Partial conformity: highlights from CalCPA's TaxTalk listserve - Tax - California Society of Certified Public Accountants responds to proposed changes in the 2001 California federal tax act - Brief Article

California CPA, June, 2002 by Leonard W. Williams

California CPA went to press just days after Coy. Davis signed two bills that conform to some, but not all, of the changes in the 2001 federal tax act.

The bills, AB 1122 (Corbett) and SB 657 (Scott) feature the following:

* The increased allowable contributions for IRAs, 401(k)s, 403 and 457 plans now are permitted for California income tax purposes.

* Conformity to the catch-up provisions allowing additional retirement plan contributions for people over 50.

* California is not conforming to the credit for retirement plan contributions, a federal credit oriented toward taxpayers with incomes under $50,000(MFJ) and $25,000 (single).

* California is not conforming to the federal government's credit of up to $500 for small employers who set up retirement plans.

* California now permits an increased $2,000 contribution to Coverdell Savings Accounts (formerly called Education IRAs); and the income limits for married couples have been raised. Also, parents may use those accounts to pay for primary and secondary schools, in addition to college expenses.

* Sec. 529 plan withdrawals will no longer be taxable for California income tax purposes, which conforms to the federal change.

* The child care expenses allowed for that credit did not increase for California income tax purposes as they did for federal income tax purposes.

* Student loan deductions liberalized by the federal government were not changed for California income tax purposes.

* In addition to these changes, several tax-conformity related bills still are winding through the legislature.

California's Conformity Practice

California only conforms by statutory enactment, it does not conform automatically. California currently conforms to the January 1998 IRC and only has selectively conformed since then.

Although automatic conformity may seem appealing, it does have drawbacks. States that have automatically conformed now face a lot of red ink because of the 2002 IRC changes.

Some more history is that the CalCPA Committee on Taxation, in the late 1970s or early 1980s, proposed that the California income tax merely be made a percentage of the federal income tax. The reasoning was that operating two parallel--but not quite identical--tax systems seemed like an abysmal waste. Although the CalCPA Board of Directors allowed the COT to pursue this, it went no where with the Legislature.

Part of the legislative opposition was turf protection, but partly it was based on the fact that Uncle Sam often changes the IRC at year end, which could have a devastating impact on California's budgetary process.

Teacher Retention Credit

Does out-of-state teaching time qualify for purposes of determining years of teaching experience? Yes.

Taxpayers who wish to claim the credit must have a California credential for the year in which they are claiming the credit. California allows nonresident teaching time to determine the number of years teaching because the state wants to attract out-of-state teachers.

One More Duty for S Corp Shareholders and LLC Members

Out-of-state S Corp shareholders and LLC members must furnish a consent to be taxed by California. If this requirement is not met, then California has the right to terminate the S Corp election. For LLCs, California has the statutory right to collect the unpaid tax attributable to its nonresident members directly from the LLC itself.

Purchasing a Business?

There are many checklists for optimizing the income tax aspects of a business purchase. However, many of them omit the fact that most people buying a business don't understand the sales tax rules. In addition to getting a re-sale certificate, the buyer also should get a sales tax clearance, to avoid being stuck with the seller's sales tax delinquencies.

EFT for California Corporate Taxes

California has an electronic fund transfer system for corporations. The program is mandatory if the quarterly estimated tax payment or extension payment exceeds $20,000; or if the total tax liability for the year exceeds $80,000. Once in the program, all future payments must be made via EFT.

Who Signs Copies of Returns?

Whether or not CPAS sign copies of returns that they retained in their files has been a periodic query on TaxTalk.

Although some listserve members were incredulous that anyone would sign a file copy, some CPAs sign their file copies, as well as the client's file copies and the federal return copy that is attached to the state return.

At the other end of the spectrum, some CPAs traditionally have signed only the federal copy that they will mail to IRS, and the California copy that they will mail to the FTB, without signing the federal copy that is attached to the California copy, or any other copies.

No adverse consequences to the latter practice have been posted.

Thanks to CalCPA Members: Professor Kitty Wright, JD, CPA; Bill West, CPA; Marty Shallon, CPA; Melody S. Thornton, CPA; Steve Kramer, CPA; and Lew Wiener, J.D.

Leonard W. Williams, CPA, is a Sunnyvale-based sole practitioner. He is a member of CalCPA's Committee on Taxation, an AICPA Tax Division member and a former Peninsula Chapter president. Williams can be reached at williams@lwwilliamscpa.com.