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California Incentives and Multi-State Tax Issues webinar slides

An online discussion of various state tax issues for companies and individuals doing business in California. Our panelists cover recent developments in California income and sales tax, tax credits and incentives, multi-state tax issues for technology companies and state residency planning for individuals. Our panel of speakers includes:

Roger Royse, Royse Law Firm
Monika Miles, Miles Consulting Group
David Wittrock, Price, Wittrock CPA LLP
David Spence, Royse Law Firm

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California Incentives and Multi-State Tax Issues webinar slides

  1. 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. 2. Health Insurance Deduction • 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 • The FTB previously stated that 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 • California conforms to the federal SE health insurance deduction (Regulation §1.162(l)-1T(a)(1)) under R&TC §17201.1
  3. 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. 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. 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. 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. 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. 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 marijuana – 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
  9. 9. RoyseLink: Connecting founders with investors and service partners. Royse University: Providing business, tax, technology and personal finance ideas to founders and executives. Royse Law Legal Wizard: Offering legal document templates and more. Royse Law Incorporator: Incorporate your company the Silicon Valley way. 15 RoyseLawIncorporator.com RoyseUniversity.com RoyseLink.com RoyseLaw Legal Wizard
  10. 10. PALO ALTO 1717 Embarcadero Road Palo Alto, CA 94303 LOS ANGELES 11150 Santa Monica Blvd. Suite 1200 Los Angeles, CA 90025 SAN FRANCISCO 135 Main Street 12th Floor San Francisco, CA 94105 Palo Alto Office: 650-813-9700 CONTACT US www.rroyselaw.com @RoyseLaw
  11. 11. © Miles Consulting Group, Inc., 2015 California Credits and Incentives: Go-Biz Programs Presented in conjunction with: Royse Law Firm January 6, 2015 Monika Miles Miles Consulting Group, Inc.
  12. 12. © Miles Consulting Group, Inc., 2015 Presenting Today - Monika Miles Founder - Miles Consulting Group Website: MilesConsultingGroup.com Email: Monika@milesconsultinggroup.com Honored To Be Recognized As:  “25 Most Powerful Women in Accounting” by CPA Practice Advisor (2012, 2013, and 2014)  “Women of Influence” by San Jose Silicon Valley Business Journal (2014) Professional Affiliations: AICPA, Texas Society of CPAs, Vistage International, NAWBO - Silicon Valley, AFWA (Past National President)
  13. 13. © Miles Consulting Group, Inc., 2015 • Manufacturers’ Partial Sales Tax Exemption • California Competes Tax Credit • New Hiring Credit Today’s Topics
  14. 14. © Miles Consulting Group, Inc., 2015 Manufacturers’ Exemption • What is it? – Partial exemption (4.1875%) of CA sales tax for placing into service qualified machinery & equipment • Who Qualifies? – Companies in NAICS codes 3111- 3399 and 541711-541712
  15. 15. © Miles Consulting Group, Inc., 2015 Manufacturers’ Exemption • What Qualifies? – Qualified equipment used in manufacturing and R&D – Used 50% or more in qualified use – First $200M in a year
  16. 16. © Miles Consulting Group, Inc., 2015 Manufacturers’ Exemption • Considerations: – Qualify under “establishment” rules? – Proper documentation of machinery’s use today – Audit will be in the future
  17. 17. © Miles Consulting Group, Inc., 2015 Manufacturers’ Exemption • Considerations: – Overstatement (and ultimately lack of documentation) can create financial statement distortion. – Big 4 auditors will review for this during f/s audits – Difficult to recover retroactively
  18. 18. © Miles Consulting Group, Inc., 2015 Manufacturers’ Exemption • By the numbers: – $1,000,000 of qualified investment = $41,875 – $10,000,000 of QI = $418,750
  19. 19. © Miles Consulting Group, Inc., 2015 Manufacturers’ Exemption • Our recommendations for success: – Qualification – Documentation of Process – Contemporaneous substantiation – Selected asset testing – Create “auditable deliverable”
  20. 20. © Miles Consulting Group, Inc., 2015 California Competes Tax Credit • What is it? – Income tax credit for companies moving to or expanding within CA • How does it Work? – Competitive application process for limited funds – Periodic application periods
  21. 21. © Miles Consulting Group, Inc., 2015 California Competes Tax Credit • Evaluation Factors: - Job Retention - Opportunity for Future Growth and Expansion - Economic Impact/Benefit to California - Incentives available in/out of state - Benefits/Fringe Benefits Provided to Employees - Strategic Importance to the State, Region, or Locality - Unemployment/Poverty in Business Area
  22. 22. © Miles Consulting Group, Inc., 2015 California Competes Tax Credit • Considerations – 25% set aside for small business – Increasing annual benefit pool – “Ratio management” is key
  23. 23. © Miles Consulting Group, Inc., 2015 California Competes Tax Credit • By the numbers – Available $$: • $151M for FYE 06/15 • $200M for each FYE thru 06/18 – Companies awarded $$ – Next application dates: • 1/5/15-2/2/15 - $75 million • 3/9/15-4/6/15 - $31 million
  24. 24. © Miles Consulting Group, Inc., 2015 California Competes Tax Credit • Miles Consulting Can Help – Initial “go/no-go” evaluation – Assistance with Phase 1 application – Ratio analysis – Assistance with Phase 2
  25. 25. © Miles Consulting Group, Inc., 2015 New Hiring Credit • What is it? • Who Qualifies? • Employee Qualifications
  26. 26. © Miles Consulting Group, Inc., 2015 New Hiring Credit • What is it? – Tax credit for hiring certain “disadvantaged” workers in specific geographic areas. Can be up to $56K in benefit per employee. • Who Qualifies? – Nobody….(just kidding)
  27. 27. © Miles Consulting Group, Inc., 2015 New Hiring Credit • Who Qualifies (Companies)? – Location in a Designated Geographic Area – Manufacturing, Biotech, etc. (not retail, restaurants) – Net increase in jobs over base year
  28. 28. © Miles Consulting Group, Inc., 2015 New Hiring Credit • Employee Qualifications? – Wages between $13.50 -$31.50 – Hired after 1/1/14 – Previously unemployed (6 months prior to hire), veteran (last12 months), recipient of EIC or CalWORKS, ex-offenders
  29. 29. © Miles Consulting Group, Inc., 2015 New Hiring Credit • Example: – Light Manufacturer in an EZ – Hiring 80 people – Starting wages at $14.00 - $15.00/hr – Benefit was estimated to be: • Less than $20K over 3 years (assuming 10% qual)
  30. 30. © Miles Consulting Group, Inc., 2015 Estimated XYZ Co Benefit Hire 80 People Who Start On 7/1/2015 Assume 10% Qualify (Minimum wage is $9.00 as of 7/1/2014 and will raise to $10.00 as of 1/1/2016. Therefore, only qualified employees with wages above $13.50 in 2015 and above $15.00 in 2016 will generate benefit.) Year: Wages: Est. Benefit: 2015 14.00 $1,400 2016 16.00 $5,800 2017 17.00 $11,600 Total Est. $18,800
  31. 31. © Miles Consulting Group, Inc., 2015 New Hiring Credit • How to Succeed… • Initial evaluation and preliminary calculations • Develop client processes • Prepare qualification support • Prepare calculations • Maintain Annual support
  32. 32. © Miles Consulting Group, Inc., 2015 CA Benefits Summary Partial Manufacturers’ Exemption California Competes Tax Credit Hiring Credit
  33. 33. © Miles Consulting Group, Inc., 2015 Some Final Thoughts… Miles Consulting is a resource for you: • Monthly Newsletter • Weekly Topical Blog • Complimentary Individual Consultation
  34. 34. © Miles Consulting Group, Inc., 2015 Questions
  35. 35. © Miles Consulting Group, Inc., 2015 Thank You! Monika Miles (408) 266-2259 Monika@milesconsultinggroup.com http://www.milesconsultinggroup.com
  36. 36. Digital Goods and Services– Sales Tax Today David Wittrock Price, Wittrock CPA LLP January 6, 2014 1
  37. 37. Digital Goods and Services  SAAS/PAAS/IAAS – Salesforce  Social Media Marketing – Groupon  Sharing Economy – Airbnb  Marketplaces – Etsy  Cloud computing services – Box  Digital content - Itunes 2
  38. 38. Some States Taxing Digital G&S  IN, KY, MS, NE, NJ, NC, SD, TN, UT. VT, WA, WI, WY  Some states tax data processing and/or information services- NY, DC, OH, TX 3
  39. 39. Tax and Product Manager Collaboration  What triggers the tax ?  Tax on ‘hotel stay’ or on ‘providing hotel’  “Transferred” electronically or “Delivered” electronically  “Use” of software or “access” to software  “Database” or “Software” 4
  40. 40. What Questions To Ask ① Can the State force collection - Nexus ② What is the customer buying, how is it used ③ Who is buying ④ Is the intermediary responsible for tax ⑤ How is it transferred ⑥ Where is it used ⑦ How is it paid for ⑧ Are there exemptions ⑨ How much $ is involved 5
  41. 41. Nexus  Click through nexus  Affiliate nexus  Independent contractor  Trade show  Drop shipments 6
  42. 42. What is Customer Buying, How is it Used  Data processing  Information  Professional services  Music, news, images  E-books  Permanent rights, temporary license 7
  43. 43. Who is Buying  End user  Business  Reseller  Government 8
  44. 44. Is the Intermediary Responsible  Marketplace that also handles payments might be an agent to collect tax  If there is tax on the underlying transaction  Is there tax on the commission / fee 9
  45. 45. How is it Transferred  Physical media  Download the software  Download key for remote access  ASP, SAAS  Plugins  Streaming  Terminology is important – “Transfer”, “Deliver”, “Access” 10
  46. 46. Where is it Used  Buyer’s corporate HQ  Bill to address  Access point  Where buyer’s customers are 11
  47. 47. How is it Paid For  One time up front license  Annual fees  Subscription  Per use 12
  48. 48. Exemptions ?  Interstate use  Resale  Exempt buyer  Exempt use 13
  49. 49. How much $ is Involved  Past periods tax – statute of limitations ?  State + many local rates  Penalties, interest  Gross up of tax base  If imports involved and ESS, could be VAT and sales tax on VAT 14
  50. 50. Nonfinancial Costs  Administrative cost of filing  Frightening registration information – officers bank accounts and home addresses 15
  51. 51. What do Customers Think  Often they prefer that the tax be charged – So they don’t have to self assess  Competitive disadvantage often overstated  Some taxes are surprise but mostly the customers know already 16
  52. 52. Broader Perspective  Tax as a compromise to the regulatory barriers  Board philosophy  Due diligence preparedness  Public opinion  Federal law and SST proposals to simplify and make uniform 17
  53. 53. What to Do ?  Make policy early on re collecting tax- revenues of $10MM  Get VP Sales involved to gauge customer reaction  Budget for administrative cost  Good language in click licenses online – short term protection but customer friction  At some point, collect in high risk states – but plan ahead now 18
  54. 54. Thank You David Wittrock Price, Wittrock CPA LLP January 6, 2014 19
  55. 55. Individuals Seeking Refuge From California C. David Spence Attorney at Law Estate, Trust and Wealth Strategies Practice Royse Law Firm, PC Palo Alto, California dspence@rroyselaw.com
  56. 56. Individuals Seeking Refuge From California Key California Issues: Q. How Can I Leave California? Q. How Can I Make My Income Leave California?
  57. 57. Leaving California California Taxes Nonresidents: California Income Tax = CTI x (California tax “as if resident”/ CTI “as if resident”)
  58. 58. Leaving California How Do I Become a Nonresident? 1. Safe Harbor: a) Outside CA 546 consecutive days, AND b) Intangibles-based income <$200K, AND c) Principal purpose is not tax avoidance.
  59. 59. Leaving California How Do I Become a Nonresident? 2. If You’re not in the Safe Harbor, Resort to: The Dreaded: Facts and Circumstances Test: Do you have California ties? No, I mean, are your closest ties to California or another place?
  60. 60. Leaving California How Do I Become a Nonresident? Where do you have your closest ties? Time spent, Location of family/children, location of principal residence, driver’s license, vehicle registration, professional and business licenses, voter registration, banking contacts, origination of financial transactions, location of health care, social ties, clubs, churches, real property ownership and investments, etc.
  61. 61. Shifting Assets in Advance of Liquidity One Idea: “Delaware Incomplete Non-grantor Trust” “DING” (or “WING” or “NING”) Moving Your Income Out of California
  62. 62. Moving Your Income Out of California Shares in Company Take care of this stock for the kids. Non-California Trustee Beneficiary Trust Instrument (The Rules) DING TrustIndependent Delaware Trustee
  63. 63. Leaving California Beware the DING/WING/NING Strategy 1. Relatively untested in California. 2. Lawyer-created technique (not specifically contemplated by the statute). 3. California has a “Throwback Rule”--Taxes distributions back to California Beneficiaries for 5 years