Tag Archives: California

The Good & Bad of the New Tax Reform: How California’s Affected

Tax reform text on calculator screen with hundred dollar bill on income tax form.

How does the federal tax reform affect California? This blog post explains.

The beginning of the year marks the start of many new things: a new year, new business goals and new federal tax reform. What do the changes in tax law mean for California companies – especially in Silicon Valley?

In The Daily Journal, Carl Guardino (CEO of the Silicon Valley Leadership Group) likened the latest tax reform to the 1960s western, “The Good, the Bad and the Ugly” – and for good reason. While there are some changes that will benefit corporations, others will likely make it difficult for businesses in the area.

Are these changes considered ‘good, bad and ugly’ throughout the entire state, all the way down to Southern California? Keep reading to find out how this year’s federal tax reform will affect corporations in Silicon Valley as well as Southern California.

‘The Good’ of Federal Tax Reform

One big change to the latest tax reform is corporations seeing tax rates slashed; instead of paying 35 percent, they’ll only need to pay 21 percent. Also, companies making profits overseas will only be subject to taxes based on where the sales are made, eliminating an additional tax they’ve been paying in years prior. As you can imagine, these changes will make a big difference for many companies in the area. It also makes U.S. businesses more competitive with the global innovation economy, an important field for many Silicon Valley enterprises. Continue reading

State Tax Deduction Limit? California Fights Back.

What’s good for the goose….

By now many of us in California have contemplated our fate regarding how the tax reform act passed by Congress last month will likely hurt Californians as a result of the federal limit on the state and local tax deduction for individual taxpayers.

In an effort to mitigate the limit of this deduction for Californians, state lawmakers have quickly looked to alternatives.

New Tax Plan – limited deduction

For residents of California and other high tax states, a major item of concern in the tax act is the cutback of deductions for state and local taxes (SALT). Taxpayers will now be able to deduct only up to $10,000 in SALT, including property taxes.   According to this recent LA Times article, limiting the SALT deduction could affect as many as 6 million Californians. California taxpayers accounts for almost 20% of all SALT deductions, which is the highest state in the nation.  Other states with large amounts of SALT deductions include New York, New Jersey and Connecticut, perhaps not coincidentally – all “blue” states.

How to mitigate the problem?

One option proposed last week by Senate President pro Tempore Kevin de Leon (D – Los Angeles), would be to recast state and local taxes as charitable contributions, which remain fully deductible under the GOP tax act.   SB227 (known as the “Protect California Taxpayers Act”) would allow California taxpayers to make a charitable donation to a government entity, the California Excellence Fund, in the amount of their state taxes.  They would then receive a dollar for dollar tax credit on their CA tax return in the amount of the donation.  (For example, a taxpayer owing $15,000 in property taxes, might pay this amount to the Excellence Fund. The taxpayer then gets a tax credit for the entire $15,000 on their CA return. On the federal tax return, the taxpayer correctly classifies this amount as a charitable contribution, which is not limited to the $10,000 SALT rule.  So, by essentially reclassifying the property tax as a contribution, the taxpayer still gets the full deduction for the entire $15,000, rather than just $10,000 on their federal return.)

Playing Devil’s Advocate?

So, that all sounds good. But will the IRS allow it?  Will Congress?

What constitutes a charity? The Internal Revenue Service (IRS) and federal courts have ruled that government entities can qualify as charities for the purpose of the charitable deduction, even when the donor receives a full state or local tax credit in return.  California and other states already have similar programs in place. For example, CA has a College Access Fund, which grants a 50% tax credit for contributions to the Cal Grants Program, which aids low-income college students.  17 additional states use a similar model to fund private education.

While the proposal is certainly creative, and has some defendable history behind it, we recommend to be cautiously optimistic about its ultimate passage in the state and then whether Congress will find a way to shut it down by passing further clarifying legislation.

For more information regarding this act published by the San Joe Mercury News, click here.

Stay tuned for further updates!

If you have any questions, please don’t hesitate to contact us at info@milesconsultinggroup.com. We are happy to help with all of your tax needs.

 

Conducting Business in the Golden State [California State Tax Woes]

Is the California state tax system scaring you away? Be sure you make an informed decision!

Is the California state tax system scaring you away? Be sure you make an informed decision!

Do you conduct business is California? The state is known for a less-than-friendly atmosphere for clients, yet the economy is responsible for $2 trillion in business annually. With 1.37 million businesses and 17 million workers, many companies are choosing to maintain a presence despite California’s state tax system scaring many others away. In fact, another article recently concluded that California is one of the best places for new business. So what’s the real story? It’s probably something in between! The truth is, as the nation’s largest state, California is a hub for commerce, and many businesses can’t afford NOT to be here.

Why do businesses stay?

In a recent article, Joe Vranich, a corporate relocation specialist and harsh critic of the Golden State’s business climate, still says, “This is the single most beautiful state I’ve ever lived in…I have the best quality of life I’ve ever had here. And the weather, I tell people I think this is the weather we’ll find when we get to heaven.”

As a resident myself, I have to agree the state does have an appealing draw. It’s not all weather and beauty, either. There are particular fields California has a stronghold on, such as technology and entertainment. And, the state has started doing what it can to try to entice companies to stay too, by providing some credits and incentives to offset the hefty California state tax costs (see our recent blog about the state’s California Competes Tax Credit). Of course, other states offer credits and incentives as well, so some of that is just California trying to keep up. Continue reading

New Laws for 2016

 

Every year state legislatures enact a number of interesting laws. We thought we’d recap a few just to ring out 2015 and ring in 2016. Here are some changes to expect in 2016 in California, and a “feel good” favorite in Illinois – just because we love our animals in every state!

CALIFORNIA

Vaccination (S.B. 277): The amendment to the vaccination law removes the immunization exemption for personal belief for children attending public or private elementary or secondary school, day care, nursery, or development center. In response to recent disease outbreaks in the country, the legislation imposes stricter guidelines and immunization requirements for people in in a classroom setting where there is a lot of human interaction. Continue reading

[California Legislation] State Updates Conformity to Federal Code

Here are the details of California's conformity to Federal code.

Here are the details of California’s conformity to Federal code.

Good news for California corporations: Gov. Brown signed Assembly Bill 154, which updates conformity to Federal Internal Revenue Code. The legislation was created for two reasons:

  1. To simplify state income tax returns, the filing and administration of California’s income tax laws.
  2. To provide relief to corporations facing income tax penalties.

Because it’s defined as an urgency statute, this bill is effective immediately, meaning taxable years on or after January 1, 2015. Keep reading for more details about the bill.

Provision 1: California’s Conformity to Federal Revenue Code

To summarize, this recently passed conformity bill means that California’s income tax laws for individuals and corporations will follow the federal Internal Revenue Code as of January 1, 2015. Of course there are a few exceptions, such as:

  • The Worker, Homeowner, and Business Assistance Act of 2009, which includes an increase in penalty for failure to file a Partnership or S Corporation Return and requires certain tax return preparers to file electronically
  • The Patient Protection and Affordable Care Act, which includes a modification of the itemized deduction for medical expenses
  • The Tax Increase Prevention Act of 2014, which includes an extension of the Work Opportunity Credit
  • The Achieving a Better Life Experience Act of 2014, which includes qualified ABLE programs and an inflation adjustment for certain civil penalties

Continue reading

Current California Tax Incentive Programs [Update]

Side view of a piggy bank with the flag design of California.

Are you aware of these California incentive programs?

As we’ve explained before, tax incentive programs are designed to provide companies with funds set aside by states or municipalities; businesses are chosen to receive these incentives based on their potential for creating jobs, increasing manufacturing activities or carrying out other positive business endeavors like incorporating sustainable practices, to name a few. We’ve previously reported on some of the newer California incentive programs that replaced the sunsetted enterprise zone program. Here is an update of some current California tax incentive programs that may benefit your company.

The California Competes Tax Credit

This is one of California’s tax incentive programs that we’ve discussed a lot this past year. It is designed to attract out-of-state businesses to expand into the Golden State, or to encourage existing companies to stay and grow here. It’s been lucrative so far, with most of the benefit going to existing California companies engaged in expansion. During the last fiscal year (which ended June 2015), Tesla received $15 million, Northrop Grumman Systems Corporation was allocated $10 million and Samsung Semiconductor, Inc. wrangled $9 million. Continue reading

California New Employment Credit

In 2014, California’s tax credit and incentive landscape changed significantly. As of 12/31/13, the state’s lucrative Enterprise Zone Program officially ended. The Enterprise Zone Program offered several tax credits, incentives and deductions for California businesses and financial institutions (note that benefits for the multi-year EZ Hiring Credit will continue to accrue for several years, and unused credits generated from the EZ program can be carried forward).  In replacing the EZ program, legislators indicated that they wanted more focus on credits that would create economic growth and jobs within the state beyond enterprise zones. They also wanted to remedy some perceived abuses with the EZ program.  We worked with the program for many years, and while it wasn’t perfect, it certainly benefited many of the state’s disadvantaged communities. Cynics of the legislative process in California (author included) might say these changes were purely political.  As you will see from our discussion of the new employment credit below, this is NOT a program meant to spur widespread hiring in California via usable tax credits as it is too restrictive to provide benefits to a broad tax base.

The New Employment Credit

The money that was previously allocated towards the EZ program is now being redirected toward three new incentive programs – the Manufacturers’ Sales and Use Tax Exemption, the California Competes Tax Credit, and the New Employment Credit. Theoretically, the New Employment Credit replaces the previous EZ Hiring Credit. The New Employment Credit is for qualified employers who hire qualified full-time employees on or after January 1, 2014.

Continue reading

California Film Tax Credits

Film Industry in California

Hollywood California has long been considered the movie capital of the world. Historically, the state has been a great location for filming due to its landscape and weather conditions and eventually numerous motion picture studios began appearing in the area. The movie industry has developed substantially since its early beginnings and so has its costs. Pairing these rising costs with the additional tax ramifications businesses face within California, film studios began filming elsewhere. Since 2004, the state has lost over 18,000 jobs within the film and television sector.

California’s Expanded Tax Credit Program

Today, other states have become more appealing locations to film for several reasons, including not just movie settings but also financial purposes. Although there are still plenty of movies being filmed in California, the film industry is not as prominent in the state as it used to be. Thus, in February 2009 California created the California Film & Television Tax Credit Program to increase film and television production, jobs and tax revenue.

This program, administered by the California Film Commission (CFC), provides a tax credit equal to 20-25% of a company’s income tax and/or sales and use tax for eligible film and television productions. Qualified productions must film at least 75% of principal photography days or 75% of the budget must be spent in the state. If the tax credit is used for income tax purposes they are nonrefundable and carried forward for 5 years and can be transferred to an affiliate. Motion pictures considered to be a qualified “independent film” (less than $10 million budget) are allowed to transfer or sell their tax credits to an unrelated party. In addition, $10 million in tax credits is reserved for independent films. The application process requires providing supporting documents to prove eligibility and filling out necessary information and production information (e.g. type of production, schedule to film, and number of principal photography days). After this the CFC will review the applications and, if selected, issue a certificate for the tax credit. Continue reading

The California Competes Tax Credit Program

The deadline to apply for the California Competes Tax Credit program is October 27th.

The deadline to apply for the California Competes Tax Credit program is October 27th.

The California Competes Tax Credit Program is in full swing. In this article we review the basics about this incentive program as well as important facts and dates to take into consideration.

What Is The California Competes Tax Credit Program?

Earlier in 2014, the State of California announced the innovative California Competes Tax Credit program. The program was implemented to offer California-based businesses an income tax credit if they’re looking to expand, or for non-California organizations looking to relocate to the Golden State.

The project has several phases, and applications from businesses go through a review process to determine which opportunities best meet the state’s objectives for economic development, and to allocate funds to companies that best carry out those objectives. Continue reading

Tesla Chooses Nevada

For the last several weeks, we’ve been blogging about tax incentives and the push of states to lure companies such as Tesla to build plants and employ workers in their state.  Last week, Tesla announced that it will be locating its new factory to produce lithium ion battery packs (the so-called “Giga-factory”) in Nevada, just outside of Reno.  Not Texas, Arizona, New Mexico, or the company’s headquarters state of California. The final tax incentive package reportedly offers the company tax breaks of over $1Billion including sales tax abatements over 20 years, real and personal property tax abatements over 10 years, payroll tax abatements, and even some transferrable tax credits (that the company can sell to other companies).   While Tesla CEO Elon Musk claimed that the deal was done with Reno not solely for the tax incentives, they certainly had a huge impact on the decision.

As a Californian, I couldn’t decide if I was happy or sad to see the plant go to Nevada.  Certainly, the obvious answer is that, as a citizen, I would have liked to see us retain or gain 6,500 jobs in the manufacturing sector.  That would be good for everyone – right?  But the state tax professional in me, and regular cynic of California politics is smiling a little bit deep inside that Tesla gave us the jilt.  I want to say, “See, I told you so!”  We watched as Governor Jerry Brown and our legislature did away with Redevelopment programs across the state in one fell swoop and then eliminated the successful enterprise zone program the following year – all in the name of somehow being friendlier to business in the Golden State.  (Right? Help me with that math!)  All of our tax rates are high (corporate, individual, and sales/use tax), we continue to have among the highest worker’s compensation rates in the country, and we make it difficult for companies to navigate our environmental laws to construct buildings – just to name a few things.  While Mr. Musk didn’t specifically call out the state about these things, I can’t help but wonder if that didn’t have something to do with his decision to locate the factory outside of California.  Tesla is the kind of company that gets things done.  My guess is that trying to build such a Giga-factory here wasn’t going to “get done” quickly.

Don’t get me wrong.  There are certainly a lot of things to love about California, which is why so many of us make this our home.  But I think it is time for Sacramento to open its collective eyes and put its actions toward truly making this a better place to do business.  If not, we’re likely to see some of our other gems leaving for other states.  Not every deal will be a $Billion and promise 6,500 jobs, but small and mid-size companies can talk with their feet as well.