Tax News January 2024

Extended Notice 2023-02 Participation Period Ends Soon

Overview

On May 31, 2023, we issued FTB Notice 2023-02. The Notice provides taxpayers the opportunity to resolve Micro-Captive Insurance (MCI) and Syndicated Conservation Easement (SCE) Transactions that may be subject to the non-economic substance transaction understatement (NEST) penalty, and receive reduced penalties by entering into a Closing Agreement to reverse their deductions and related transaction costs.

Extended Participation Period

On November 13, 2023, we issued FTB Notice 2023-03, extending the period for participating in the resolution program. To participate, eligible taxpayers must now submit a Closing Agreement by January 31, 2024.

Installment Payment Agreement Update

Background

Assembly Bill 1765 will expand the installment payment agreement terms for those that enter into a payment plan on or after January 1, 2024.

New Updates

As of January 1, 2024, individuals who submit an application for an installment agreement for a tax liability not to exceed $25,000, and not to exceed a 60-month payment plan, will no longer be required to complete the self-certification of financial hardship process.

The intent of this change is to reduce taxpayer burden and increase taxpayer compliance. FTB is actively working to update our website, installment agreement notices, and remove self-certification language from the application process to reflect the change in the law.

2023 California Tax Credits

Foster Youth Tax Credit

Entering its second year, California’s Foster Youth Tax Credit (FYTC) increases to as much as $1,117 for tax year 2023.

As of late 2023, close to 5,000 current and former foster youth received more than $5 million in FYTC, though an estimated 60,000 Californians are eligible for the credit.

The credit is available to taxpayers who meet all the following requirements:

• Qualify for the California Earned Income Tax Credit (CalEITC).
• Are age 18 through 25 at the end of the tax year.
• Were in foster care at age 13 or older and placed through the California foster care system.
• Satisfy foster care verification requirement.
• Claim the credit on the FTB 3514, California Earned Income Tax Credit, or follow tax software instructions.

Young Child Tax Credit

For tax year 2023, the maximum Young Child Tax Credit (YCTC) also increases to $1,117.

For tax year 2022 and forward, taxpayers without earned income – or even negative income, within limits – might be eligible for YCTC if they otherwise meet all YCTC and CalEITC requirements and have a child under the age of six at the end of the tax year. (Note: Taxpayers without at least $1 of earned income would not qualify for CalEITC but may still qualify for YCTC.)

Stay connected with our website for more information about Foster Youth Tax Credit, Young Child Tax Credit and the related California Earned Income Tax Credit.

Deduction of Section 174 Research Expenses – Nonconformity with IRC

In general, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2015. While California has partially conformed to the federal changes made by the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017, we want to remind you California has not conformed to the changes regarding the deduction of research expenses under IRC section 174 effective for tax years beginning after December 31, 2021.

Since California does not conform to these changes, taxpayers may need to make state adjustments on their California tax returns to account for any federal and state differences associated with the expensing or amortization of research expenditures.

Federal Law

The TCJA changes to IRC section 174 include updating the terminology of IRC section 174 costs to "Specified Research or Experimental Expenditures." In addition, taxpayers must capitalize and amortize their research expenses over five years (domestic) or fifteen years (foreign) for tax years beginning after December 31, 2021. The current expense or deduction of research expenditures is no longer allowed for federal purposes.

California Law

California does not conform to the changes made to IRC section 174 and has not adopted the updated terminology to define "Specified Research or Experimental Expenditures" or the expense treatment of research costs. Taxpayers may continue to deduct IRC section 174 research expenses paid or incurred or elect to amortize over a five-year period on their California returns.

File CA Form 109 Electronically

On January 2, 2024, the CA business e-file program will allow charities and non-profits filing Form 109, California Exempt Organization Business Income Tax Return, to file returns electronically.

Our business e-file program already allows the ability to submit original, amended, or superseded returns for corporations, partnerships, limited liability companies, and exempt organizations filing Form 199, California Exempt Organization Annual Information Return, electronically.

Contact your software provider to determine if they support the ability to e-file CA Form 109 Exempt Organization Business Income Tax returns.

Stay connected with our website and Tax News for more information about our business e-file program.

Enhancements to the “Stand-Alone” Electronic Payment Program

On January 2, 2024, exempt organizations can submit an electronic funds withdrawal (EFW) request for certain payment types using tax preparation software.

These payment requests will be accepted as “stand-alone,” and can be submitted separately from the e-file return. The return can be filed at a later date.

The following new payment types are available:

• Quarterly estimate payments
• Extension payment

Corporations, partnerships, limited liability companies, and exempt organizations can still submit EFW requests for return and estimate payments with the e-filed return using tax preparation software.

As a reminder, the following stand-alone EFW payment types are currently available for the following programs:

• Individuals
  • Quarterly estimate payments
  • Extension payment
• Fiduciary (Estate/Trust)
  • Quarterly estimate payments
  • Extension payment
• Business Entities (Corporations/Limited Liability Companies/Partnerships)
  • Quarterly estimate payments
  • Extension payment
  • Annual tax payment
  • Estimated fee
  • PTE elective tax

Contact your software provider to see if they support “stand-alone EFW” payments for exempt organizations. Stay connected to our website and Tax News for more information about our e-file program.

Learn More About Full Online Account Access

We would like to address some of the questions we received for MyFTB’s Full Online Account Access.

When a Power of Attorney (POA) declaration or Tax Information Authorization (TIA) relationship is approved for a new client, a tax professional is granted Limited Online Account Access to the client’s information. If Full Online Account Access is requested at the time a POA or TIA is filed, or later in MyFTB, we send the client an authorization code they must use to activate the tax professional’s access.

Here are some questions and responses that may help you and your clients understand better:

Annual Legislative Proposal Stakeholder Meeting

On Wednesday, November 15, 2023, the Franchise Tax Board (FTB) hosted its annual Legislative Proposal (LP) Stakeholder Meeting to gain input from the public. We appreciate the attendees for taking the time to participate and share their thoughts.

Eliminating the Repeal Date for Electronic Communication

Summary

Revenue and Taxation Code (RTC) Section 18416.5 currently allows taxpayers or their authorized representatives the choice to send and receive a notice, statement, bill, protest, or other communication between the FTB and the taxpayer electronically. This RTC section will automatically be repealed on January 1, 2025.

This LP would eliminate this repeal date thus continuing to authorize the FTB and the taxpayer or their representative, to send and receive certain notifications electronically.

Next Steps for the Legislative Proposal

The LP was presented and approved at the three-member FTB Board Meeting, held on December 6, 2023. Next, we will begin to look for a legislative author for the approved proposal.

In addition, there is one prior board-approved proposal for which FTB continues to seek an author.

FTB Conformity Stakeholder Meeting

After reviewing the seven federal acts that were enacted in 2021 and 2022, FTB determined that the changes made by these acts to the Internal Revenue Code and the impact on California personal income tax and corporation tax laws would not generate significant discussion to sustain a meeting in 2023.

FTB will host the next Conformity Stakeholder Meeting to provide an open discussion forum and gather input and comments from stakeholders when there is major federal legislation enacted.

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, if you have questions about the content, you will need to contact the IRS directly.

IRS: Free Dec. 14 webinar to focus on tax year 2023 Form 1099-K reporting rules; designed to help reporting income through payment apps and online marketplaces

IR-2023-236, Dec. 12, 2023 — The IRS will hold a free webinar, designed primarily for tax professionals whose clients receive income typically reported to them on Form 1099-K, including those who often use popular payment apps and online marketplaces.

Get ready to file in 2024: What’s new and what to consider

IR-2023-235, Dec. 11, 2023 — The IRS urged taxpayers to take important actions now to help them file their 2023 federal income tax return next year.

IRS: 2024 Flexible Spending Arrangement contribution limit rises by $150

IR-2023-234, Dec. 8, 2023 — During open enrollment season for Flexible Spending Arrangements (FSAs), the IRS reminds taxpayers that they may be eligible to use tax-free dollars to pay medical expenses not covered by other health plans through their FSA.

IRS Independent Office of Appeals releases fiscal year 2024 priorities; focus on improving taxpayer service

IR-2023-233, Dec. 8, 2023 — The IRS’s Independent Office of Appeals released its Focus Guide for fiscal year 2024.

IRS requests applications for 2024 ETAAC membership

IR-2023-231, Dec. 7, 2023 — The IRS is accepting applicants for nomination to the Electronic Tax Administration Advisory Committee (ETAAC) through Jan. 31, 2024.

IRS expands work on aggressive Employee Retention Credit claims; 20,000 disallowance letters being mailed, more action and voluntary disclosure program coming

IR-2023-230, Dec. 6, 2023 — As part of continuing efforts to combat dubious Employee Retention Credit (ERC) claims, the IRS is sending an initial round of more than 20,000 letters to taxpayers notifying them of disallowed ERC claims.

Treasury, IRS provide guidance for those who manufacture new clean vehicles

IR-2023-228, Dec. 1, 2023 — The Department of the Treasury and the IRS issued two items of guidance on the excluded entity restriction of the section 30D clean vehicle credit, as amended by the Inflation Reduction Act.

IR-2023-239: IRS issues standard mileage rates for 2024; mileage rate increases to 67 cents a mile, up 1.5 cents from 2023

Notice 2024-08 provides the optional 2024 standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business, charitable, medical, or moving expense purposes. This notice also provides the amount taxpayers must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate plan. Additionally, this notice provides the maximum fair market value of employer-provided automobiles first made available to employees for personal use in calendar year 2024 for which employers may use the fleet-average valuation rule in § 1.61-21(d)(5)(v) or the vehicle cents-per-mile valuation rule in § 1.61-21(e).

Notice 2024-08 will be in IRB: 2024-2, dated January 8, 2024.

Ask the Advocate: Happy New Year!

I hope everyone had a joyous and festive holiday! On December 6, 2023, during the Franchise Tax Board (FTB) board meeting, FTB held one of their most important meetings of the year, the Taxpayers’ Bill of Rights (TBOR) hearing. I thank FTB for providing this forum each year that allows taxpayers and tax professionals an opportunity to present their proposals on suggested changes to California's tax laws and ways FTB can improve the services they provide.

If you were unable to attend, or follow the meeting live online, you may access an archived video and other public meetings at Meetings | FTB.ca.gov.

During this years’ board meeting and hearing, some of the highlights include:

Board Meeting

• An overview of FTB’s Missions and Values, and Diversity Equity and Inclusion teams. They both worked together to refresh the organization’s five values About us | FTB.ca.gov
• Deputy Controller Hasib Emran reminded us December 10 was the 75th anniversary of Human Rights Day.
• Return processing highlights: 18.8 million Personal Income Tax returns filed. (95% filed electronically)

TBOR Hearing Tax Community Concerns

• California conformity - California has not conformed or only partially conformed to numerous federal law changes.
• Allow pass-through entities to apply overpayments of entity taxes to the Pass-Through Entity Elective Tax.
• The Office of Tax Appeals’ lack of jurisdiction over Notice of Proposed Overassessment.

I thank the previous TBOR hearing participants. The issues they raised helped us improve FTB’s processes and services.

As a result of past years’ TBOR hearing suggestions, Draft Tax Forms | FTB.ca.gov are available on the FTB website and What's new with tax forms? is a static Tax News resource.

We will provide written replies to this year’s TBOR submissions by February 1, 2024, and add them to the Taxpayers’ Rights Advocate page under your taxpayer rights | FTB.ca.gov along with prior years’ responses that are currently available.

I appreciate your continued support and input throughout 2023. Rest assured, my team and I are here to help. We look forward to a new year and the opportunity to provide our assistance when needed.