BILL ANALYSIS
AB 1580
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Date of Hearing: April 27, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1580 (Committee on Revenue and Taxation) - As Amended:
March 26, 2009
Majority vote. Fiscal committee.
SUBJECT : Income tax: estimate tax payments: dependent
exemption credit: apportionment factor.
SUMMARY : Makes technical, clarifying changes to several
provisions of the Personal Income Tax (PIT) Law and the
Corporation Tax (CT) Law that were amended in the recently
enacted budget-related bills. Specifically, this bill :
1)Clarifies the operative date for the provision related to the
temporarily reduced amount of the dependent exemption credit.
2)Revises the percentages used to determine the amounts of
estimated tax payments under the "annualized income
installment method" to be consistent with the recently enacted
law.
3)Requires the Franchise Tax Board (FTB) to apply wage
withholding toward a taxpayer's estimated tax payment
obligation using the recently modified percentages.
4)Corrects an erroneous cross-reference in Revenue and Taxation
Code (R&TC) Section 19136.8 relating to a penalty for the
underpayment of estimated tax.
5)Clarifies that an annual election to use the single sales
factor apportionment formula may be made by an apportioning
trade or business only for taxable years beginning on or after
January 1, 2011.
EXISTING LAW :
1)Reduces, for taxable years 2009 and 2010, the amount of the
dependent exemption credit available to individual taxpayers
from $309 to $99. [ABx3 3 (Evans), Chapter 18, Statutes of
2009].
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2)Requires individual and corporate taxpayers to make quarterly
payments of their estimated full-year tax liability.
Generally, the estimated tax of a corporation subject to the
franchise tax cannot be less than the minimum tax. Individual
taxpayers must make quarterly payments when the tax is
expected to exceed $500 after subtracting withholding and
credits, and when withholding and credits are expected to be
less than the lesser of 90% of the current year's tax, or 100%
(110% for higher income taxpayers) of last year's tax. The
second option (110% of the last year's tax) is not available
to taxpayers with incomes over $1 million in the current
taxable year ($500,000 for married, filing separately). Those
taxpayers must pay at least 90% of their tax liability for the
current taxable year in quarterly estimated tax payments or
face a penalty.
Prior to January 1, 2009, taxpayers were required to remit four
estimated tax payments, each equaled to 25% of the taxpayer's
annual tax liability. However, for taxable years beginning on
or after January 1, 2009, the amount of the first two
estimated payments due in April and June were increased to 30%
of the annual tax liability, and the amounts due in September
and December were reduced to 20% of that liability. [SBx1 28
(Senate Committee on Budget), Chapter 1, Statutes of 2008
(SBx1 28)].
3)Allows a taxpayer to calculate the estimated tax payment due
for each installment period based on an "annualized income
installment method". This method requires that the annualized
tax due be multiplied by an increasing percentage of 22.5%,
45%, 67.5% and 90%, instead of the regular percentages of 30%,
30%, 20%, and 20%.
4)Allows FTB to apply wage withholding as quarterly installments
toward a taxpayer's required annual payment at 25% of the
total tax liability each quarter. (R&TC Section 19136).
5)Imposes a penalty on a taxpayer for any underpayment of
estimated tax. The penalty is an amount equal to the
underpayment rate multiplied by the amount of the
underpayment. The underpayment rate is the same as the
interest rate charged for tax delinquencies, currently, at 5%.
The penalty is calculated by comparing the required amount
for each estimated tax payment, determined under either the
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regular method (30%, 30%, 20%, and 20%) or the "annualized
income installment method", with the amount paid by the due
date of that installment. (R&TC Section 19136).
6)Provides that a penalty for the underpayment of an installment
of estimated tax is not imposed if the underpayment was
created or increased by the disallowance of the jobs tax
credit because the allocated credit limit had been exceeded.
(SBx3 15 (Calderon), Chapter 17, Statutes of 2009].
7)Prescribes the apportionment formula for corporate taxpayers.
For taxable years beginning on or after January 1, 1993, the
apportionment formula for most taxpayers has been a
three-factor formula consisting of property, payroll, and
double-weighted sales factors. For taxable years beginning on
or after January 1, 2011, certain apportioning trades or
businesses are allowed to make an annual election to use a
single factor, 100% sales (single sales factor) apportionment
formula, instead of the three-factor, double-weighted sales,
apportionment formula.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in a gain of $60 million in fiscal year (FY) 2009-10, $12
million in FY 2010-11, $2 million in FY 2011-12, and $8 million
in FY 2012-13 due to the modification of the percentages for
calculating estimated tax payments under the "annualized income
installment method".
COMMENTS :
1)The purpose of this bill is to clarify and resolve several
issues related to the recently enacted budget trailer bills.
2)What is estimated tax? Estimated tax is the method used to
pay tax on income that is not subject to withholding. This
includes income from self-employment, interest, dividends,
alimony, rent, gains from the sale of assets, prizes and
awards. A taxpayer may also have to pay estimated tax if the
amount of income tax being withheld from the taxpayer's
salary, pension, or other income is not enough.
3)Regular installment method . For estimated tax purposes, the
year is divided into four payment periods, where each period
has a specific payment due date. Once a taxpayer determines
the total annual estimated tax, the taxpayer may use either a
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regular installment method or an "annualized income
installment" method to calculate the amount of required
payment. Generally, a taxpayer will use a regular installment
method only if the taxpayer's income is, basically, the same
throughout the year. Prior to the 2009 tax year, most
taxpayers were required to remit four quarterly estimated tax
payments, each equal to 25% of the taxpayer's annual tax
liability. Thus, under the regular installment method, the
required payment for each period was calculated by dividing
the annual estimated tax due by four. In 2008, the
Legislature enacted SBx1 28, which accelerated the payment of
estimated tax for both corporate and individual taxpayers for
taxable years beginning on or after January 1, 2009. SBx1 28
permanently changed the percentages applicable to the
estimated tax payments. It increased the first two estimated
payments required in April and June to 30% each and reduced
the amounts paid in September and December to 20% each. SBx1
28 also accelerated the payment schedule if the payments begin
after one quarter.
4)Annualized income installment method . If the taxpayer's
income fluctuates throughout the year, a lower installment may
be required under the "annualized income installment method".
The annualized income installment method annualizes the
taxpayer's tax at the end of each period based on a reasonable
estimate of the income, deductions, and other items relating
to events that occurred from the beginning of the tax year
through the end of the period. Under this method, a taxpayer
would compute the required estimated tax payment for each
period by multiplying the annualized estimated tax due by an
incresing percentage of 22.5%, 45%, 67.5%, and 90%. While
SBx1 28 did not specifically address the "annualized income
installment" method, the intent of the Legislature was to
accelerate estimated tax payments regardless of the
installment method chosen by the taxpayers. Furthermore, one
of the assumptions used to estimate revenue from the
acceleration of the estimated tax provision in SBx1 28 was
that the acceleration would be applicable to both installment
methods. Consistently with the recently enacted law, this
bill increases the percentages used to determine quartely
payments under the "annualized income installment" methods to
27%, 54%, 72%, and 90% of the annualized tax due.
REGISTERED SUPPORT / OPPOSITION :
AB 1580
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Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098