Additional CA Business Tax Rules going into effect affecting states outside CA
Tax season is upon us and the newest revisions to the California tax codes affect not only residents of the state but those who do business with CA (the 5th largest economy in the world).
For the millions of Californians who went to the polls in November these ballot measures and Bills may be familiar. Here are three that passed into law and two that did not. We review what they are and what they mean for your business and personal taxes in 2021.
In June 2020, Gov. Gavin Newson (D) signed into law Assembly Bill 85 which included retroactive tax increases.
- AB85 suspends a business’ ability to claim a CA net operating loss (NOL) deduction in 2020, 2021, or 2022. (“Net Operating Losses” result when a company’s expenses exceed its revenue in a year).
- Businesses with net income below $1 million may still claim the NOL deduction. Therefore, if your company lost money in 2020 and then had net income of $1M or more in 2021 and beyond, your NOLs would be suspended.
This law applies to all businesses – individuals (Sch C filers), flow through entities, and C corporations.
The law also retroactively caps at $5 million the amount of credits a business may claim in 2020, 2021, and 2022.
A slight tax reduction was enacted for certain businesses that are newly register to do business in the state in 2021, 2022, or 2023, with a three-year suspension of the $800 minimum corporate tax.
SB 1447 passed into law: The Small Business Hiring Tax Credit
The Small Business Hiring tax credit is available on a first-come, first-served basis, and is equal to $1,000 per each net new employee, up to $100,000 per business.
The requirements to claim the credit are that the business:
- Has fewer than 100 employees and
- Experienced a 50% or greater decline in gross income during the second quarter of 2020.
The credit can reduce a business’ personal income tax, corporation tax, or sales tax bill. The credit expires December 31, 2021.
Prop 19 – The Property tax law
Described as a protection for the elderly or those transferring property from one generation to the next, Prop 19, in practice, limits the conditions in which property owners can transfer California real property between parent and child without triggering a reassessment of the property value for property tax purposes.
The new rules went into effect on February 16, 2021.
Under Prop 19, properties are taxed based on their assessed value (also known as the base year value or taxable value) rather than their fair market value.
Assessed value equals the purchase price plus a 2% increase per year until there is a change in ownership.
The existing law excludes from reassessment transfers between parents and children of the transferor’s (a) primary residence, regardless of value, and (b) $1 million of assessed value of “other real property” (such as second homes and investment properties). This is commonly referred to as the parent-child exclusion.
Prop 19 has the following effects:
- The ability to transfer $1M of assessed value of “other property” is eliminated.
- The ability to transfer a primary residence between parent and child without reassessment will not apply unless two conditions are met:
- The primary residence must also become the recipient (or child)’s primary residence; and
- The fair market value (FMV) of the primary residence at the time of transfer cannot exceed the transferor’s assessed value by more than $1 million.
If the difference between FMV and the Assessed value is greater than $1M, then the NEW assessed value will be the FMV less $1M.
If the transferor’s primary residence does not become the recipient’s primary residence, then the property will be reassessed at its fair market value.
What the new law from Prop19 means for you:
If you are transferring a home to a child and you bought that home in the 1960s or 70s in an area which was off the beaten path and – in the intervening years – the world has grown up around you significantly elevating your property value; And, if you are now downsizing and giving the property to your child to be used as their primary residence; you may well be “gifting” them a large tax burden.
The following bills did NOT get passed into law:
AB 1253 would have increased California’s highest income tax rate of 13.3% income to 16.8% on some high-income individuals, which would have been retroactive to January 1, 2020 (before COVID-19).
AB 2088, “The Wealth Tax”, would have imposed a 0.4% wealth tax on all net worth above $30 million (global assets owned) taking into account all assets and liabilities held by an individual globally.
- It would have applied to residents, part-year residents, and to any person who spends more than 60 days in California in a given year.
- If the wealth tax had passed, there would have been a “tail” requiring you to keep paying for ten years. Likely this was aimed at the people who are migrating out of CA for tax purposes to places like AZ and TX as this law would have also taxed people who left CA.