California Report on IRC Conformity

The Franchise Tax Board (FTB) of California is required by law to produce an annual report on all changes to federal income tax law enacted in the previous year.  The Tax Cuts and Jobs Act (the “Act”) enacted in December 2017 contains many significant changes to federal income tax law and FTB issued preliminary report and plans to issue a final report by April 20, 2018.  The preliminary report issued on March 20, 2018 clarifies, along with other matters, that California does not conform to the federal rules related to the repatriation of certain foreign-earned income under IRC sections 245A, 951A and 965.

Under IRC section 245A, a U.S. corporation that owns 10% or more of a foreign corporation will receive a 100% dividends-received deduction on dividends paid by the foreign corporation out of its foreign-source earnings.  However, California continually maintains its own Worldwide Unitary Combined Report and Water’s-Edge tax regime, and does not conform to the federal 100% dividends-received deduction provision.

Section 951A subjects U.S. shareholders of CFCs with Global Intangible Low-Taxed Income (“GILTI”) to current tax.  The full amount of the U.S. shareholder’s share of the GILTI is treated as an income inclusion with applicable deductions.  California does not conform to the federal rule in connection with the Subpart F provision and it imposes tax on actual distribution.

The Act imposes a one-time deemed repatriation tax on untaxed earnings of foreign corporations accumulated prior to 2018 under IRC section 965. California does not conform to the federal provision and tax will be imposed when the actual distribution is made.

Please click on link below to view the California’s Preliminary Report on Specific Provisions of the Federal Tax Cuts and Jobs Act.

https://www.ftb.ca.gov/law/legis/Federal-Tax-Changes/CAPreliminaryReport3Provisions-Revise.pdf

IRS Notice 2018-28: Section 163(j)

The IRS issued Notice 2018-28 (the “Notice”) stating that the IRS will issue regulations providing additional guidance related to the amended section 163(j).  Before the issuance of the regulations, taxpayer may rely on the rules described in the Notice.

The amended 163(j) disallows a deduction for net business interest expense of any taxpayer in excess of 30% of a business’s adjusted taxable income. There is an exception to this limitation that applies to taxpayers with average annual gross receipts for the three taxable year period ending with the prior tax year that do not exceed $25 million.  In applying the rule in practice, there were many areas requiring additional clarifications and guidance, and the following are some of the issues addressed in the Notice:

Section 5 of the Notice clarifies that the limitation under section 163(j) is intended to be applied at the level of the consolidated group.  In other words, a consolidated group’s taxable income for purposes of calculation adjusted taxable income will be its consolidated taxable income, and intercompany obligations will be disregarded for purposes of determining the limitation in section 163(j)(1).

Section 6 of the Notice clarifies that the limitation under section 163(j) will not affect whether or when such business interest expense reduces earnings and profits of the payor C corporation.

Section 3 of the Notice clarifies that taxpayers with disqualified interest disallowed under prior section 163(j)(1)(A) for the last taxable year beginning before January 1, 2018, may carry such interest forward as business interest to the taxpayer’s first taxable year beginning after December 31, 2017.

Please click on the link below to view the Notice 2018-28.

https://www.irs.gov/pub/irs-drop/n-18-28.pdf

연방세율 인하에 따른 캘리포니아 세율 인상?

연방세율이 21%로 인하되는 것에 대해서, Kevin McCarty와 Phil Ting 캘리포니아 민주당 하원의원들은 캘리포니아 한계세율을 기존 8.84%에서 18.84%로 인상하는ACA-22안을 내 놓았다. 이 법안에 따르면, 2018년 1월 1일 이후에 시작되는 과세연도에 1백만불 이상의 법인소득에 10%의 추가 세금이 부여되게 된다.

두 하원의원은 지난 연방세법개혁안은 중산층이 아닌, 백만장자들에게만 혜택을 주는 법안이며, 일반 캘리포니아 납세자들에게 이러한 기업들의 경제적 이득을 나누어 주기 위해서 ACA-22를 준비했다고 밝혔다.

이 법안이 통과된다면, 캘리포니아 주 내에 있는 법인들이 다른 주로 사업을 옮긴다거나, 법인들이 캘리포니아 내에 추가로 투자하기를 꺼려하게 만들것으로 예상된다. 이러한 이유로, 캘리포니아는 민주당이 강세를 띄지만 ACA-22는 통과되기는 어려울 것으로 전망된다. 법안이 실질적으로 효력을 얻기 위해서는, 이 법안은 상하원에서 동의를 받아야 하며, 그 후에 추가로 투표에 따라 통과가 되어야 한다.

자세한 내용은 아래의 링크를 참조하기 바란다:
http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180ACA22

California Democrats’ Reaction to Federal Corporate Rate Reduction

In response to the federal corporate tax rate reduction to 21%, two Democratic assemblymen, Kevin McCarty and Phil Ting, introduced Assembly Constitutional Amendment 22 (“ACA-22”) that would impose a 10% surcharge on qualified corporate net income over $1,000,000 effective for taxable years beginning on or after January 1, 2018.  This bill, if enacted, will effectively increase marginal California corporate tax rate from 8.84% to 18.84%.

McCarty and Ting believe that the recently enacted federal tax laws, including corporate tax rate reduction, favors billionaires over middle-class workers, and they are introducing ACA-22 to share with ordinary California taxpayers the economic gains provided by federal income tax cuts for corporations.

The 10% surcharge is believed to cause some businesses to migrate out of the state and companies might be less inclined to make investment in the state.  For these reasons, despite the fact that California is a liberal state, ACA-22 faces an uphill battle.  To be signed into law, the bill must be approved in both houses of Legislature and, if passed, would also need voter approval.

For the reference, here is a link to ACA-22.
http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180ACA22