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Changes to 2008 Forms

Updates to the Schedule P (541) Instructions on 02/25/2014 –– Instructions for 541 Schedule P, Alternative Minimum Tax and Credit Limitations - Fiduciaries

We replaced text on Pages 5 and 6, Line 4v –– Other Adjustments.

Previous Version

Note: new text added.

Revised Version

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.

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.

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Updates to the Schedule P (541) Instructions on 02/21/2013 –– Instructions for 541 Schedule P, Alternative Minimum Tax and Credit Limitations - Fiduciaries

We replaced text on Page 5 and 6, Line 4v, Other Adjustments, last bullet.

Previous Version

Qualified small business stock exclusion (R&TC Section 18152.5). California law provides an exclusion similar to the federal exclusion under IRC Section 1202 and allows exclusion of 50% of the gain on the sale of qualifying small business stock originally issued after August 10, 1993, and held for more than five years. However, for California purposes, 80% of the issuing corporation’s payroll as measured by total dollar value must be attributable to employment located within California, and at least 80% of the value of the assets of the corporation must be used by the corporation in the active conduct of one or more qualified trades or businesses in California. If the estate or trust excluded gain as allowed under R&TC Section 18152.5, multiply the excluded amount by 50% and enter it on this line as a positive amount.

The estate or trust (except a common trust fund) may not pass through the exclusion for the gain on qualified small business stock (R&TC Section 18152.5) to a beneficiary. Therefore, it would also not pass through the adjustment related to this exclusion to the beneficiary. When the estate or trust completes its first Schedule P (541) as explained in General Information G, Alternative Minimum Taxable Income (AMTI) Exclusion, it should include the adjustment for the exclusion of the gain on qualified small business stock. When the estate or trust completes its second Schedule P (541) for the beneficiary, it should not include the adjustment for the exclusion of the gain on qualified small business stock, since the exclusion may not be passed through to the beneficiary, see R&TC Section 18152.5(g)(4).

Revised Version

Note: text deleted.

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.

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Updates to 2008 Schedule P (541) Alternative Minimum Tax and Credit Limitations – Fiduciaries Instructions

The revised Internet version is available for download as of 02/18/2009.

Revision Details: R&TC Section 17039.2 limits the application of business credits allowable under Chapter 2 to 50% of the net tax, with specific exceptions for individual taxpayers. This revision removes the exceptions that do not apply to estates and trusts. This revision also adds Other State Tax Credit (OSTC) and clarifies the OSTC is not considered a limited credit. The OSTC is authorized in Chapter 12 of the R&TC.

  • The update is located in the Schedule P (541) Instructions, Page 6, 2nd Column, "How to compute the limitation," 2nd sentence, bulleted list and 3rd sentence.

Previously read:
The limitation only applies to business tax credits, and does not apply to the following credits:

  • Credit for household and dependent care
  • Credit for adoption costs
  • Renter´s tax credit
  • Credit for personal exemption
  • Credit for qualified joint custody head of household and qualifying taxpayer with a dependent parent
  • Credit for senior head of household
  • Excess contributions of unemployment compensation

The credits listed above are required to be applied before any business tax credits are applied.

Revised to:
The limitation only applies to business tax credits, and does not apply to the Other State Tax Credit.

This may reduce the taxpayer's tax liability because it removes the implied business credit limitation from the OSTC.

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