Federal & California Tax Differences
Some of California’s taxation procedures and regulations are distinctly different from those of the Internal Revenue Service. If you are unaware of these differences, you could end up with a large tax debt to the Franchise Tax Board. Some of the major differences include:
- Net Operating Loss-California’s rules for net operating loss match federal laws except when it comes to carrybacks. The FTB’s rules are extremely complex and seem to change annually, but for 2013 NOL, the carryback amount cannot exceed 50 percent while for 2014 NOL, the amount cannot be greater than 75 percent. The 2015 NOL will be 100 percent.
- Registered Domestic Partners-California law requires Registered Domestic Partners to file state income tax returns using either the married/RDP filing jointly or married/RDP filing separately status. RDPs are not allowed to file federal income tax returns using the married status.
- Mortgage Forgiveness Debt Relief-California does not conform to federal law regarding the discharge of indebtedness from the disposition of a principal residence.
- Statute of Limitations on Collection-Whereas the IRS has a 10-year statute of limitations for collecting past due accounts, the FTB’s statute is 20 years. This can mean even though a taxpayer is no longer a California resident, the FTB can still collect an old tax debt by issuing a bank account levy or seizing an IRS or other state income tax refund.
- Statute of Limitations on Assessment -The FTB has four years from the date of filing to assess more taxes on a filed return while the IRS has only three years from the date of filing.
- Audit Selection-Although many FTB tax audits are the result of an IRS audit, the agency also uses unique criteria when choosing a taxpayer or business for audit by accessing Department of Motor vehicle records as well as state property tax bills. The execution of tax-deferred Section 1031 like-kind exchanges and reported losses from flow-through entities also have a tendency to trigger an FTB audit.
- Tax-Exempt Entities-There are several differences for tax-exempt entities operating in California. Whereas federal law does not require entities with less than $5,000 in gross receipts to apply for exemption, the state demands all nonprofit entities apply for and receive an exempt determination or acknowledgement letter from the FTB.
- Foreign Earned Income-Federal law allows an exclusion of foreign earned income while California taxes residents on income from all sources, including earned income from foreign countries.
There are many more differences between California and federal tax laws. For more information, go to www.ftb.ca.gov/forms/updates/conformity.shtml.
The attorneys of Brown, PC have extensive experience and in-depth knowledge of California and federal tax laws, and can help you navigate through the differences. We represent clients in Los Angeles and throughout California. Please contact the professionals at Brown, PC to discuss your case. We can be reached online or via telephone at 817-870-0025.