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California AB91 Closes Loophole, Provides Tax Breaks for Small Businesses, Families
On July 2, 2019, California Gov. Gavin Newsom signed Assembly Bill 91 (AB91), which conforms to several provisions in the Tax Cuts and Jobs Act (TCJA) passed by Congress in 2017. This bill improves the state’s long-term financial stability by closing a series of loopholes and providing tax breaks to small businesses. It will also finance a huge expansion of the California Earned Income Tax Credit to provide support for the state’s most disadvantaged families and reduce poverty in the state. The provisions are effective beginning with the 2019 taxable year unless otherwise noted.
Reform and simplification of small business accounting method
- Extends flexibility to most businesses with gross receipts of less than $25 million to use less-cumbersome methods. Cash method of accounting is acceptable.
Exclusion for student loan debt discharged/canceled due to death or disability
- Excludes the amount of student loan indebtedness discharged on or after Dec. 31, 2011, due to the death or disability of the student.
Increased contributions to ABLE accounts and Section 529 rollovers
- Increases the contribution limit for ABLE accounts and allows nontaxable Section 529 plan accounts to roll over to ABLE accounts if made within 60 days of the distribution and the ABLE account belongs to the same beneficiary.
- Allows the beneficiary to contribute up to 100% of earned income to the ABLE account If the beneficiary is employed and does not participate in an employer retirement plan. This additional contribution to an ABLE account for compensation earned by the designated beneficiary is up to the prior year’s poverty level for a one-person household.
Disallowance of FDIC premiums
- Limits the deduction for Federal Deposit Insurance Corp. (FDIC) premiums for large banks and other financial institutions. The amount of the deduction is phased out depending on the consolidated assets of the bank, from $10 billion to $50 billion. No deduction is allowed for banks with consolidated assets exceeding $50 billion.
Modification to the limit on excessive employee remuneration
- Expands the limitation on the deduction of excessive employee compensation per year to include performance-based compensation and commission payments.
Elimination of net operating loss carrybacks
- Eliminates the use of net operating loss carrybacks for individual and corporate taxpayers.
- Allows only losses attributable to tax years beginning on or after Jan. 1, 2013, and before Jan. 1, 2019, to be available for carryback.
Limitation on losses for taxpayers other than corporations
- Prevents taxpayers from deducting excess business losses in the tax year the losses are generated. Disallowed losses are carried forward and applied as net operating losses in subsequent tax years.
Technical termination of partnerships
- Establishes California’s conformity to the repeal of the partnership technical termination provisions. Taxpayers may elect to apply this provision to the 2018 taxable year as well.
Limitation of like-kind exchanges
- Eliminates the use of like-kind exchanges for personal property, while retaining the deferral of like-kind exchanges for business and investment real estate except stock in trade or other property held primarily for sale.
Elimination of separate Section 338 elections
- Disallows corporations from choosing to make a separate Section 338 election for federal and state income tax purposes.
Taxpayers can see relief with the signing of AB91 because tax compliance for small businesses will be simplified and more new revenue will come in to the state. However, because AB91 conforms to only certain parts of the TCJA, there may be more questions than answers when preparing a California return.
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