After the Tax Cuts and Jobs Act (TCJA) was enacted, there was much speculation on whether states would conform to the bill’s provisions. California has recently passed AB 91, which conforms to a portion of the TCJA. The following are notable changes to California tax law, of which the majority are effective for the 2019 tax year:
- Expansion of the Earned Income Tax Credit (EITC), including updated calculation factors to be revised annually with the recomputation of income tax brackets. Additionally, effective after December 31, 2018, qualifying children can generate a refundable “young child tax credit.” The refundable “young child tax credit” is capped at $1,000 per qualified taxpayer per tax year and is available for households with a child under six.
- Increased contributions to ABLE accounts (accounts funded for the purpose of supporting persons with disabilities) and changes to make distributions to a qualified tuition program nontaxable.
- Forgiven student loan indebtedness due to death or disability of the student is excluded from income.
- Disallowed or limited deduction for premiums paid pursuant to an assessment by the Federal Deposit Insurance Corporation (FDIC).
- Limited deductibility of per employee remuneration in excess of $1,000,000 for publicly held companies. This includes limits on performance-based compensation. A transition rule applies to compensation paid pursuant to a written binding contract that was in effect March 31, 2019 (November 2, 2017 for federal).
- Disallowed net operating loss carrybacks for individuals and corporations. This provision is not set to end by December 31, 2025, unlike federal.
- The measurement for allowing small business accounting methods changed from $5,000,000 to $25,000,000 for average annual gross receipts for the prior three taxable years. This small business accounting method conformity applies retroactively to the 2018 tax year with an election and is available for the following items:
- Permitted use of the cash method of accounting.
- Inventory and uniform capitalization under §263A.
- Exemption from the requirement that long-term construction contracts be determined by the percentage-of-completion method.
- Modified conformity to the new excess business loss limitation for non-corporate taxpayers ($500,000 limitation on losses for married filing jointly taxpayers, $250,000 for single taxpayers). California treats the excess loss carryforward the same as federal. This provision is not set to end by December 31, 2025, unlike federal.
- Partnerships are no longer required to file two short-period returns following a technical termination (when there is a sale or exchange of 50% or more of the interest in a partnership within a 12-month period). An election can be made to apply to partnerships with tax years beginning after December 31, 2017 and before December 1, 2019.
- Like-kind exchanges under §1031 are limited to real property. Taxpayers are no longer able to use this for trade-in vehicles or personal property.
If you have questions or would like more information, please contact Chelsea French at firstname.lastname@example.org or 844.4WINDES (844.494.6337).