporation’s first Where to Find
estimated tax payment is due. If the
QSSS was acquired during the income SB 519
year, the QSSS tax is due with the
S corporation’s first estimated tax Information
payment after the QSSS election date.
Your S corporation client that acquires a For a copy of FTB Publication 1003,
QSSS after the due date of the first “1997 Tax Law Changes Enacted in
estimated tax installment must include the 1998,” (see article beginning on page 1)
QSSS tax amount in the payment for the visit FTB on the Internet at
next estimated tax installment. For http://www.ftb.ca.gov or write Tax
example, a calendar-year S corporation Forms Request, Franchise Tax Board,
acquires a QSSS on May 31, 1998. The P.O. Box 307, Rancho Cordova, CA
$800 QSSS annual tax should be entered 95741-0307.
on the Form 100-ES, “Corporation An analysis of SB 519 also is available
Estimated Tax,” in the QSSS Tax Amount at FTB’s Internet address. And for a
box for Installment 2, which is due on copy of the bill, write or visit the
June 15, 1998. Legislative Bill Room, Room B-32,
Deferral of income for family farm State Capitol, Sacramento, CA 95814.
corporations. Under SB 519, California Or call (916) 445-2323. You also will
has repealed the provision that allowed find a copy of SB 519 at the Official
family farm corporations with income of California Legislation Information Web
site at http://www.leginfo.ca.gov on the
more than $25 million in any year to defer
tax if the income resulted from changes in †
Internet.
required accounting methods.
Page 16

Nonresident Withholding:
The Rules for Partnerships
Are your partnership clients withholding liability. However, FTB is working to
Planning to taxes on California source income to
nonresidents?
help partnerships that are not aware of
nonresident withholding requirements to
Move? Recent Franchise Tax Board establish withholding procedures. FTB
correspondence with partnerships reveals will not assess penalties if the failure to
If you plan to move your withhold is due to reasonable cause.
office, be sure to alert Tax that many are not aware of nonresident
News. withholding requirements or are confused For more information on the nonresident
about the requirements. withholding requirements, see FTB
Make sure the newsletter Publication 1017, “Nonresident
continues to reach you Partnerships, including limited liability
companies classified as partnerships and Withholding – Partnership Guidelines.”
without delay. Send your The publication includes 78 questions and
new address and telephone limited liability partnerships, are required
to withhold: answers about nonresident withholding
number to: Tax News, P.O. for both domestic and foreign partners, as
Box 520, Rancho Cordova, • 7 percent of the amount of California well as six tax forms.
CA 95741-0520. source income distributed to domestic
nonresident partners. This rule does To obtain the publication, contact FTB at
Also include the account http://www.ftb.ca.gov on the Internet.
number that is printed above not apply when distributions during
the year total $1,500 or less or when Click on “Tax Forms” and then on
your name and address on the
†
last page of this issue. FTB grants the partner a waiver. “Miscellaneous Tax Forms.” You also
can obtain the publication by mail by
• At the maximum tax rate for foreign writing Tax Forms Request, Franchise
partners. Currently, the rate for Tax Board, P.O. Box 307, Rancho
individuals is 9.3 percent of the Cordova, CA 95741-0307.
amount of California source income
allocated. For corporate partners, the If you have questions that are not
maximum rate is 8.84 percent. answered by Publication 1017, call FTB’s
Waivers are not available to foreign Nonresident Withholding staff at
partners. (916) 845-4900. (FTB’s Nonresident
Withholding Section was formerly known
FTB considers waivers of the withholding
requirements for domestic partners on a
as the Withhold-at-Source Section.) †
case-by-case basis. However, waivers
generally are granted if the partner meets
one of these conditions:
1998 Law Means
• Consistently files California returns
and makes estimate payments. Changes to
• Is a partnership. 1997 Tax Returns
• Is included in a group return.
CONTINUED FROM PAGE 15
• Is a newly admitted partner.
• Can show that the 7 percent rate will taxable or income years beginning after
result in more withholding than the August 5, 1997, that are included in the
amount required. federal Taxpayer Relief Act of 1997.
Waivers also are usually granted if the For your business entity clients, follow
partnership meets one of these conditions: the instructions for federal Form 1120-
REIT, “U. S. Income Tax Return for Real
• Is publicly traded. Estate Investment Trusts,” for provisions
• Is setting up a withholding program related to the Taxpayer Relief Act
and experiencing administrative of 1997.
problems. California retains its nonconformity to
Partnerships that fail to withhold may be various alternative taxes imposed on
liable for the amount of taxes due from certain REIT income and activities,
the partner. They also may be subject to although such amounts remain includible
penalties and interest charges as if the in California taxable income.†
withholding due was the partnership’s tax

May 1998
Page 17

FTB Notice Addresses


S Corporation Issues
The Franchise Tax Board has identified definition of ineligible corporations was
two concerns for financial corporations amended so that financial institutions that How to Order
that use the reserve method of accounting do not use the reserve method are now
for bad debts. eligible for S corporation status for Package X
The concerns, which involve federal purposes. And California has
S corporation status and elections, stem conformed to the federal definition for The 1997 Package X is still
from 1997 legislation. They are outlined income years beginning on or after available.
in FTB Notice 98-3, “S Corporations – January 1, 1997.
If you would like to have a
Change in Accounting Method from Bad So, if a financial corporation using the copy, call the Franchise Tax
Debt Reserve for Banks, Savings and reserve method of accounting for bad Board at (916) 845-7070 and
Loan Associations, and Financial debts elected S corporation status for ask for a Package X order
Corporations.” California tax purposes under prior law, it form.
One issue involves the termination of became ineligible for S corporation status
in California beginning January 1, 1997. You may order the
S corporation status for financial Package X in a CD-ROM
corporations that validly elected the status If the taxpayer does nothing, its
S corporation status ends at the beginning version for $19 and in a
under prior law but are not eligible looseleaf or bound paper
S corporations under current law. The
second issue involves treating an
of its income year, and it must pay tax on
its income as a C corporation. volume for $12.†
S corporation election as an automatic To avoid the termination of its
election to change the corporation’s S corporation status, a financial
accounting method for bad debts. corporation may apply to change its
Termination of S corporation status. method of accounting for bad debts from
Before the Small Business Jobs the reserve method to the specific charge-
Protection Act of 1996 was enacted, the off method for its first income year
federal definition of ineligible beginning on or after January 1, 1997. It
corporations for S corporation status should complete and file federal Form
included financial institutions. For 3115, “Application for Change in
federal purposes, financial institutions Accounting Method,” with its California
included banks and savings and loan Form 100S, “S Corporation Franchise or
associations. California conformed to the Income Tax Return,” by the return’s
federal definition of ineligible extended due date. The taxpayer should
corporations. However, California write “Filed pursuant to FTB Notice
recognizes another type of financial 98-3” in red across the top of the first
institution, the financial corporation, page of Form 3115. FTB has waived the
which was not included in the federal requirement to file the application within
definition of financial institutions. 180 days after the beginning of the
California tax law also allowed banks, income year in which the corporation
savings and loan associations and wants to make the change.
financial corporations to report bad debts Automatic election. The federal Small
using the reserve method of accounting. Business Jobs Protection Act of 1996
So, under the prior law, if a financial allows a financial institution that does not
corporation elected federal use the reserve method of accounting for
S corporation status, it could also be a bad debts to elect S corporation status for
California S corporation and use the taxable years beginning on or after
reserve method for California tax January 1, 1997.
purposes. If a financial institution using the reserve
With the enactment of the Small Business method of accounting for bad debts files
Jobs Protection Act of 1996, the federal Form 2553, “Election by a Small
Business Corporation,” to elect federal

CONTINUED ON PAGE 18
Page 18

Homeowner/Renter FTB Notice


Assistance Season Addresses
to Open S Corporation Issues
Need Electronic The filing period for Homeowner and
CONTINUED FROM PAGE 17

Filing Help? Renter Assistance claims is fast S corporation status, it will be deemed to
approaching. have elected to change its method of
If you need assistance or have The assistance is available to qualifying accounting for bad debts to the specific
questions about electronic senior, blind and disabled individuals as a charge-off method.
filing, you can find the once-a-year reimbursement from the state In general, a federal tax election is
information you need either of California for a portion of the property binding for California tax purposes unless
by phone or on the Internet. taxes assessed on a home or paid the taxpayer makes a different election for
To talk to someone at the indirectly through rent. The Franchise California. If a corporation elects to
Franchise Tax Board’s Tax Board administers the program. become an S corporation for federal
electronic filing Help Desk, Homeowner and Renter Assistance claims purposes but wants to remain a California
call (916) 845-0353. Or may be filed any time after C corporation, the C corporation election
contact FTB at its http:// May 15, 1998, and before August 31, must be made no later than the last day for
www.ftb.ca.gov.elecserve making the federal S corporation election.
†
1998.
address on the Internet. However, because the last date for making
To qualify for homeowner assistance,
claimants must have owned and lived in a C corporation election for 1997 had
their own homes in California on passed before the legislation was enacted
December 31, 1997. For renter last year, special 1997 implementation
assistance, claimants must have lived in a provisions were included in the law. If a
qualified rented residence in California financial institution that did not qualify as
and paid $50 or more per month for rent an S corporation under prior law made a
during 1997. For either kind of valid federal election to be an S
assistance, claimants also must: corporation between January 1, 1997, and
the date of the changes to California law
• Have been age 62 or older, blind or in October 1997, the corporation will be
disabled on December 31, 1997. treated as an
• Have had a total household income of S corporation for California tax purposes
$13,200 or less in 1997. for its first income year beginning on or
• Have had a gross total household after January 1, 1997. To retain its
income of $24,000 or less in 1997. C corporation status for California
purposes, a corporation must have elected
• Be a citizen or designated alien, to do so no later than April 1, 1998,
including a qualified alien, of the which was 180 days after the date that the
United States when the claim is filed. legislation was enacted.
FTB will mail claim forms to last year’s For more information, read FTB Notice
claimants no later than May 15, 1998. 98-3, published on February 20, 1998.
After that date, other claimants may It is available from FTB’s
obtain forms from FTB’s http://www.ftb.ca.gov Internet address. It
http://www.ftb.ca.gov Internet address, by also has been published by most tax
calling (800) 338-0505 and selecting
“Personal Income Tax Forms” at the
services. †
voice prompt or by visiting an FTB
district office. Claimants also may obtain
a form by writing Tax Forms Request,
Franchise Tax Board, P.O. Box 307,
Rancho Cordova, CA 95741-0307.
In addition, free assistance is available
from the Homeowner and Renter
Assistance volunteer program. For
information on program sites, call
(800) 852-5711 or a local Senior Citizen
Information and Referral Service or visit
†
an FTB district office.

May 1998
Page 19

Some Taxpayers Need to File


1996 Returns
Although the deadline for filing 1997 tax Even though the assessments are more
returns has come and gone, some
taxpayers have not yet filed their 1996 tax
accurate than previously, they are still
technically “estimates.” When a taxpayer
Partnership
returns. files a return, FTB makes any necessary Schedule K-1:
The Franchise Tax Board currently is adjustments to the tax, penalties and
contacting 1996 nonfilers, asking them to interest due. Also, filing a return is the File One Way
file returns. Taxpayers who fail to only way for taxpayers to obtain all of the
respond will receive a proposed deductions, exemptions and other credits To save time, money and
assessment based on available to which they are entitled. paper, partnerships should file
information. A client who has a filing requirement but their Schedule K-1s
cannot pay the tax due should file the preferably by magnetic media
The accuracy of the proposed assessments or disk. Filing on paper is
has improved because the information that return without a payment and apply to pay
in installments. Most taxpayers qualify less preferable but still
FTB receives has improved. The allowed. However,
Employment Development Department for an installment plan after filing a
return. A new form FTB 3567, partnerships should not file
has a new method of reporting on magnetic media and paper.
withholding amounts to FTB so that the “Installment Agreement Request,” is
assessments account for most, if not all, of available at FTB’s http://www.ftb.ca.gov Some partnerships are
the taxpayer’s withholding credits from Internet address and in the 1997 following up their magnetic
employers. Assessment accuracy also has Package X. Or call (800) 338-0505 to media filing of the Schedule
improved due to a new method of access “Personal Income Tax Forms” at K-1 (565), “Partner’s Share
estimating income for self-employed the voice prompt and enter code 949. Or of Income, Deductions,
write Tax Forms Request, P.O. Box 307, Credits, etc.,” by sending the
taxpayers.
A client who receives a proposed
Rancho Cordova, CA 95741-0307. † Franchise Tax Board paper
copies of the same schedules.
assessment should still file a tax return.
Filing both ways creates
duplications on FTB’s
reporting system, cancels the
Partnership Schedule K-1: savings that the partnership
reaped by choosing magnetic
Paper-Free Filing media and wastes paper. As a
result, ask your partnership
The good news is that in 1997 the is available in an updated FTB clients to send all Schedule
Franchise Tax Board received via Publication 1062, “Guide for K-1 (565) K-1s for limited and general
partners on magnetic media
†
magnetic media 1.3 million of the Filing by Diskette or Magnetic Media.” It
Schedule K-1s that partnerships file in has 1997 specifications and record only.
California. layouts. For a copy, contact FTB’s
The bad news is that approximately Internet Web site at
2.7 million more of the partnership http://www.ftb.ca.gov/elecserv, and click
Schedule K-1s were filed on paper. on “Businesses-Filing/Payments.” Or call
That’s a lot of paperwork for partnerships FTB’s electronic filing Help Desk at
to produce and for FTB to process (916) 845-0353.
manually and store. At the federal level, the Internal Revenue
The approximately 1,200 partnerships that Code now requires partnerships with 100
file the Schedule K-1 (565), “Partner’s or more partners to file not only their
Share of Income, Deductions, Credits, Schedule K-1s but federal Form 1065,
etc.,” with California have 100 or more “U.S. Partnership Return of Income,” by
partners. Any of the partnerships that magnetic media. The requirement is
want to trade their current method of effective for tax years beginning after
filing Schedule K-1s for a simpler, paper- December 31, 1997. Although California
free method should contact their software does not have a similar provision, FTB is
studying potential impacts of conforming
developer and/or the vendor who
produces the K-1s. Technical information †
to the federal law.
Page 20

Tax Talk:
Fax Personal
Income Tax Four Hours = Four Credits
Collection The new four-hour Tax Talk home study All presentations on the video include a
course for 1998 is an opportunity for you question-and-answer session. Tax
Queries to obtain four continuing education professionals who gathered for the
credits. videotaping at Cosumnes River College in
Now you can fax the The course, which includes a video, Sacramento pose the questions to the state
Franchise Tax Board your textbook and an examination, covers and federal tax experts.
questions about personal federal and state tax issues. The home study course costs $80. To
income tax collection. The home study course features “When obtain an order form, contact FTB’s
The fax number, which is for the Smoke Clears,” information on recent http://www.ftb.ca.gov/education Internet
tax professionals only, is site or call (916) 845-7070.
†
tax law changes from both the federal and
(916) 845-0494. California perspectives. An enrolled Tax Talk is a program of the Center for
agent participates in the discussion. Also Tax Education, sponsored by the Internal
included are “Do-It-Yourself Audits: Revenue Service, the Franchise Tax
SBE’s New Managed Audit Program,” Board, the State Board of Equalization,
“Help Wanted: Apply Your Situation the Employment Development
Here – How California’s Employment Department, the California State
Factors Work” and “What Your Clients University, Sacramento, School of
Get Out of Partnerships…and How.” Business Administration and California
Community Colleges. †