BILL ANALYSIS Ó AB 2754 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 2754 (Revenue and Taxation Committee) As Amended August 22, 2014 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |55-20|(May 29, 2014) |SENATE: |24-12|(August 26, | | | | | | |2014) | ----------------------------------------------------------------- Original Committee Reference: REV. & TAX. SUMMARY : Requires that the dependent's tax identification number be included on a return when claiming a Dependent Exemption Credit, requires a business entity that prepares a return using tax preparation software to file the return electronically, allows taxpayers to use the Governor's Office of Business and Economic Development (GO-Biz) California Competes tax credits to reduce the tentative minimum tax (TMT), and allows a charitable remainder trust (CRT), in modified conformity with the federal income tax law, to retain its tax-exempt status when it has an unrelated business taxable income (UBTI) by paying tax on that income.. The Senate amendments : 1)Add language allowing taxpayers to use GO-Biz California Competes tax credits to reduce the TMT. 2)Add language that allows a CRT, in modified conformity with the federal income tax law, to retain its tax-exempt status when it has a UBTI by paying tax on that income. 3)Address chaptering out issues. AS PASSED BY THE ASSEMBLY , this bill: 1)Provided, beginning on or after January 1, 2015, that a Dependent Exemption Credit exemption shall not be allowed unless the identification number, as defined in Internal Revenue Code (IRC) Section 6109, of the dependent is included on the return. 2)Provided that a taxpayer shall have the right to claim the credit or refund of adjusted amounts within the statute of AB 2754 Page 2 limitation. 3)Required, beginning on or after January 1, 2014, that a business return be filed using electronic technology if the return was prepared using a tax preparation software. The return shall be filed in a manner prescribed by the Franchise Tax Board (FTB). This provision applies to returns required to be filed on or after January 1, 2015. 4)Provided that a business entity required to file a return electronically under this section may annually request a waiver of the requirement from the FTB for a taxable year. The FTB may grant the waiver if it determines that the business entity is unable to comply with the requirements due to technology constraints, where compliance would result in undue financial burden, or due to circumstances that constitute reasonable cause, and not willful neglect. 5)Provided that a business entity that is required to electronically file a return and fails to comply shall be subject to a penalty of $100 for the first year and $500 each year thereafter unless the failure is due to reasonable cause, and not willful neglect. This provision applies to returns filed for taxable years beginning on or after January 1, 2017. 6)Provided that the penalty shall apply per combined reporting group, not per taxpayer included in a combined reporting group. 7)Provided that the FTB shall conduct a robust education program advising businesses of the new electronic filing requirements and shall liberally interpret and grant waivers of the penalty to minimize unnecessary adverse impacts to businesses that experience difficulty complying with these requirements. 8)Defined an "acceptable return" as an original or amended return that is required to be filed by a business entity other than the return for unrelated business taxable income. 9)Defined a "business entity" as a corporation, including an "S" corporation, an organization exempt from tax, a partnership, or a limited liability company. 10)Defined "tax preparation software" as any computer software program used to prepare an acceptable return or for use in tax AB 2754 Page 3 compliance. 11)Defined "electronic technology" to include, but is not limited to, the Internet, cloud computing, or an electronic information delivery system. 12)Defined "technology constraints" as an inability of the tax preparation software to electronically file the acceptable return as required by this section as a result of the complex nature of the return or inadequacy of the software. FISCAL EFFECT : Unknown COMMENTS : CRT. California will conform to the federal tax treatment of CRTs that have UBTI in order to allow such trusts to retain their tax-exempt status for California tax purposes. Currently, a CRT that has UBTI is treated differently under the federal and California tax laws. Under federal law, such a CRT will be subject to the 100% excise tax on its UBTI, but it will retain its tax-exempt status, which means other types of income generated by the CRT will continue being exempted from the federal income tax. In contrast, under California's law, which was federal law prior to 2007, the CRT will lose its tax-exempt status and all of its income, including UBTI, will be subject to the income tax in California. Reducing TMT with GO-Biz tax credits. While, as a general rule, tax credits may not be used to reduce the regular tax below the TMT, both the Corporate Tax and Personal Income Tax Law provide exceptions for certain tax credits. Some of these credits include the research and development credit, the enterprise zone sales tax credit, the enterprise zone hiring credit, and the former manufacturing investment credit. As such, the GO-Biz California Competes tax credit may be used to reduce regular tax liability but only to the TMT level, which prevents full monetization of the credit. The proposed technical fix is needed to allow taxpayers to utilize the GO-Biz credit in full. The purpose of e-filing. If the return of a business entity is prepared using tax preparation software, but a paper return for that business entity is filed, the FTB must process that return using costly manual data capture methods that lack the accuracy and efficiency associated with e-filing. This bill would AB 2754 Page 4 require a business entity that files an acceptable return that was prepared using tax preparation software to file the return by electronic technology in a form and manner prescribed by the FTB, unless the business entity, upon request, is granted a waiver. Requiring a business entity to e-file a return when a taxpayer uses tax preparation software would result in the FTB processing returns more quickly, which would expedite approved refunds and utilize cost-effective technology to meet operational goals. E-filing a return lowers the initial cost of processing returns. The FTB estimates that the average cost to the department to process a business entity paper filed return is $6 (includes complex and smaller taxpayer returns), as opposed to $0.36 (primarily based on smaller taxpayer returns) for an e-filed return. The purpose for requiring a tax identification number (TIN). Not requiring a TIN for each dependent be included on the state tax return precludes the department from validating Dependent Exemption Credits during return processing, which delays the correction of erroneous or duplicated dependent credits and increases the cost of correcting these errors for taxpayers and the department. This bill would allow the FTB to confirm that a dependent's TIN is used only once, which would increase the integrity of the returns, reduce inaccurate returns, and erroneous dependent credits. This bill would also increase the timeliness of the FTB's compliance efforts, and decrease the amount of incorrect refunds issued to taxpayers. Additionally, this bill would allow the FTB to create an automated versus manual method for examining dependent credits that could reduce departmental cost. Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0005442