Tax News March 2025

Tax News Flash – Incorrect Form 1099-G

February 20, 2025 - Incorrect Form 1099-G

2024 Tax Law Changes

Wildfire Relief Payment – For taxable years beginning after December 31, 2019, and before January 1, 2026, the Federal Disaster Tax Relief Act of 2023 allows an exclusion from gross income for any amount received by an individual as a qualified wildfire relief payment. Generally, California law does not conform. If any qualified amount was excluded from income for federal purposes and California law provides no similar exclusion, include that amount in income for California purposes.

For more information and for specific wildfire relief payments excluded for California purposes, go to Schedule CA (540) instructions.

Net Operating Loss Suspension – For taxable years beginning on or after January 1, 2024, and before January 1, 2027, California suspended the net operating loss (NOL) carryover deduction. Taxpayers may continue to compute and carryover an NOL during the suspension period. However, taxpayers with net business income or modified adjusted gross income of less than $1,000,000 or with disaster loss carryovers are not affected by the NOL suspension rules.

The carryover period for suspended losses is extended by:

• Three years for losses incurred in taxable years beginning before January 1, 2024.
• Two years for losses incurred in taxable years beginning on or after January 1, 2024, and before January 1, 2025.
• One year for losses incurred in taxable years beginning on or after January 1, 2025, and before January 1, 2026.

For more information, refer to R&TC Section 17276.24, and get FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Individuals, Estates, and Trusts.

Business Credit Limitation – For taxable years beginning on or after January 1, 2024, and before January 1, 2027, there is a $5,000,000 limitation on the application of business tax credits. The total of all business tax credits including the carryover of any credit for the taxable year may not reduce the “net tax,” for personal income tax filers, or “tax,” for corporate filers by more than $5,000,000. This limitation does not apply to the Low-Income Housing Credit or the Pass-Through Entity Elective Tax Credit. The credit for prior year Alternative Minimum Tax is not subject to the credit limitation. Business tax credits should be applied against “net tax” before other credits. For taxpayers in a combined report, the limitation is applied at the group level.

For each taxable year of the limitation, taxpayers may make an irrevocable election to receive an annual refundable credit amount for the credits disallowed due to the $5,000,000 limitation. If a taxpayer elects to make any credit that is disallowed due to the $5,000,000 limitation refundable, they must make the same election for all other credits claimed that year that were also disallowed due to the $5,000,000 credit limitation. Taxpayers may claim 20% of this refundable credit in each year of a five-year refundable period. The refundable period begins the third taxable year after the taxable year in which the election is made. The irrevocable election must be made annually by completing FTB 3870, Election for Refundable Credit, and attaching it to an original, timely filed tax return.

S corporations may not elect to make credits taken at the entity level refundable.

If a taxpayer does not choose to make the election outlined above, business tax credits disallowed due to the limitation may be carried over. The carryover period for disallowed credits is extended by the number of taxable years the credit was not allowed.

For more information, refer to R&TC Sections 17039.4,17039.5, 23036.4, and 23036.5 and get FTB 3870.

Intangible Drilling and Development Costs – California law does not allow the deduction for intangible drilling and development costs in the case of oil and gas wells paid or incurred on or after January 1, 2024 (R&TC Section 24423 has been repealed).

For more information, refer to R&TC Section 17260 and get Schedule P (540), Alternative Minimum Tax and Credit Limitations – Residents, FTB 3885A, Depreciation and Amortization Adjustments, and FTB Pub. 1001, Schedule P (100), Alternative Minimum Tax and Credit Limitations – Corporations and FTB 3885, Corporation Depreciation and Amortization.

Percentage Depletion – For taxable years beginning on or after January 1, 2024, California law does not allow the calculation of depletion as a percentage of gross income from the property for specified natural resources, including coal, oil shale, oil and gas wells. R&TC Sections 17681.3 and 17681.6 allowing state nonconformity to federal rules for percentage depletion of certain refiner exclusions as well as the temporary suspension of taxable income limit for marginal production have also been repealed.

For more information, refer to R&TC Section 17681 and get Schedule P (540), FTB 3885A, and FTB Pub. 1001.

Enhanced Oil Recovery Credit Repeal – For taxable years beginning on or after January 1, 2024, the Enhanced Oil Recovery Credit has been repealed. Taxpayers may now only claim available carryovers.

For more information, get FTB 3540, Credit Carryover and Recapture Summary.

Postponement of Certain Tax-Related Deadlines – Beginning on or after June 27, 2024, the Director of Finance shall determine when IRC Section 7508A, related to postponement of certain federal tax-related deadlines, applies for California purposes to a taxpayer affected by a state of emergency declared by the Governor or a federally declared disaster. Impacted taxpayers can request an additional relief period if the state postponement period expires before the federal postponement period by filing FTB 3872, California Disaster Relief Request for Postponement of Tax Deadlines.

For more information, get FTB 3872 and refer to R&TC Section 18572.

Special Rules for Certain Distributions from Qualified IRC Section 529 Tuition Plans – The Federal Consolidated Appropriations Act (CAA), 2023, allows qualified IRC Section 529 tuition plans maintained for 15 years to rollover to a Roth IRA without a tax or penalty. Under the federal law, rollover distributions from an IRC Section 529 plan to a Roth IRA after December 31, 2023, will be treated in the same manner as the earnings and contributions of a Roth IRA. California law does not conform to this federal provision. Rollover distribution from an IRC Section 529 plan to a Roth IRA is includible in California taxable income and subject to an additional tax of 2½ percent.

For more information, go to Schedule CA (540) instructions and get FTB 3805P, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.

Catch-Up Contributions for Certain Individuals – For taxable years beginning on or after January 1, 2024, the federal CAA, 2023, provides for the indexing of the $1,000 catch-up contribution to an IRA for individuals aged 50 or older. The CAA, 2023, also increases certain contribution amounts, including catch-up contributions for individuals aged 50 or over as defined in IRC Section 414(v). California law does not conform to these federal provisions. Any amount contributed that exceeds the contribution amount allowed for California may need to be included in income for California purposes. Any distribution from contributions in excess of the California limit may become taxable when distributed.

For more information, go to Schedule CA (540) instructions and get FTB Pub. 1005, Pension and Annuity Guidelines.

Wildfire Mitigation Payment – For taxable years beginning on or after January 1, 2024, and before January 1, 2029, California law allows a qualified taxpayer an exclusion from gross income for any amount received as a California qualified wildfire loss mitigation payment through the California Wildfire Mitigation Financial Assistance Program.

For more information, go to Schedule CA (540) instructions and R&TC Section 17138.8.

Voluntary Contribution – You may contribute to the following new funds:

• Prevention of Animal Homelessness and Cruelty Voluntary Tax Contribution Fund
• California ALS Research Network Voluntary Tax Contribution Fund

State Disability Insurance – For taxable years beginning on or after January 1, 2024, California removes the taxable wage limit and maximum withholdings for each employee subject to State Disability Insurance (SDI) contributions. All wages are taxable for the purpose of computing SDI worker contributions. As a result, the excess SDI (or VPDI) withheld line has been removed from the personal income tax return by updating the line as “reserved for future use.”

For more information, go to edd.ca.gov.

New Advanced Strategic Aircraft Credit – The sunset date for the New Advanced Strategic Aircraft Credit to reduce tax below the Alternative Minimum Tax (TMT) is extended until taxable years beginning before January 1, 2031.

For more information, go to R&TC Section 23036 and get Schedule P (100).

Reporting Requirements – Taxpayers may need to file Form 4197, Information on Tax Expenditure Items, with the tax return to report tax expenditure items as part of the Franchise Tax Board’s (FTB’s) annual reporting requirements under R&TC Section 41. To determine if you have an R&TC Section 41 reporting requirement, refer to the R&TC Section 41 Reporting Requirements section or get Form 4197.

Suspension Notices for Corporations and Limited Liability Companies

As a reminder, we resumed normal business processes on September 1, 2023, to issue suspension notices for corporations and limited liability companies.

If you or your client received a pre-suspension or suspension letter and plan to revive an entity, you may submit your request using the online revivor assistance request form to connect with us for account specific assistance. You may also call Business Entities Collections Assistance at 888-635-0494 or 916-845-7033 or follow instructions included in the letter.

For more information regarding suspensions, go to My business is suspended.

For more information on MyFTB and its features, go to MyFTB account.

How to Assist Your Client When You Receive a Letter or Notice From FTB

Receiving a tax notice from FTB can be a daunting experience for both you and your client. However, with the right approach, you can navigate this process efficiently and continue to provide your client the best service possible.

Carefully read and understand the specific issue outlined in the tax notice. FTB may send notices for various reasons, including:

• Outstanding tax balances
• Revisions to refunds
• Audits or reviews of submitted tax returns
• Requests for additional information or documentation
• Changes made to a return

Notices provide important details to assist in resolving an account. If you agree with the notice or letter, you may not need to contact FTB. If you disagree with the notice or letter, it is recommended you do the following:

1. Check MyFTB to view your client’s account information. If you disagree with the information on your client’s MyFTB account or disagree with the notice or letter, you may use MyFTB secure chat or message to address the issue.
2. Follow the instructions on the notice and respond by mail, fax, or online. If the balance due is expected, your client is encouraged to pay the balance in full by the due date to avoid additional interest, penalties, or fees, if applicable.
3. Contact FTB using one of the many options available.

Each year, leading up to the April 15 tax filing deadline, FTB holds current tax year balance due notices (e.g. FTB 4963A, FTB 5818B) until after the final filing date. This is to ensure payments received on April 15 are posted correctly to your client’s account prior to sending any notices. These notices serve as a courtesy reminder your client has an outstanding tax balance due.

Visit the Letters page to view a list of common personal and business notices and learn about why your client received a notice and what you need to do.

New Business Entity ID

The California Secretary of State will issue newly formed corporations, limited liability companies, and limited partnerships a 12-digit alphanumeric entity identification number.

The new numbering format differs from the format used for previously issued identification numbers for these entity types. We will be able to accept the new and existing numbering formats.

Single Member LLCs Must File a Form 568

Filing season is underway for the small business community and this may be a good time to remind your single member limited liability company (SMLLC) clients that a tax return Form 568 is also due. An SMLLC that is disregarded for federal tax purposes, is also disregarded for California tax purposes, and generally files their federal taxes using a Schedule C.

California law also states, however, that the separate existence of the eligible business entity is not disregarded for purposes of the:

• LLC annual tax
• LLC fee
• LLC tax return filing requirement

Generally, a disregarded SMLLC must file a tax return (Form 568) by the same deadline applicable to the owner's tax return. California does grant an automatic extension of time to file a return. Please keep in mind, however, that an extension of time to file is not an extension of time to pay the LLC annual tax or fee.

In summary, SMLLC taxpayers should be aware that a disregarded SMLLC is also required to

• File a tax return (Form 568)
• Pay the LLC annual tax
• Pay the LLC fee (if applicable)

Items of income, deduction, and credit (after applying appropriate limitations) from the SMLLC should be included in the owner’s tax return.

For more information, go to Single member LLC

California Competes Tax Credit (CCTC)

For the last application period of Fiscal Year 2024/2025, the Governor's Office of Business and Economic Development (GO-Biz) will accept applications for the California Competes Tax Credit starting February 24, 2025, through March 10, 2025.

This application period has $214.7 million available for allocation, plus any remaining unallocated amounts from the previous applications periods. Applications for the credit are being accepted at calcompetes.ca.gov.

For more information, go to California Competes Tax Credit.

Payment Plans

Personal

Taxpayers who are unable to pay the full amount owed within 90 days of the first notice of a balance due, or who have a financial hardship, may be eligible for a payment plan.

FTB will accept applications for personal income tax payment plans, where the balance owed is $25,000 or less, and taxpayers will have up to 60 months to pay off the total amount. It may take up to 90 days to process a request. If approved, it will cost $34 to set up the agreement (added to the balance) and an acceptance letter will be mailed with payment details. While we process requests, taxpayers should still make payments to avoid more interest and penalties.

To apply for a payment plan online, taxpayers must owe less than $25,000, pay the amount in 60 months or less, and file all required tax returns for the past 5 years. Taxpayers cannot apply online if they have a current payment plan in place, a wage garnishment, a bank levy, or other collection orders. Instead, call (800) 689-4776 to request payment plan options.

Business

Entities that cannot pay their tax bill in 90 days and want to request a payment plan can apply. It may take up to 60 days to process the request. Typically, the payment plan will need to pay off the balance in 12 months. If approved, it will cost $50 to set up the payment plan and the amount is added to the balance.

To apply for a payment plan, business entities must call (888) 635-0494.

Internal Revenue Service (IRS) Updates and More

We partnered with the IRS to provide monthly IRS articles to assist our tax professional and small business communities. We are excited to share this information; however, questions about the content, should be directed to the IRS.

Don’t wait on hold; use IRS online tools for faster help

IR-2025-22, Feb. 12, 2025 — With the 2025 filing season underway and the anticipated high demand for IRS phone lines around the Presidents Day holiday, the IRS encouraged taxpayers to visit IRS.gov and use online tools to get immediate answers.

IRS urges taxpayers to choose tax preparers carefully to protect their personal information

IR-2025-21, Feb. 3, 2025 — The IRS reminded taxpayers that choosing the right tax professional is essential to helping them avoid tax-related identity theft and financial harm.

IRS, national partners launch EITC Awareness Day on 50th anniversary of the Earned Income Tax Credit

IR-2025-20, Jan. 31, 2025 — The IRS and partners around the nation celebrated the 50th anniversary of the Earned Income Tax Credit (EITC) with the launch of this year’s EITC Awareness Day campaign.

IRS offers top tips to make tax time easier

IR-2025-19, Jan. 30, 2025 — The IRS provided taxpayers with six tips to make filing their 2024 tax return easier.

2025 tax filing season starts as IRS begins accepting tax returns today; taxpayers have many options for help

IR-2025-18, Jan. 27, 2025 — The IRS opened the 2025 tax filing season and is accepting and processing federal individual tax year 2024 returns.

IRS provides updated frequently asked questions for the energy efficient home improvement and residential clean energy property credits

IR-2025-17, Jan. 17, 2025 — The IRS updated the frequently asked questions in Fact Sheet 2025-01.

Ask the Advocate – A Note of Appreciation from the Taxpayers’ Rights Advocate!

I want to express my sincere gratitude for your diligence to identify and report systemic issues. Most recently, you reported an issue with an FTB tax form. Your feedback is invaluable to assist us to address errors, clarify instructions, and improve the overall usability of essential tax forms.

By bringing these issues to our attention, you play a crucial role to ensure more accurate, efficient, and taxpayer-friendly filing and payment processing. Your insights help us advocate for necessary updates, reducing confusion and compliance burdens for California taxpayers.

The forms FTB 5013 PC and FTB 5012 PC were reported in the Systemic Issue Management System (SIMS) and my team evaluated each for improvement. The forms were designed to allow a business entity to make multiple entity payments with a single check. The forms provide FTB clear instructions on how a single payment should be applied to multiple entities. However, the form relied on an Excel spreadsheet in which the user could enter an unlimited number of entities on a single form. Our evaluation revealed FTB systems could only accommodate 25 entities per payment and thus created a complex manual process to properly allocate more than 25 entities per single payment. A complex manual process may result in processing errors and misapplied payments.

In alignment with FTB’s value to deliver excellent products and services, my team collaborated with the appropriate FTB business area to improve the form and instructions. The improvement limits the user’s ability to enter no more than 25 entities per form. A single payment may only be allocated to a maximum of 25 entities; otherwise, an additional payment and form must be submitted. This improves operational efficiency and minimizes processing errors.

To request a copy of the revised FTB 5013 PC or FTB 5012 PC, go to Forms, type in the form number, provide your e-mail and the form will be sent to you.

We appreciate your continued partnership and encourage you to keep sharing your observations. Your commitment to identify and report systemic issues plays a vital role to improve our state’s tax administration.