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| when it was received or when it was redeemed. If you want to change the election later on, you must get special permission from the Franchise Tax Board. If you chose to include the noncash patronage dividend in the year redeemed enter it on Schedule CA, line 9, column B and then enter the actual amount redeemed on Schedule CA, line 9, column C. Use Schedule CA to enter the amounts to deduct it from the federal amount if it was included in income in the federal tax return but it is not taxable for California tax purposes. Again, California Schedule CA is to make adjustments for the differences or nonconformity items between federal and California. If the California treatment of the dividends coincides with the federal treatment of the dividends, then there is no need for an adjustment and therefore the item simply flows through to California from the federal tax return. |
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Controlled Foreign Corporation (CFC) |
| Controlled Foreign Corporations are sometimes used to artificially defer tax by means of offshore entities which have a lower tax. Certain types of income of Controlled Foreign Corporations must be included in the federal gross income of the U.S. shareholder in the year the income is earned by the CFC even if the income is undistributed. In certain circumstances, earnings of CFC may be deferred from U.S. tax if not actually distributed to the U.S. shareholder. Taxability of Controlled Foreign Corporations (CFC) can get a bit complicated. California taxes Controlled Foreign Corporation dividends in year distributed and not in the year earned. This is different from the federal treatment of CFC by the Internal Revenue Service. If CFC dividends are earned in one year and distributed in a later your they may be included in your federal income for the year earned, so you must make an adjustment for California. Enter the dividends earned on Schedule CA, line 9, column B to account for the federal and California nonconformity. On the other hand, enter the dividends for the year distributed on Schedule CA, line 9, column C. California taxes CFC dividends in the year the dividends were distributed and federal taxes dividends in the year earned, therefore, one year you will have to make one adjustment and the other year you will have to make another adjustment for the same dividends in question. Some years the year of distributions will be the same as the year earned and no adjustment will be necessary. Remember, Schedule CA is there to reconcile the differences between federal and California items. |
| Distributions of pre-1987 earnings from S corporations |
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There are advantages to every type of business organization. Many taxpayers think that the best business organization for them is the S corporation. An S corporation is similar to a partnership. It elects to pass corporate income, losses, deductions, and credits through to the shareholders for federal tax purposes. Consequently, the S corporation shareholder report the S corporation income on their personal income tax returns and pay the individual income tax rates on this pass through income. The S corporation status allows individuals to avoid double taxation on the corporate income. There are certain qualifications you must meet in order to be considered an S corporation. You have to qualify and you can also lose your S corporation status if you don’t maintain the requirements. |
| At one point before 1987 there was no S corporation status election at the California taxation level. All corporations were corporations for California. Then in 1987 California started allowing for the election of S corporation status. If the distributions from the S corporation exceed the California balance in the accumulated adjustments account (AAA), you have a distribution from pre-1987 earnings. To account for the differences with your federal tax return, enter distributions from pre-1987 earnings on Schedule CA, line 9, column C. You also need to enter any earnings in any later year that the corporation was a federal S corporation but a California regular C corporation on Schedule CA, line 9, column C to account for the difference in the accumulated adjustments account (AAA) balance. Now California allows for the election of S corporation status, so the tax returns for federal and California will match for the most part. However, if there are any differences you need to account for them on |
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| Revised: 07/09/15 |
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