Changes for businesses
The California Legislature recently enacted Assembly Bill 1452. It contains several provisions that affect business entities and individual taxpayers with business income.
Taxpayers with net business income of $500,000 or more
For taxable years beginning in 2008 or 2009, taxpayers with net business income of $500,000 or more are subject to the following:
- Limitation on utilizing business tax credits.
- Suspension of net operating loss (NOL) deductions.
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.
Business tax credits limitation
If the net business income is $500,000 or more, the maximum business tax credit allowable for the 2008 and 2009 taxable years is 50 percent of the net tax prior to the application of any credits.
Some common business credits are:
- Research and Development Credit.
- Low Income Housing Credit.
- Enterprise Zone Credit.
- Manufacture Investment Credit.
All other limitations to using the credits (such as the zone income limitation for the Enterprise Zone Credit) still apply. The business tax credits not allowed due to the limitation can be carried over to future years. Any carryover period for the credit will be extended for the years the credit was disallowed.
NOL deduction suspension
Taxpayers with net business income of $500,000 or more in taxable years beginning in 2008 and 2009 must suspend their NOL deductions for the years the threshold is met. Taxpayers
may continue to compute and carryover an NOL during these years. After the suspension period, NOL deductions can again be utilized. The carryover period is extended for the suspended losses.
A new carryback provision will be adopted for all NOLs incurred on or after January 1, 2011. All taxpayers will be able to carry back NOLs for two taxable years preceding the year of the loss. The amount of the carryback is determined based on the year the NOL is incurred.
Limited Liability Company (LLC) Fee
For taxable years beginning on or after January 1, 2009, the due date for the LLC fee is earlier. The LLC fee must now be estimated and paid by the 15th day of the sixth month of the current taxable year. A 10 percent penalty will be added to the fee for any underpayment. The underpayment penalty does not apply if the LLC timely pays a fee equal to or greater than the total LLC fee paid for the previous taxable year.