Authored by Frances Ellington and Arun Dubey
As the IRS and U.S. Treasury roll out FAQs and additional guidance on the CARES Act and COVID-19-related legislation, the GHJ State and Local Tax Team has fielded numerous questions from clients on how these new laws will affect California’s state taxes. Below is some insight into the most frequently asked about topics and how they will apply on a state-level.
The cash payment from federal government in the amount of $1,200 for individuals ($2,400 total for individuals filing joint return) and $500 per qualifying child under the recently enacted federal CARES Act is NOT subject to California income tax.
Additional Unemployment Compensation
The emergency increase in unemployment compensation benefits in the amount of $600 per week that an individual receives from federal government due to recently enacted CARES Act is also NOT subject to California income tax. Generally, the standard unemployment benefits are subject to California income tax.
Early Withdrawal Tax Penalty Waivers
The federal early-withdrawal penalty waivers for distributions from qualified retirement accounts under the federal CARES Act also applies for California income tax purposes.
Income Tax Filing and Payment Deadlines
Income tax deadlines for business entities and personal income tax have been extended until July 15, 2020. These extensions apply to filing, payment, audits, billing, notices, assessments and claims for refund, as well as relief from subsequent penalties and interest. See the Franchise Tax Board (FTB) News Release for additional detail.
Refund of CA Estimated Tax
The estimated taxes paid by businesses and individuals in excess of anticipated liability can be refunded upon filing a California return with the FTB. The FTB will not refund the taxes paid for next year until the taxpayer files a return and requests a refund of the amount. For example, 2019 estimated tax paid would not be refunded by the FTB until the 2019 tax return is filed and a refund is requested.
Sales Tax Filing and Payment Deadlines
The California Department of Tax and Fee Administration (CDTFA) set a 90-day extension for tax returns and tax payments for all businesses filing a return (e.g., sales and use tax) for less than $1 million in taxes. That means small businesses will have until July 31, 2020 to file their first-quarter and second-quarter returns.
Sales Tax Loan from CDTFA
Small business taxpayers, meaning those with less than $5 million in taxable annual sales, can take advantage of a 12-month, interest-free payment plan for up to $50,000 of sales and use tax liability. Additional information on the program can be found here.
Protection Program (PPP) Forgiveness
Under federal law, loan forgiveness generally counts as taxable income. Under the CARES Act, however, expressly excludes the forgiveness of small business loans under the Paycheck Protection Program (PPP) from this provision. California may not conform to tax forgiveness. However, the state has yet to adopt provisions in the CARES Act. California will allow corresponding payroll expense deductions historically allowed by the FTB.
Qualified Improvement Property (QIP)
Under the CARES Act, the depreciation method for QIP changed from 39-year property to 15-years Modified Accelerated Cost Recovery System (MACRS) property and thus makes it eligible for 100-percent bonus depreciation for federal tax. California does not conform to the federal treatment of bonus depreciation or the CARES Act changed related to QIP. For California purposes, the useful like of QIP is generally 39 years (40 years under Alternative Depreciation System [ADS]).
For California tax purposes, if a taxpayer’s 1031 like-kind exchange identification period or exchange period is due to expire on or after April 1, 2020 and before July 15, 2020, taxpayer’s identification period and exchange period is extended until July 15, 2020.
Real Estate Withholding
California did NOT extend the due date for real estate withholding for COVID-19 effected taxpayers. Any amount required to be withheld and remitted for the transfer of real property is due by the 20th day of the month following the close of escrow. Similarly, the taxpayer must file Form 593, Real Estate Withholding Statement, no later than the 20th day following the month escrow closes.
Additional resources and COVID-19 state information for California is located here.
GHJ has been actively monitoring these issues. Please consult your GHJ tax advisor or a member of our COVID-19 Resource Team if you have any questions about this or any other COVID-19-related items.