BILL ANALYSIS �
AB 1984
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Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1984 (Harkey) - As Amended: April 1, 2014
SUSPENSE
Majority vote. Fiscal Committee.
SUBJECT : Income taxes: net operating losses: carrybacks:
overpayments: estimated tax
SUMMARY : Conforms California tax law to federal tax law with
respect to the extension of time for repayment of taxes by
corporations expecting net operating loss (NOL) carrybacks and
the tentative refund adjustment (quick refund) for NOL
carrybacks, and requires the Franchise Tax Board (FTB) to
provide regulations allowing a credit against the estimated tax
for the amount determined to be an overpayment of tax.
Specifically, this bill :
1)Conforms to the Internal Revenue Code (IRC) Section 6164,
relating to the extension of time for repayment of taxes by
corporations expecting NOL carrybacks.
2)Requires the FTB to prescribe regulations for providing a
credit against the estimated tax for the amount determined by
the taxpayer or the FTB to be an overpayment of the tax for
the preceding taxable year.
3)Conforms to the IRC Section 6411, relating only to the
application of tentative carryback adjustments of taxes for
the prior taxable year affected by NOL carrybacks.
EXISTING FEDERAL LAW :
1)Allows a taxpayer to carry an NOL back two years and forward
20 years.
2)Provides special rules for the carryback of NOLs relating to
specified liability losses, casualty or theft losses, disaster
losses of a small business, and farming losses.
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3)Allows an eligible small business to elect to increase the NOL
carryback period from two years to three, four, or five years
for NOLs arising in tax years ending after December 31, 2007,
as provided. An "eligible small business" is one that meets a
$15 million (or less) gross receipts test for the taxable year
in which the loss arose.
4)Modifies provisions for the payment of interest and the
statute of limitations for assessing additional tax when
taxpayers take advantage of NOL carrybacks.
5)Allows a corporation, anticipating a current-year NOL, to
postpone all or some of its income tax from the immediately
preceding year, and includes extending the time for payment of
an income tax deficiency. (IRC Section 6164.)
6)Provides that a taxpayer may apply for a tentative carryback
adjustment of the tax for the prior taxable year if they have
NOL carrybacks, net capital losses, or business credit
carrybacks. (IRC Section 6411.)
7)Prescribes regulations providing for the crediting against the
estimated income tax for any taxable year of the amount
determined by the taxpayer or the Secretary to be an
overpayment of the income tax for a preceding taxable year.
(IRC Section 6402(b).)
EXISTING STATE LAW
1)Allows a California taxpayer to calculate its NOL in
accordance with federal rules. For NOLs attributable to
taxable years beginning before January 1, 2008, it limits the
carryforward period to 10 years in circumstance where federal
law allows 20 years. However, for NOLs attributable to
taxable years beginning on or after January 1, 2008, the
applicable carryforward period is 20 years.
2)Suspends NOL deductions for taxable years 2008 through 2011
for PIT and CT taxpayers.
3)Conforms to the federal law allowing NOL carrybacks for NOLs
attributable to taxable years beginning on or after January 1,
2013, with the following modifications:
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a) An NOL may be carried back only two years;
b) The amount of NOL carryback attributable to taxable year
2013 is limited to 50% of the NOL;
c) The amount of NOL carryback attributable to taxable year
2014 is limited to 75% of the NOL; and,
d) The amount of NOL carryback attributable to taxable year
2015 and thereafter is 100% of the NOL.
4)Allows taxpayers to carryback an NOL, from a taxable year
beginning on or after January 1, 2013, to a taxable year
beginning on or after January 1, 2011.
5)Provides that the FTB is authorized to prescribe regulations
providing for the crediting against the estimated tax for any
taxable year of the amount determined by the taxpayer or the
FTB to be an overpayment of the tax for a preceding taxable
year. (R&TC Section 19362.)
6)Does not modify the rules for interest computations or statute
of limitations relating to NOL carrybacks.
FISCAL EFFECT : The FTB estimate General Fund revenue loss of
$85 million in fiscal year (FY) 2013-14, $100 million in FY
2014-15, $150 in FY 2015-16, and $90 million in FY 2016-17.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Due to budget constraints, California's [NOL] law had
generally been suspended for the 2008 through 2011 tax
years. Starting with 2012 the State of California ended
the suspension of [NOLs]. Also, as part of the 2008-09
budget agreement, NOL carrybacks were enacted, in partial
conformity to federal law, for losses generated in the 2011
and subsequent tax years. However, once again, due to
budget constraints, NOL carrybacks were suspended until the
2013 tax year.
Now that both suspensions have lifted, it is an appropriate
time to revisit more conformity to federal law in the area
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of NOLs, and complete the work the Legislature started.
There are three common-sense areas that California should
conform to, and these are areas that practitioners have
raised with the Franchise Tax Board as far back as 2008, at
the FTB's mandated taxpayer's bill of right hearing.
Federal law provides for a speedy refund for NOL carrybacks
by allowing taxpayers to file an application for tentative
adjustment application (IRS Form 1139 for corporations and
IRS Form 1045 for all others). It is popularly known as a
"quickie refund." An application for tentative adjustment
is not the same as a claim for refund.
The application is filed instead of a refund claim, and
must be filed no later than 1 year after the taxpayer
sustains the NOL.
Like the IRS, the FTB would be required to act on the
application within a specified timeframe. An overpayment
is first applied to offset any unpaid tax liability; any
remainder may be credited against any unpaid tax liability,
and any amount then remaining is either refunded or
credited against tax currently due.
The second area of conformity would allow corporations that
expect an NOL carryback from the current (unfinished) tax
year to extend the time for payment of all or a part of the
tax still payable for the immediately preceding year by
filing a form similar to the IRS Form 1138. Corporations
would file Form 1138 after the start of the tax year of the
expected NOL but before the tax of the preceding tax year
is required to be paid.
Taxpayers are ineligible if they have not paid all required
payment.
The last area of conformity would allow taxpayers who file
refund claim to apply the overpayment to an outstanding
liability and /or to estimated tax payment requirements
(and/or a refund).
Conforming to federal law would benefit taxpayers, by
eliminating confusion during filing, and allowing them to
resolve their refund claim more quickly. This is
especially important for smaller firms that often
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experience losses during the first years of business.
2)Background . On September 30, 2008, the Governor signed into
law AB 1452 (Budget Committee), Chapter 763, Statutes of 2008,
to implement provisions of the 2008-09 Budget agreement.
Among other things, AB 1452 suspended the NOL deduction for
the 2008 and 2009 tax years, except for taxpayers with net
business income of less than $500,000 in either year,
authorized NOL carrybacks for losses incurred in 2011 or later
tax years, and expanded the NOL carryforward period from 10
years to 20 years for losses incurred after January 1, 2008.
AB 1452 authorized taxpayers to use carrybacks to offset their
income during the two prior tax years. The carryback
provisions were scheduled to phase in, with 50% of any 2011
NOLs available for carryback, 75% of any 2012 NOLs, and full
carryback for NOLs in subsequent years.
Two years later, when the Legislature was facing another
difficult budget, SB 858 (Senate Budget and Fiscal Review
Committee), Chapter 721, Statutes of 2010, was enacted into
law. SB 858 further suspended the NOL deductions for the 2010
and 2011 taxable years and delayed the implementation of the
NOL carrybacks provisions, among other changes. Specifically,
SB 858 disallowed NOL carrybacks for any NOLs attributable to
taxable years beginning before January 1, 2013. Consequently,
under existing law, the carryback provisions are scheduled to
phase in with 50% of any 2013 NOLs available for carryback,
75% of any 2014 NOLs, and full carryback for NOLs attributable
to tax year 2015 and thereafter.
3)NOL . The basic rationale for allowing losses to be carried
forward and back flows from recognition that businesses are
established with the goal of making a profit over a business
cycle rather than in any particular year. The NOLs help
smooth out the income and taxes paid over a business cycle,
thereby allowing a business to make efficient decisions
regarding financing and investment. For example, consider two
firms, one with a $100 loss in year one and a $300 gain in
year two, the second with a $100 gain in each year. Without a
NOL deduction, over the two years, the first firm would report
$300 taxable income, while the second would report $200, even
though each had $200 net income. [Department of Finance
(DOF), Annual Tax Expenditure Report, 2008-09.]
4)Tentative "Quick" Refund . Federal law provides corporations,
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other than an S corporation, with the ability to file Form
1139 to apply for a quick refund of NOL carrybacks. In
general, the corporation must file for a quick refund within
12 months of the end of the tax year of incurring an NOL. The
IRS will process the application within 90 days from the date
the application is filed or 90 days from the last day of the
month in which the taxpayer is required to file a tax return.
This bill would conform California to the federal process of
obtaining a quick refund. Sponsors of the bill note that
obtaining a refund is currently a lengthy process and can take
as long as one to two years, which unnecessarily burdens
business owners who are trying to pay debts and other
obligations. It is important to remember that the quick
refund is considered to be a tentative adjustment of the
taxpayer's tax liability. It is not a settlement of liability
for the year or a formal claim for refund, and the adjustment
could lead to a post-refund examination. The quick refund
would provide businesses with cash to pay debts without
precluding FTB's ability to process and audit the tax filing.
Moving from a one- to two-year processing time down to a
90-day processing time substantially increases workload and
places a serious strain on FTB staff. FTB does not have the
same level of staffing that is available at the IRS.
Furthermore, a 90-day turnaround allows for only a very
cursory examination of the application. To aid FTB's
processing of the quick refund, the author may wish extend the
processing time to 180 days. Additionally, this bill only
applies the quick refund for corporations. In order to be
consistent with federal law, the author may wish to apply the
quick refund to the personal income tax law.
5)Extension of Time for Payment of Taxes . Federal law allows a
corporation anticipating a current-year NOL to file Form 1138
to postpone the payment of all or some of its income tax from
the immediately preceding year. Generally, to take advantage
of NOLs, taxpayers have to first wait for the conclusion of
the tax year and then file an amended return or ask for a
quick refund. In this case, a corporation can file for a
postponement of payment of taxes from the preceding tax year
in the current (unfinished) tax year. By allowing a
corporation to postpone part or all of the payments during the
year, companies can keep more cash on hand to pay debts or
make payroll.
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Both the extension of payment of taxes and the quick refund
provisions of this bill allow the taxpayer to obtain funds now
instead of waiting for the FTB to process NOL claims. This
could make it difficult for the FTB to ensure tax compliance,
as the actual amount of NOL may change from original time of
estimation. As noted above, the turnaround times for the
claims are very quick and taxpayers may find themselves in a
situation where they owe interest on funds that they should
not have received.
6)Apply Overpayments to an Outstanding Liability . Federal law
allows taxpayers to apply their overpayments to an outstanding
liability or an estimated tax payment. California law also
allows taxpayers to apply an overpayment to an outstanding
liability. In fact, the authorizing statutes, both at the
state and federal level, are almost identical. The difference
is not in law but in the way the two provisions are
administered. For amended returns, the IRS allows a taxpayer
to designate on Form 1120X the amount of overpayment a
taxpayer would like to apply to an estimated tax or
outstanding liability. California does not provide taxpayers
with a similar option. Adding the option would require a
regulation. The author may wish to remove this unnecessary
provision since it already exists in law.
7)Payment of Interest for NOLs . A taxpayer may amend a return
to carryback an NOL to a year in which taxes were paid. It is
unclear if interest on the NOL has to be paid beginning from
the date of overpayment instead of the year in which taxpayer
amended the return. The IRS only pays interest from the date
of the amended return. In order to conform to federal law,
the author may wish to clarify that interest only applies from
the date the amended return is filed instead of the year in
which the NOL is carried back.
REGISTERED SUPPORT / OPPOSITION :
Support
California Taxpayers Association (Sponsor)
California Chamber of Commerce
California Manufacturers & Technology Association
National Federation of Independent Businesses
Opposition
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None on file
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098