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Changes to 2008 Forms

Updates to the Schedule D (541) on 02/21/2014 –– Capital Gain or Loss

We replaced text on:

  1. Instructions, Page 1, General Information, A Purpose
  2. Instructions, Page 1, Specific Line Instructions, Part I – Capital Gain and Loss
  3. Instructions, Page 1, Specific Line Instructions, Part I – Capital Gain and Loss

Previous Version

  1. Qualified Small Business Stock
    California does not conform to IRC Section 1045 and IRC Section 1202

    In Cutler v. Franchise Tax Board (2012) 208 Cal App 4th 1247, 146 Cal Rptr. 3d 244, the California Court of Appeal found that the California qualified small business stock (QSBS) provisions of R&TC Sections 18038.5 and 18152.5 discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution. R&TC Sections 18038.5 and 18152.5 provided for a California deferral and exclusion of gain from the sale of QSBS if eighty percent of the corporation’s property and payroll was located in California for substantially all of the taxpayer’s holding period of the stock. An unconstitutional statute is invalid and unenforceable. Therefore, the California deferral and exclusion are not available.
  2. Note: new text added.
  3. Line 4 – Report the amount from Form 1099-DIV, box 2a, on line 4.

Revised Version

  1. Qualified Small Business Stock
    California law does not conform to federal law changes regarding the increase in the percentage of the gain exclusion for the sales of qualified small business stock acquired after February 17, 2009. California law allows an exclusion of 50% of any gain from the sale or exchange of qualified small business stock held for more than 5 years. For California purposes, 80% of the issuing corporation’s payroll must be attributable to employment located within California (at time of issuance). Also, at least 80% of the value of the corporation’s assets must be used by the corporation to actively conduct one or more qualified trades or businesses.

    R&TC Section 18038.5 also provides for the deferral of gain from the sale of small business stock that has been held for six months or more, if qualified replacement stock is purchased within 60 days after the sale giving rise to the gain. Report gain deferred from the sale of qualified small business stock in accordance with the instructions contained in Revenue Procedure 98-48.

    For more information, go to ftb.ca.gov and search for qsbs.
  2. Line 1 – If the estate or trust qualifies for the R&TC Section 18152.5 (similar to IRC Section 1202) exclusion of gain on qualified small business stock, report 100% of the gain on line 1. Directly below the line on which you reported the gain, enter in column (a) “Section 18152.5 exclusion” and enter as a (loss) in column (g) 50% of the gain. Also report 50% of the exclusion as a positive number on Schedule P (541), line 4v.
  3. Line 4 – Report the amount from Form 1099-DIV, box 2a, on line 4. If you received a Form 1099-DIV, Dividends and Distributions, with a gain in box 2c, part of that gain (which is also included in box 2a) may be eligible for the R&TC Section 18152.5 exclusion. California does not have a special capital gain tax rate. In column (a) of line 1, enter the name of the corporation whose stock was sold. In column (g) of line 1, enter the amount of your allowable exclusion as a loss.

Reason for the changes

AB 1412 (Stats. 2013, ch. 546), signed by the Governor on October 4, 2013, retroactively allows the Qualified Small Business Stock (QSBS) deferral and 50 percent gain exclusion for tax years 2008 through 2012.

Impact

This revision may decrease the tax liability for taxpayers who did not report a QSBS exclusion or deferral for taxable years beginning on or after January 1, 2008.

Back to Tax Form Changes for 2008


Updates to the Schedule D (541) on 02/27/2013 –– Capital Gain or Loss

We replaced text on:

  1. Instructions, Side 1, General Information A Purpose
  2. Instructions, Page 1, Specific Line Instructions, Line 1
  3. Instructions, Page 1, Specific Line Instructions, Line 4

Previous Version

  1. Qualified Small Business Stock
    California R&TC Section 18152.5 provides an exclusion (similar to the federal exclusion under IRC Section 1202) for 50% of the gain on the sale of qualifying small business stock originally issued after August 10, 1993, that was held for more than five years. However, for California purposes, 80% of the issuing corporation’s payroll must be attributable to employment located within California, and at least 80% of the value of the corporation’s assets must be used by the corporation to actively conduct one or more qualified trades or businesses in California.

    R&TC Section 18038.5 also provides for the deferral of gain from the sale of small business stock that has been held for six months or more, if qualified replacement stock is purchased within 60 days after the sale giving rise to the gain. Report gain deferred from the sale of qualified small business stock in accordance with the instructions contained in Revenue Procedure 98-48.

    Estates and trusts are eligible for the exclusion; however, estates and trusts (other than common trust funds) may not pass through the exclusion to their beneficiaries. See R&TC Section 17750.
  2. Line 1 – If the estate or trust qualifies for the R&TC Section 18152.5 (similar to IRC Section 1202) exclusion of gain on qualified small business stock, report 100% of the gain on line 1. Directly below the line on which you reported the gain, enter in column (a) “Section 18152.5 exclusion” and enter as a (loss) in column (g) 50% of the gain. Also report 50% of the exclusion as a positive number on Schedule P (541), line 4v.
  3. Line 4 – Report the amount from Form 1099-DIV, box 2a, on line 4. If you received a Form 1099-DIV, Dividends and Distributions, with a gain in box 2c, part of that gain (which is also included in box 2a) may be eligible for the R&TC Section 18152.5 exclusion. California does not have a special capital gain tax rate. In column (a) of line 1, enter the name of the corporation whose stock was sold. In column (g) of line 1, enter the amount of your allowable exclusion as a loss.

Revised Version

  1. Qualified Small Business Stock
    California does not conform to IRC Section 1045 and IRC Section 1202.

    In Cutler v. Franchise Tax Board (2012) 208 Cal App 4th 1247, 146 Cal Rptr. 3d 244, the California Court of Appeal found that the California qualified small business stock (QSBS) provisions of R&TC Sections 18038.5 and 18152.5 discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution. R&TC Sections 18038.5 and 18152.5 provided for a California deferral and exclusion of gain from the sale of QSBS if eighty percent of the corporation's property and payroll was located in California for substantially all of the taxpayer's holding period of the stock. An unconstitutional statute is invalid and unenforceable. Therefore, the California deferral and exclusion are not available.
  2. Note: text deleted.
  3. Line 4 – Report the amount from Form 1099-DIV, box 2a, on line 4.

Reason for the changes

The Court of Appeal’s held in Cutler v. Franchise Tax Board (2012) 208 Cal. App. 4th 1247, that the qualified small business stock exclusion and deferral statutes under California Revenue and Taxation Code (R&TC) Sections 18152.5 and 18038.5 are unconstitutional. These sections are now invalid and unenforceable.

Impact

This revision increases the tax liability for taxpayers who reported a qualified small business stock exclusion or deferral for taxable years beginning on or after January 1, 2008.

Back to Tax Form Changes for 2008