In this presentation, we discuss California's hot topics of the year from tax non-conformity, and medical marijuana to health insurance, and motion picture credits

1. IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
Roger Royse
Royse Law Firm, PC
Palo Alto, San Francisco, Los Angeles
rroyse@rroyselaw.com
www.rogerroyse.com
www.rroyselaw.com
Skype: roger.royse
Twitter @rroyse00
CALIFORNIA HOT TOPICS

2. California Tax Non-Conformity
• Self-employed health insurance deduction
– The California tax system does not properly conform with the Affordable
Care Act with regards to the application of the tax credits
• Under the ACA, taxpayers can elect to receive an “advanced tax credit” to
reduce monthly health insurance premiums or pay the entire premium and
receive a “premium tax credit” on their federal tax return
• Self-employed taxpayers can take a deduction for health insurance premiums
• Broadly, the amount of the health insurance deduction at the federal level
should be the net amount paid after any ACA tax credits (either the advanced
tax credit or the premium tax credit)
– When calculating their California tax liability, self-employed taxpayers can
deduct the amount “paid” for health insurance in the year
• According to the FTB, the amount paid: (1) for Advanced tax credit taxpayers =
the net amount of the insurance premiums; or (2) for Premium tax credit
taxpayers = the gross amount without adjustment for the premium tax credit
– Therefore, taxpayers get a larger California tax deduction if they take the
premium tax credit on their federal tax return as opposed to receiving an
advanced tax credit

3. California Tax Non-Conformity
• Cancellation of indebtedness and reacquisition of debt
– Under federal tax law, taxpayers could defer and spread out certain
cancellation of indebtedness income from 2009 and 2010 (relating to the
reacquisition of debt instruments) over a five year period commencing in
2014
– California did not comply with this provision and therefore the income
would have been taxed in full in 2009 or 2010
– Any federal income relating to this adjustment for 2014 and beyond can be
excluded for California tax purposes
• Tax Depreciation
– For C Corporations only, California does not comply with the accelerated
deductions available under MACRS and ACRS (§ 168)

4. California Tax Non-Conformity
• Federal Tax Extenders
– In December, Congress extended certain tax provisions that had expired on
December 31, 2013 (inc. energy efficient tax credits, work opportunity tax
credit, and tax free distributions from IRAs for charitable purposes) to
cover the 2014 calendar year
– California does not automatically conform to Congress’ extension of the
following tax provisions: (1) exclusion of discharge of indebtedness income
on principal residences (§ 108); (2) asset expense elections (§ 179); (3)
bonus depreciation (§ 168(k)); and (4) reduced built-in gain holding
periods for S Corps (§ 1374)

5. California Hot Topics
• “Doing Business” in California
– Swart Enterprises, Inc. v FTB:
• An out-of-state corporation held a 0.2% membership interest in a California LLC
• The membership interest was held as an investment and the corporation had
no right to manage the affairs of the LLC
• The FTB assessed the $800 minimum tax on the corporation alleging that it was
“doing business in California” due to its interest in a California LLC
• The Court held that the corporation only had a passive interest in the LLC and
as such was not doing business in California
• The corporation was more akin to a limited partner than a general partner and
therefore the general partnership rules (dictating that if the partnership was
doing business in California then all the partners were considered to be as well)
did not apply here

6. California Hot Topics
• Like-kind exchanges
– From January 1, 2014, taxpayers need to file an information return (Form
3840) with the FTB if they complete a like-kind exchange of California
property for property located outside California
– The form must be filed in the year of the exchange and for each
subsequent year until the entire gain has been recognized
• Administrative dissolutions of non-profits
– A.B. 1529 would have allowed for administrative dissolution of non-profit
entities that either the FTB had suspended for a period of at least 48
months or had not filed a statement of information for a period of at least
48 months
– Any California tax liabilities (together with interest and penalties) would
have been wiped-out with the exception of unpaid taxes relating to
unrelated business income
– The Governor vetoed the bill because it would have required
reprogramming of a computer system that is due to be replaced soon

7. California Hot Topics
• Asset sales in bankruptcy reorganizations
– A recent ruling from the FTB stated that a series of asset sales made over a
period of two years as part of a company’s post-Chapter 11 bankruptcy
reorganization were not “occasional sales” for the purposes of
apportionment under the California sales factor
• Motion Picture Credit
– A new motion picture credit will come into effect on January 1, 2016
– Increases annual funding from $100 million to $330 million
– Introduces a competitive system that allocates money based on type of
production and the number of jobs created
– The credit is now available for one-hour television series and television
pilots

8. California Hot Topics
• Medical marijuana
– From August 2015, marijuana dispensaries in the City of Berkeley must
donate a minimum of 2% of their product to residents of low-income
cities.
– Applicable residents are those with annual income below $32,000 (or
$46,000 per family) and a prescription for marijuna
– This will result in a loss of the sales tax ordinarily collected on that 2% of
marijuana
– Marijuana dispensaries are still having problems opening bank accounts
due to their activities being illegal under federal law
• Without a bank account, these businesses are forced to pay IRS liabilities in
cash which results in a 10% penalty each time
– Legislation prohibiting the IRS from imposing this penalty for businesses
that legally sell marijuana passed the House but has not passed the
Senate

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@RoyseLaw
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