Nonresident Shareholders Intangible Income Ruled Subject to California Tax

Date June 27, 2022
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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/

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California Proposes Unclaimed Property Voluntary Compliance Program

Date March 4, 2022
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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.

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California Rolls Out a New Tax Credit for Small Businesses that Hire New Employees and Suspends the Net Operating Loss Carryover

Date October 5, 2020
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HBK CPAs & Consultants

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.

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Lesser Known State Tax Credits That You Could Be Using

Date July 14, 2020
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HBK CPAs & Consultants

We all know about the generous tax credits that many states offered to Amazon to entice it to locate to their state. Wouldn’t it be nice if there was a tax credit available to us average folks? You are in luck! Many states are offering tax credits that are available to the average person or small business owner. Read on for more information on some of the more beneficial – and lesser-known – tax credits that we have identified.

CALIFORNIA – Agriculture Product Donation Credit

Under California law, a qualified taxpayer who donates qualified donation items to a food bank located in California is allowed a credit against the “net tax” equal to 15% of the qualified value of those items. The tax credit is effective for tax years beginning on or after January 1, 2020, and before January 1, 2022. A qualified taxpayer is a person responsible for planting, managing and harvesting the crop. It also includes the person responsible for growing the qualified donation item or harvesting, packing, or processing the item as long as they are not a retailer.

Qualified donation items include the obvious fresh fruits and vegetables, but it also includes the following raw agricultural products and processed foods:

  • fruits, nuts and vegetables
  • meat food product
  • poultry
  • eggs
  • fish
  • rice
  • beans
  • fruits, nuts and vegetables in canned, frozen, dried, dehydrated and 100% juice forms
  • cheese, milk, yogurt, butter, and dehydrated milk
  • infant formula
  • vegetable oil and olive oil
  • soups, pasta sauce, and salsa
  • bread and pasta
  • canned meats and canned seafood

PENNSYLVANIA – Malt Beverage Tax Credit

In an effort to encourage the growth of small breweries, Pennsylvania offers a credit to offset the cost of investment for manufacturing expenditures in the malt or brewed beverage industry. The Commonwealth has $5,000,000 in credits available each year. The maximum credit available to the brewer is $200,000 based on the cost of Qualifying Capital Expenditures. Qualifying Capital Expenditures include plant, machinery, or equipment for use by the brewery in the Commonwealth in the manufacture and sale of malt or brewed beverages. Applications are due to the PA Department of Revenue by April 1st each year.

The credit is applied toward the taxpayer’s Pennsylvania Malt Beverage excise tax liability. The PA Malt Beverage excise tax is levied on malt or brewed beverages manufactured and sold for use in Pennsylvania or manufactured outside of Pennsylvania but sold for importation and use in Pennsylvania. The tax is borne by the consumer, but manufacturers, distributors, and importers remit the tax to the commonwealth.

NEW YORK – Credits available for veterans

New York offers three different property tax exemptions to veterans who have served in the U.S. Armed forces. Veterans are eligible to receive one of three exemptions.

  • Alternative Veterans’ Exemption
    • Available only on residential property of a veteran who has served during a designated time of war, or who has received an expeditionary medal
    • Currently available in over 95 percent of the county, city, town, and village taxing jurisdictions across the state. School districts also have the option to offer this exemption
  • Cold War Veterans’ Exemption
    • Available only on residential property of a veteran who served during the Cold War period
    • Counties, cities, towns, villages, and school districts have the option to offer this exemption to qualified veterans
  • Eligible Funds Exemption
    • Provides a partial exemption
    • Applies to property purchased by a veteran. Such owners must purchase the property with pension, bonus or insurance monies

On November 12, 2019, New York Governor, Andrew Cuomo, signed a law amending the tax law to include veterans who have certain qualifying conditions or who were discharged as an LGBTQ veteran in the definition of a qualifying veteran. This allows veterans who may have been dishonorably discharged due to PTSD or being LGBTQ to have access to veteran’s benefits.

Illinois – Minimum Wage Tax Credit

On January 1, 2020, Illinois raised the minimum wage to $9.25. The rate increased to $10 on July 1, 2020. As a result, a tax credit was offered to small businesses to help relieve the financial burden of the increase. Employers who have 50 or less full-time equivalent employees are allowed a credit of 25% on the difference paid by a business due to the minimum wage increase. The average wage paid per employee making less than $55,000 in 2020 must be greater than the average wage paid per employee making less than $55,000 in 2019.

A “Qualified Employee” is an employee who is earning the required minimum wage for the current reporting period and whose average wage paid during the previous four reporting periods was equal to or less than the required minimum wage. The employee must be a full-time employee who works at least 520 hours in a quarter. The maximum credit for the first and second quarters of 2020 is $6,500 and $11,375 for the third and fourth quarters.

Maryland – Apprenticeship Tax Credit

Maryland is just one of sixteen states who offer a tax credit related to the employment of an apprentice. The Maryland Apprenticeship Tax Credit is available to Registered Apprenticeship Sponsors and/or employers who employ an eligible Registered Apprentice(s). For each eligible Registered Apprentice, a credit up to $1,000 is available.

The credit may be taken against the state income tax for the first year of the Registered Apprentice’s employment. The Registered Apprentice must also have worked for the Employer for a minimum of seven full months. There is no limit on how many Registered Apprentices can be claimed for each taxable year provided they meet the eligibility criteria. The credit may be carried forward if the tax credit exceeds the amount of state income tax.

The Maryland Department of Labor, Licensing, and Regulation (DLLR) is limited to granting $500,000 for this credit per taxable year. The credits are provided on a first-come, first-serve basis.

There are state tax credits available for all types of taxpayers. You just need to look. If you have questions about state tax credits, please contact your HBK Advisor.

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California Changes Nexus for Sales Tax Threshold

Date May 2, 2019
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HBK CPAs & Consultants

Effective April 1 2019 the state legislature of California enacted economic nexus for sales tax with a threshold set at $100,000, however, effective immediately, the state has changed this provision by increasing the threshold to $500,000. This change impacts any business which sells products or services within or to individuals or business into the state of California. It does include online sales.

If you registered under the $100,000 threshold (and don’t exceed the new $500,000 threshold), you can choose to either maintain your account or cancel it if you no longer meet the economic nexus thresholds within the state. Please keep in mind that if you do not meet the new $500,000 threshold and choose to maintain your account with the state of California you may still have filing requirements.

The California Legislature recently passed Assembly Bill No. (AB) 147 which requires:

Retailers located outside of California (remote sellers) to register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax if, in the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer exceed or exceeded $500,000; and

All retailers required to be registered with the CDTFA, whether located inside or outside of California, to collect and remit district use tax to the CDTFA on all sales made for delivery in any district that imposes a district tax if, in the preceding or current calendar year, the total combined sales of tangible personal property in this state or for delivery in this state by the retailer and all persons related to the retailer exceeds or exceeded $500,000.

The new collection requirements are operative as of April 1, 2019, and supersede our previous direction regarding 1) the use tax collection requirements for out-of-state retailers (see Special Notice L-5652), and 2) the district use tax collection requirements for all retailers, including retailers located inside or outside California (see Special Notice L-5913).

If you are a remote seller who previously registered with the CDTFA to collect California use tax due to the state’s prior direction (see Special Notice L-565), and you do not meet the new $500,000 sales threshold pursuant to AB 147, nor do you have any contacts with California that would qualify you as a retailer engaged in business there, you may either close your account or continue to collect the use tax as a courtesy to your California customers.

To close your account, please contact the California legislature’s Customer Service Center at 1-800-400-7115. Please be advised, any use tax collected by you from your California customers must be reported and paid to the CDTFA. Additional registration and fee collection requirements for sales of certain items may apply.

Please note: If you sell 1) new tires or vehicles and equipment that include new tires, 2) covered electronic devices, 3) lead-acid batteries, or 4) lumber or engineered wood products, you may have additional registration and fee collection requirements.

If you have questions, please contact HBK Tax Advisory Group member Cassandra Baubie, JD, at CBaubie@hbkcpa.com.

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