The California Court of Appeals ruled on June 13 that nonresident shareholders of flow-through S corporations are subject to California tax on their pro-rata share of intangible income on the sale of shares in a subsidiary. The ruling is another example of states’ initiatives to collect taxes from out-of-state businesses conducting operations in their states.

The court ruled on a particular entity, or goodwill, that had acquired a business located in California. The nonresident shareholders argued that the income from the entity should be treated as intangible income sourced to the state of their domiciles under personal income tax law. But the court ruled that even if the personal income tax law applied, the income would still be taxable by California because the goodwill had acquired a location there, that the management and disposition of the intangible property was an integral part of the goodwill’s operation, and that the intangible income of a multi-state operation must be apportioned.

For more information on how rulings and legislation related to state and local taxes might impact your business, contact us at hbksalt@hbkcpa.com or visit our website at https://hbkcpa.com/client-services/tax/state-and-local-tax-consulting/

In mid-February we wrote to warn you about California legislation that requires taxpayers filing a corporation franchise/income tax return, a partnership return, or an LLC return to disclose whether they have historically filed unclaimed property reports with the California State Controller’s Office (SCO) (Read past article here.) The law, passed in Summer 2021, effective as of January 2022, and applicable to 2021 tax returns, is significant, we noted, “because it allows California’s Franchise Tax Board (FTB) to share information with the SCO that will likely lead to unclaimed property audits of taxpayers that have not filed unclaimed property returns.”

New legislation, California AB 2280, has been proposed that would modify the mandate. Among its provisions, AB2280 would, according to the bill’s Abstract, “allow the Controller to establish the California Voluntary Compliance Program, for the voluntary compliance of holders for the purpose of resolving unclaimed property that is due and owing to the state under the Unclaimed Property Law”. As such, it would allow certain unclaimed property holders to report past-due unclaimed property without having to pay interest.

To be eligible for the Voluntary Compliance Program—and for the SCO to waive interest assessments—an unclaimed property holder would be required to:

• Participate in an unclaimed property training and education program
• Review of its books and records for the previous 10 years for unclaimed property
• Report unclaimed property to the SCO within six months of entering the program
• Perform due diligence notifying property owners of unclaimed property
• Provide unclaimed property reports and payments to SCO

As we advised in our earlier article, if your business has California unclaimed property or you are unsure, now is the time to review your records. Assessing the potential liability for the unclaimed property will allow you to evaluate risk and prepare for the voluntary compliance program if AB2280 becomes law. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

California will require taxpayers filing a corporation franchise/income tax return, partnership return, or LLC return to disclose whether they have historically filed unclaimed property reports with the State Controller’s Office (SCO). The law passed last summer and is effective January 1, 2022 for 2021 tax returns. The unclaimed property reporting is significant as it will allow the Franchise Tax Board (FTB) to share information with the SCO that will likely lead to unclaimed property audits of taxpayers that have not filed unclaimed property returns.

California’s unclaimed property system is one of the most unforgiving in the United States with no current voluntary compliance program, a 10-year lookback, and an annual interest rate of 12% on unreported property. There is speculation around the new reporting law that California may consider offering a voluntary compliance program to incentivize property holders into reporting unclaimed property. Reports suggest a mere 2% of businesses comply with the state’s reporting laws.

If your business has California unclaimed property or you are unsure, now is the time to review your records. Assessing the potential liability for the unclaimed property will allow you to evaluate risk and prepare for the reputed voluntary compliance program if it comes. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

Tax Credit

As California is still in the midst of fighting the COVID-19 virus, it has already moved on to assisting small businesses with the recovery. Small businesses that lost at least half their gross receipts during the pandemic can get a $1,000 tax credit for every full-time employee they hire between July 1 and November 30, 2020.

Eligible businesses are those that had fewer than 100 employees before the pandemic began and experienced a loss of gross receipts of at least 50% in the second quarter of 2020 compared with the second quarter of 2019.

Businesses can reserve a $1,000 credit for each full-time employee they hire during the period for a maximum of $100,000 credit. Applications will be made through the Franchise Tax Board.

The credit can be claimed on the 2020 original state income tax return. The credit can be carried forward through 2025. If the business does not owe income tax, the credit can be applied towards sales and use tax.

The state funding for the credit is capped at $100 million.

Net Operating Loss Suspension

For larger taxpayers, it is important to note that California has suspended the Net Operating Loss Carryover which was passed as part of the state budget. For tax years beginning on or after January 1, 2020, and before January 1, 2023, California generally suspends NOL deductions. The suspension applies to both personal income and corporate taxpayers. It does not apply to taxpayers with net business income or modified adjusted gross income of less than $1 million.

For any NOL for which a deduction is denied because of the suspension, California will extend the carryover period. The extension period is:

• Three years for losses incurred in tax years beginning before Jan. 1, 2020.
• Two years for losses incurred in tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2021.
• One year for losses incurred in tax years beginning on or after Jan.1, 2021. and before Jan. 1, 2022.

If you have questions about the California Tax Credit for new jobs or the Net Operating Loss suspension, please contact your HBK advisor.