EZ Policy Blog

Here is the March 2010 edition of the FTB’s “Tax News” newsletter.

Here is the February 2010 edition of the FTB’s “Tax News” newsletter.

Here is the January 2010 edition of the FTB’s “Tax News” newsletter. It includes this item about the Enterprise Zone Program:

In our June 2009 issue of Tax News we asked the question, “Are you familiar with California’s Enterprise Zones?”

We now ask, “Are you aware some taxpayers who work in an Enterprise Zone may be entitled to a credit for the wages they earned?”

The Enterprise Zone tax incentive programs were created to help local businesses, and encourage outside businesses to locate in economically depressed areas. Also, the programs have a provision that allows low income individuals working within an Enterprise Zone to claim a credit that may help eliminate their California tax liability.

The Enterprise Zone Employee Credit is five percent of the wages attributable to employment within an enterprise zone up to $10,500. The maximum credit per zone is $525. The Enterprise Zone Employee Credit is reduced by nine cents ($0.09) for every dollar the taxpayer receives in excess of $10,500 and any unused credit is lost (no carryover is allowed).

The Enterprise Zone Employee Credit is claimed on form FTB 3553 and the taxpayer must file a Form 540 or the Long Form 540NR to claim this credit. The Enterprise Zone Employee Credit can only be used to offset the tax attributable to employment within the enterprise zone. If a taxpayer earned wages in more than one zone, a separate form FTB 3553 is needed for each zone.

The following business-related tax incentives are also potentially available to a taxpayer doing business in an Enterprise Zone, so you may want to see if your clients are doing business within one of the state’s many Enterprise Zones.

Hiring credit.
Sales or use tax credit.
Business expense deduction.
Net interest deduction for lenders.

Enterprise Zone tax incentives apply only to business activities and investments that take place in an Enterprise Zone that has received final designation.

While these Enterprise Zone incentives have been around for quite some time, there have been recent changes to the zones.

For a listing of all Enterprise Zones, expired, active and conditional, or to check if any of your clients work or have a business located within an Enterprise Zone, go to the California Department of Housing and Community Development (HCD) website at www.hcd.ca.gov/fa/cdbg/ez/.

For more information on the Enterprise Zone incentives and the Enterprise Zone Employee Credit, please call our Enterprise Zone Hotline at 916.845.3464.

I think there is a mistake here. The article state, “Enterprise Zone tax incentives apply only to business activities and investments that take place in an Enterprise Zone that has received final designation.” However, AB 1550 explicitly enabled taxpayers to utilize the benefits of the program even before a conditionally designated zone receives its final designation:

Section 7074.2(c) Notwithstanding any other provision of law, an expiring enterprise zone that applies for a new enterprise zone designation pursuant to Section 7073 or 7073.1, and receives a conditional designation letter from the department, may offer, and a taxpayer doing business within the geographic boundaries of the new zone referenced in the conditional designation letter shall be eligible to receive, all enterprise zone benefits until the department makes a final designation or declines to redesignate the zone. The department shall make the effective date of the new zone the date of expiration of the previous designation and the term of the new zone shall begin on that date.

Here is the December 2009 edition of the FTB’s “Tax News” newsletter.

This month’s edition includes a section on the “New Jobs Tax Credit:”

Will Your Client Qualify for the New Jobs Credit?

Newly enacted state law, ABX3 15 (Assembly Budget Committee, Stats. 2009 Third Extraordinary Session, Ch. 10) allows a potential income tax credit of $3,000 to a qualified taxpayer for each additional full-time employee hired. The total amount of the credit available to taxpayers is capped at $400 million.

This credit will not be subject to the 50 percent limitation for business credits in 2009. This credit does have an eight year carryover provision.

The credit must be claimed on a timely-filed original return received by us before the cut-off date. This cut-off date is defined as the last day of the calendar quarter within which we estimate the $400 million limit will be reached. The cut-off date has not yet been determined.

This credit is allowed for taxable years beginning on or after January 1, 2009.

An employer qualifies for the credit if both apply:

1. They employed a total of 20 or fewer employees on the last day of the preceding taxable year (for Calendar taxpayers this would be December 31, 2008).

2. They have a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year.

Here is the November 2009 edition of the FTB’s “Tax News” newsletter.

Here is the October 2009 edition of the FTB’s “Tax News” newsletter.

Here is the September 2009 edition of the FTB’s “Tax News” newsletter.

Here is the August 2009 edition of the FTB’s “Tax News” newsletter.

Here is the June 2009 edition of the FTB’s “Tax News” newsletter.

This month’s edition includes an article called, “Enterprise Zone – Nonprofits May be Allowed Net Interest Deduction:”

California provides for special tax incentives to encourage investment in specific geographic areas targeted for economic revitalizing called Enterprise Zones within the state. One of these incentives is the net interest deduction. It is available to banks and other lenders. The requirements are simple. If a bank or lender makes a qualified loan to a qualified debtor, it is allowed to deduct the net interest received from such loan against its California taxable income. To be a qualified transaction, the loan must be made to a debtor that is engaged in a “trade or business” in an Enterprise Zone. The term “trade or business” is generally defined for tax purposes as “an activity engaged in for profit.” When a bank or lender makes an otherwise qualified loan to a nonprofit organization, the question arises as to whether a nonprofit is engaged in a trade or business, and thus considered to be a qualified debtor for the purposes of the net interest deduction.

In the past, we disallowed debts made to nonprofit organizations based on the general presumption that nonprofit organizations are not engaged in a trade or business as defined under various tax provisions in the Internal Revenue Code and the California Revenue and Taxation Code.

However, we recently revised this policy based on statutory authority in the California Corporation Code that suggests a nonprofit could be recognized as being engaged in a trade or business. The California Corporation Code which governs nonprofit entities affirms the nonprofit’s right to “carry on a business at a profit,” and use that profit for any lawful activity.” Many nonprofit organizations accept donations, conduct fundraising activities, or charge fees. This revenue is used to sustain the organization, pay salaries, interest, fund capital improvements, expansions, etc. These activities are similar to a trade or business engaged to earn a profit.

Therefore, qualified loans made to nonprofit organizations can qualify for the Enterprise Zone net interest deduction if the debtor meets all the other required qualifications.

This is clearly related to the appeal before the Board of Equalization in the matter of Farmers and Merchants Bank. See here for more details on that case.

Here is the June 2009 edition of the FTB’s “Tax News” newsletter.

This month’s edition includes an article called “Are You Familiar With California’s Enterprise Zones?“:

The Enterprise Zone (EZ) tax incentive program was created in 1986 to help local businesses, and encourage outside businesses to locate in economically depressed areas. The federal government does not have a comparable economic development program or business tax incentives.

The EZ program has been around for quite some time, but there have been changes to the program that could affect your clients’ businesses.

Between October 2006 and March 2009, 34 California’s enterprise zones expired. Many of these jurisdictions chose to apply again with the California Department of Housing and Community Development (HCD) for a new designation along with new jurisdictions. Today there are 42 active or conditional designated enterprise zones. For a listing of expired, active, and conditional enterprise zones, go to hcd.ca.gov and search for EDA.

The re-designated zones are treated as two zones, the “Old Zone” that expired and the “New Zone.” In some cases, the jurisdictions added new geographic areas to the “New Zone” and in other cases, the jurisdictions removed areas that were once in the “Old Zone.” The following five business-related tax incentives are potentially available to a taxpayer doing business in an enterprise zone, so you may need to see if your client is doing business within one of these new geographic areas.

Hiring credit.
Sales or use tax credit.
Business expense deduction.
Net operating loss deduction.
Net interest deduction for lenders.

Enterprise zone tax incentives apply only to business activities and investments that take place after an enterprise zone has received final designation.

For more information on the EZ Credit, please visit ftb.ca.gov.

If you attended last week’s CAEZ Board meeting in Sacramento, then you heard the big news that the FTB’s Jeanne Harriman is being promoted effective next month. See below the text of an informational release that will appear on the FTB website in June. For as long as I can remember, Jeanne has been the star attraction at every CAEZ conference (the only speaker allowed to set her own “ground rules”), as well as at the quarterly Board meetings. But that was nothing compared to the value of her participation at the Board’s Strategic Planning Session dinners.

Here is the preview for the press release:

Jeanne Harriman Appointed to: CEA II, Financial Management Bureau

June 1, 2009

Jeanne has worked for FTB since 1989. She began her career as a tax auditor, and has worked in all audit programs including working in the field for two years. In recent years, she has been primarily responsible for directing staff that have responsibility for final review of audit cases, establishing practices and procedures for the Audit Division, assisting or leading projects related to the audit workload or to enterprise issues, and resolving or addressing emerging trends or issues raised by FTB staff or FTB stakeholders.

As bureau director, Jeanne will be responsible for the enterprise-wide budgeting, accounting, and resources allocation functions. She will work with the Department of Finance, the State and Consumer Services Agency, the California Legislature, and other state agencies in obtaining the resources FTB needs to achieve the department and state’s priorities. In addition, Jeanne will oversee the accounting functions to ensure that all legal mandates are complied with and that the FTB reports its financial performance accurately and timely.

Jeanne holds a Bachelor of Science degree in Accounting and a Masters degree in taxation from California State University, Sacramento. She is a licensed Certified Public Accountant.

Here is the May 2009 edition of the FTB’s “Tax News” newsletter.

This month’s edition includes a special section on the New Film Credit.

FTB held its Interested Parties Meeting today on the credit reassignment issue introduced by AB 1452.

In addition to the meeting, FTB published a web page of FAQs.

Here is the April 2009 edition of the FTB’s “Tax News” newsletter.

Of special interest is this section covering the new “New Jobs Tax Credit:”

A New Jobs Tax Credit is now available for employers beginning on or after January 1, 2009. The credit, which will be claimed on the 2009 tax return, is $3000 for each additional full-time employee for small businesses with 20 or less employees. This credit will not be subject to the 50 percent limitation for business credits.

The total amount of the credit available to taxpayers will be capped at $400 million. We will determine when the cap has been reached and will set a cut-off date for claiming the credit. The credit must be claimed on a timely filed original return received by us before the cut-off date. This cut-off date is defined as the last day of the calendar quarter within which we estimate the $400 million limit will be reached. The cut-off date has not yet been determined.

Taxpayers claiming the credit after the cut-off date will be notified that the credit is denied. If the credit is denied because the cap has been reached, taxpayers will not be subject to the underpayment of estimated tax penalty or underpayment of tax penalty to the extent that the underpayment was created or increased by the disallowance of the credit.

An employer will qualify for the credit if:

* Each qualified full-time hourly employee is paid wages for not less than an average of 35 hours per week.
* Each qualified full-time employee that is a salaried employee was paid compensation during the year for full-time employment within the meaning of Section 515 of the Labor Code.
* On the last day of the preceding taxable year, they employed a total of 20 or fewer employees.
* There is a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year. For taxpayers who first commence doing business in California during the taxable year, the number of qualified full-time employees employed in the preceding year would generally be zero, unless certain special rules apply.

An employer may not claim the credit for those employees who are any of the following:

* Certified as a qualified employee in an enterprise zone or targeted tax area.
* Certified as a qualified disadvantaged individual in a manufacturing enhancement area or a targeted tax area.
* Certified as a qualified disadvantaged individual or qualified displaced employee in a local agency military base recovery area.
* An employee whose wages are included in calculating any other credit allowed.

A new credit form is currently being developed and will be available by December 2009.

I have just been alerted to FTB Notice 2009-02 “Exemption from Contractual Protection Reportable Transaction Disclosure and Reporting Rules for California Enterprise Zone Hiring Credits,” posted today. Here is the link to the full notice: http://www.ftb.ca.gov/law/notices/2009/2009_2.pdf.

The notice states:

The purpose of this Notice is to advise taxpayers and material advisors that a transaction involving a refundable or contingent fee relating to a California Enterprise Zone Hiring Credit (EZ Hiring Credit) will not be taken into account in determining whether the transaction is a transaction with contractual protection for purposes of the reportable transaction disclosure rules under Treasury Regulation section 1.6011-4(b)(4). The Franchise Tax Board (FTB) will no longer require: (1) taxpayers to disclose a transaction with contractual protection involving EZ Hiring Credits, or (2) material advisors to report a transaction with contractual protection involving EZ Hiring Credits or maintain lists of such advisees. However, if the transaction with contractual protection involving EZ Hiring Credits falls under one of the other categories of reportable transactions required to be disclosed under Treasury Regulation section 1.6011-4(b), disclosure will be required pursuant to that other section.

The FTB will be hosting an interested parties meeting on April 3, 2009 to discuss new provisions introduced in AB 1452 and SBx1 28 regarding the assignment of tax credits between unitary affiliates.  Details can be found here on FTB’s website.

They have released a draft tax Form 3544, with instructions, for public comment.   The following is from section C of the instructions:

The eligible assignee shall be treated as if it originally earned the assigned credit. Any limitations or restrictions that applied to the assignor will also apply to the eligible assignee. The assignor shall disclose the existence and nature of any limitations on the assigned credits to the eligible assignee and to the FTB. Such limitations may include, but are not limited to: limitations imposed on the credit to certain types of income, such as income from one of the California Enterprise Zones; limitations imposed by California’s incorporation of IRC Section 383; or limitations on the number of years the assigned credits may be carried forward. In addition to the requirement to separately list credits earned in separate taxable years, the assignor must also separately list credits which are subject to separate and distinct limitations and disclose each of those separate and distinct limitations in a statement to be attached to this form.

For example, a taxpayer has MIC credits that were earned from assets placed in service prior to January 1, 2004. Those credits have not been used and were carried forward and assigned in the 2009 taxable year. Those credits would expire in the 2011 taxable year, based on the original date that the taxpayer originally earned the credit. The credits would expire for the assignee in 2011, unless the carryover period was extended.

In addition, the use of the EZ credits is limited to the tax that is the result of income from the zone in which the credit was earned. This rule applies to the assignee as well. For zone credits assigned, the assignee must have a tax liability as a result of income generated in the same zone that the original credit was generated. For example, if the original credit was generated in the Fresno enterprise zone of the assignor, then the assignee must have a tax liability that was the result of income from Fresno enterprise zone.

In addition, when a corporation has a “ownership change” as defined in IRC Section 382, tax credits may be subject to a limitation imposed under IRC Section 383. In such situations, the annual use of credits is limited to an amount determined under IRC Section  383.

Here is the March 2009 edition of the FTB’s “Tax News” newsletter.

Here is the February 2009 edition of the FTB’s “Tax News” newsletter.

Here is the January 2009 edition of the FTB’s “Tax News” newsletter.

This issue includes information regarding the changes to tax credit usage implemented in AB 1452.  It includes the following guideline to determine if a business falls under the $500,000 threshold set by the legislation:

For individual taxpayers, net business income is generally reported on federal Form 1040 Schedules C, E, F, or Form 4797 (as adjusted for California purposes). For business entities, all California income is included to determine if the $500,000 threshold is met.

Here is the December 2008 edition of the FTB’s “Tax News” newsletter.

This issue has the the legislative wrap up, for example:

AB 1452 (Committee on Budget, Stats. 2008, Ch. 763): Does the following:

* Suspends net operating loss (NOL) deductions for two years, makes the NOL carryover period 20 years, and allows taxpayers a two-year carryback for NOLs from 2011 and later.
* Authorizes FTB to conduct a tax amnesty for the 2003 through 2006 taxable years for corporation and personal income taxpayers. (Repealed by SBX1 28.)
* Requires a limited liability company (LLC) to estimate and pay its LLC fee by a specific date. (Clarified by SBX1 28.)
* Limits the amount of tax credits that may reduce tax for two years, and allows tax credits to be assigned among members of a combined reporting group under the Corporation Tax Law. (Clarified by SBX1 28.)
…
SBX1 28 (Senate Budget Committee, Stats. 2008, First Ex. Sess. 2007-2008, Ch. 1): Does the following:

* Accelerates the amount of estimate tax payments required to be made for taxable years beginning on or after January 1, 2009, and eliminates the option for certain taxpayers to use last year’s income tax in calculating estimate payment requirements for current year.
* Repeals Tax Amnesty provisions and penalty, as enacted in AB 1452.
* Enacts a new corporation tax penalty for understatements of tax in excess of $1 million for taxable years beginning on or after January 1, 2003.
* Clarifies the operative date for the requirement to estimate and pay the limited liability company fee of taxable years beginning on or after January 1, 2009.
* Clarifies legislative intent on business tax credit assignment language in AB 1452 for purposes of proper implementation of that section.