California will decide next year whether to conform to the tax changes the federal government made in late 2017.
US states piggyback on the federal tax laws by using federal taxable income as a starting point for their own income tax calculations.
The California legislature must vote periodically to move the date forward through which it “conforms” to how the federal government calculates taxable income.
The state conforms currently to the federal income tax calculations only through January 1, 2015.
The Franchise Tax Board has been gathering input on which tax changes since then should be accepted by the state. The comment window closed on December 15.
The board will report to the state legislature next.
A number of big issues are in play.
California still takes the position that partnerships terminate for income tax purposes after a transfer of 50% or more of the profits and capital interests within a 12-month period. The federal government stopped treating such partnerships as terminated at the start of 2018.
The federal government stopped collecting an alternative minimum tax from corporations in 2018. California must decide whether to follow.
The federal government now caps the interest that a company can deduct each year on debt at 30% of an expanded definition of the company’s taxable income. California has no cap.
The federal government now limits how much a company can use net operating losses carried forward from an earlier year to reduce its current income. Such losses can only be used to reduce current taxable income by up to 80%. The federal government also no longer allows NOLs to be carried back up to two years as it did before 2018. California has not yet adopted these changes.
The federal government used to tax US companies on worldwide income. It now has a more complicated approach. Active income that US companies earn through foreign subsidiaries conducting real businesses — rather than making passive investments — is no longer taxed in the US, unless the foreign subsidiary has more than a 10% return on its depreciable tangible assets, in which case the US will look through the foreign subsidiary and require the US parent to report the excess return as income in the US without waiting for the foreign earnings to be repatriated to the United States. This is called a “GILTI” tax. California must be decide whether to include such income in the corporate tax base in California.