BILL ANALYSIS
AB 115
Page 1
Date of Hearing: May 16, 2005
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Johan Klehs, Chair
AB 115 (Klehs) - As Amended: May 2, 2005
Majority vote. Tax Levy. Fiscal Committee.
SUBJECT : Personal income and corporation taxes: Conformity
SUMMARY : Generally conforms California personal income and
corporation tax laws to federal income tax laws as set forth in
the Internal Revenue Code (IRC) as of January 1, 2005, with
limited exceptions. Specifically, this bill :
1)Conforms to many provisions of the numerous federal tax bills
that have been enacted since the last conformity date, as well
as maintaining separate tax laws in selected areas.
Specifically adopts:
a) Exception to passive activity loss rules for real estate
professionals.
b) Expansion of the exclusion from income for qualified
foster care payments.
c) Creation of the health savings accounts (HSAa). Also
made retroactive to taxable year 2004 to permit transfers
of remaining balances from Archer Medical Savings Accounts
(Archer MSAs) to HSAs without being taxed as a disqualified
distribution.
2)Adopts the uniform definition of "child", extension of
provisions regarding Archer MSAs, and technical amendments
related to prior tax legislation from the Working Families Tax
relief Act of 2004 (WFTRA), also known as Public Law 108-311.
3)Conforms to numerous provisions of the American Jobs Creation
Act of 2004 (AJCA of 2004), also known as Public Law 108-357
adopted. Specifically includes:
a) Miscellaneous technical and administrative provisions
dealing with S corporations and real estate investment
trusts.
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b) Allowance of certain expenses related to rural letter
carriers without limitation.
c) Transfers of suspended losses incident to divorce.
d) Special rules for livestock sold on account of
weather-related conditions.
e) Expensing of reforestation expenditures.
f) Modification of class life (for depreciation purposes)
of certain track facilities.
g) Changes related to charitable deductions including
limitation of the amount of the deduction for contributions
of motor vehicles, boats and airplanes to the amount the
charity receives at a subsequent sale; increased reporting
requirements for noncash charitable contributions; and
revised rules for treatment of contributions of patents and
similar property.
h) Provisions related to reportable transactions and tax
shelters.
i) Limitation of employer deductions for certain
entertainment expenses.
4)Conforms via stand alone legislation to AJCA of 2004
provisions allowing current expense of capital costs related
to compliance with the Environmental Protection Agency (EPA)
sulfur regulations and tax credit for the production of
ultra-low sulfur diesel fuel.
5)Does not conform to several provisions of AJCA of 2004,
primarily for reasons of cost. The more notable of the
nonconformity provisions are as follows:
a) Various depreciation-related provisions including:
Two-year extension of increased expensing for small
businesses (not in conformity with expiring provisions);
reduced recovery period for depreciation of certain
leasehold improvements and restaurant property;
modification of application of income forecast method;
modification of depreciation rules for motion picture and
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television productions, and aircraft.
b) Various provisions related to foreign corporations,
foreign tax credits, etc.
c) Deductions for dividends repatriated to the United
States (U.S.) from foreign subsidiaries.
EXISTING LAW bases much of its tax laws on the federal IRC.
California does not automatically conform to new federal
legislation. Rather, California may conform to specific
enactments at the federal level or may conform to the IRC as of
a specified date. The latest IRC to which California has
conformed is that in effect as of January 1, 2001. Since the
last "date change" legislation, California has adopted several
provisions of federal legislation, but there remain many federal
tax provisions representing selected areas of nonconformity, as
explicitly stated in the California Revenue and Taxation Code.
FISCAL EFFECT : The Franchise Tax Board (FTB) prepared the
following estimate of the revenue impacts in their specific
fiscal year (FY) of the primary conformity pieces of this bill:
-----------------------------------------------------------------
| | REVENUE IMPACT |
| PROVISION | ($ MILLIONS) |
-----------------------------------------------------------------
|------------------------------------------+-------+------+------|
| | FY | FY | FY |
| |2005-06|2006-0|2007-0|
| | | 7 | 8 |
|------------------------------------------+-------+------+------|
|Exception to passive activity loss rules | -$35 | | |
|for real estate professionals | |-$25 |-$25 |
|------------------------------------------+-------+------+------|
|Expansion of exclusion from income for | -$ | -$ | -$ |
|qualified foster care payments |4 |3 |3 |
|------------------------------------------+-------+------+------|
|Health Savings Accounts-applicable to | | | |
|taxable years beginning after December | -$29 | | -$23 |
|31, 2003, with amended returns allowed | |-$18 | |
|for taxable year 2004 | | | |
|------------------------------------------+-------+------+------|
|Uniform definition of child and other | -$10 | -$ 7 | -$ |
|provisions of WFTRA | | |7 |
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|------------------------------------------+-------+------+------|
|Miscellaneous provisions of AJCA adopted | | | |
|by date-change conformity |+$30.4 |+$39.1|+$37.2|
|------------------------------------------+-------+------+------|
|Stand-alone conformity to provisions | | | |
|dealing with EPA sulfur regulations and | -$ .4 | | -$ |
|tax credit for the production of | |-$1.1 |1.2 |
|ultra-low sulfur diesel fuel | | | |
|------------------------------------------+-------+------+------|
|TOTAL | -$48 | | -$22 |
| | |-$15 | |
----------------------------------------------------------------
Proposition 98 Fiscal Effect : Committee staff estimate the
revenue loss to K-14 school funding will be $26 million in FY
2005-06, $8 million in FY 2006-07, and $12 million in FY
2007-08.
COMMENTS :
1)There have been no fewer than five federal tax bills during
the period since California last conformed its tax laws to the
IRC as of January 1, 2005. California has adopted some of the
tax law changes in a piece-meal fashion, but has not
considered a general conformity measure for several years.
Federal tax legislation enacted in late 2004 was so
substantial as to warrant serious consideration of a "date
change" conformity measure. The author proffers this "date
change" conformity measure so that California will be one step
closer to federal tax law, which should enhance compliance
with the California tax laws.
2)Committee staff note that nonconformity can lead to a myriad
of problems for California taxpayers. Specifically:
a) The failure to conform to federal law in some areas but
not in other related areas can be confusing and might lead
to improper tax reporting to California. An example of
this situation is California's failure to conform to the
exception to passive loss rules for real estate
professionals despite conformity with the remaining passive
activity loss rules.
b) Other areas should be adopted so that taxpayers who
follow federal laws will not automatically violate of
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California tax laws. An example of this situation is the
ability to roll-over balances in an Archer MSA to the new
HSAs without triggering a tax liability at the federal
level. However, for California tax purposes, that
roll-over would constitute a disqualified distribution from
the Archer MSA and the taxpayer would be subject to tax and
penalties for the transfer that is wholly approved for
federal tax purposes.
c) Another area involves failure to conform to definitions.
For example, the federal tax law adopted a uniform
definition of "child" for purposes of all provisions that
provide tax benefits with respect to children. These
provisions include head of household filing status,
dependent care credit, child care credits, earned income
credit, and the dependency exemption. The statutes used
slightly differing definitions or separate criteria, which
caused some persons be classified as a child for some tax
purposes but not for others. California also has varying
definitions for "child" and California taxpayers would
benefit from consistent definitions as well.
3)Several bills have been introduced in this legislative session
that provide specific levels of conformity of California tax
laws to Federal legislation that passed during 2004. Only
this bill proposes a comprehensive adoption of Federal
legislation, accomplished by way of conforming to the IRC as
of January 1, 2005, with specific exceptions as noted. AB 398
(Villines) conforms to the enhanced depreciation deductions.
AB 661 (Plescia) and SB 173 (Maldonado) conform to the federal
provisions for health savings accounts. AB 666 (Bermudez)
conforms to the federal deduction for dividends repatriated to
the U.S. from foreign subsidiaries. AB 810 (Parra) conforms
to the federal provisions allowing enhanced expensing and
credits related to production of ultra-low sulfur diesel fuel.
All of these bills are pending before the Revenue and
Taxation Committees of their respective houses of origin.
4)FTB staff note that the provisions dealing with low-sulfur
diesel fuel target the tax benefit to activities within
California. A recent federal Court of Appeals decision found
that an investment credit offered by the State of Ohio was
unconstitutional because it gave preferential tax treatment to
companies that located or expanded in Ohio over taxpayer
locating in a different state. That decision, Cuno v.
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DaimlerChrysler (2004), 386 F. 2d 738, was appealed to the
U.S. Supreme Court and the U.S. Supreme Court accepted the
case for review. Although a decision has not yet been issued,
FTB staff note that targeted tax incentives conditioned on
activities occurring in California may be subject to
constitutional challenge.
REGISTERED SUPPORT / OPPOSITION :
Support
California ACORN
Opposition
None in file
Analysis Prepared by : Kimberly Bott / REV. & TAX. / (916)
319-2098