In general, California conforms to federal tax law for the most part. However, any differences between California and federal must be noted in the tax forms in order for you to calculate the California state tax returns correctly. There will be many differences. Your job as tax preparer is to make sure that you apply credits and deductions to tax income correctly. Familiarize yourself with different deductions and credits which federal allows and what differences, if any, with which the state of California does not conform with. There may be new federal tax laws passed that the state of California has not got around to consider yet, and therefore, you may have to make adjustments accordingly. If there is a federal tax deduction or credit, you need to look for the corresponding California state deduction or credit and if there is none, you need to remove it from the California gross income. 

Net Operating Loss (NOL). What is it? You know that if you own a business you can manipulate your income to certain extent. You can make decisions towards the end of the year that will allow you to also manipulate your tax rate. Again, this is to a certain extent and it is all legal. The correct name for using time to manipulate your tax return is called tax planning. When you use the tools available to you in tax planning, you forecast your tax liability based on all the facts present at the moment and you work on ways to reduce your tax liability. If you need a loss to offset your income and you know that a business will most likely operate at a loss in the first three years, you may want to venture into a new business. The goal of starting a business is to make a profit and a loss is just something that happens early on in the start of your new venture. This has to do with all the set up expense at the beginning of the business start-up. You may have an NOL as a result. At the early start of all business there more expenses for necessary items such as marketing.

Not too long ago, individuals were filing tax returns as single taxpayers although they were technically married. Then, individuals were filing tax returns for federal tax purposes as single and were filing as married filing jointly/RDP for California. According to the Franchise Tax Board code section 297, domestic partners “are two adults who have chosen to share one another’s lives in an intimate and committed relationship of mutual caring.” Both persons must file a Declaration of Domestic Partnership with the Secretary of State. Upon filing this partnership with the state of California, the individuals are given the same rights and responsibilities that are given to married individuals. Thus, with this new ruling, individuals of the same sex can now file joint tax returns just as married individual do. Federal now allows for individuals of the same sex to file jointly. However, with federal there are special requirements to establish the relationship like the state of California requirement to file a Declaration of Domestic Partnership with the Secretary of State. The requirements are usually established with the individual states or countries that allow same sex marriages. The new federal benefit for same sex couples is a result of many states allowing same sex couples to file tax returns as married individuals. Now both California and federal allow for same sex partners to file a joint tax return.

For California tax purposes, you need to know when to use Schedule CA and when to make California adjustments on this schedule CA. Very important to remember that if both the state of California and federal coincide and agree with the tax rules, there are no differences and therefore no need for Schedule CA of Form 540. When California agrees with the federal credits and deductions it is considered conformity. California tax laws conform to the federal tax laws for the most part. When you file tax returns you have to file a tax return for federal and also a tax return for California. California is one of the fifty states which require the filing of a tax return. There are only seven states which don’t require filing of a tax return and California is not one of these states. I’ll mention them here just for fun: These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington (state) and Wyoming. If you prepare tax returns in one of these seven states, you don’t need to worry about filing a state tax return. Even if you live in California, you’ll get a few of those. You know, the taxpayers who move from state to state. At times you your client, the taxpayer, may have live part of the year in California and the other part in another state. Therefore, knowing which states don’t require filing a tax return is good to know and can save you some research time. If you know this, you only need to worry about filing the federal return for this state or for part of the year the taxpayer lived in that no income tax state. California is one of the states that requires the filing of a state tax return.

If you have to prepare a tax return involving a soldier, you need to find out everything you need to find out about soldiers and military pay. When preparing returns with military pay situations you will most of the time have to deal with nonresident and part-year resident taxpayers. In some situations, the military taxpayer may have lived in California all year but not be liable for California taxes. Other times, the taxpayer may be liable dependent on when the soldier entered the military and when he or her started living in California. As a rule, the military taxpayer is considered a resident of the state from which he or she entered the military. The individual does not lose his or her residence or domicile in any state when in compliance with military orders. Likewise, the person does not acquire a new residence or domicile by being in compliance with military orders. Some will be full-year residents, others will be nonresidents and still others will be part-year residents. If you have to file a nonresident California tax return you would have to use Form 540NR. You would use this Form for either a short form or long form California tax return. Active duty military members is included in your California income calculations as taxable income to California only if the military taxpayer is domiciled and stationed in California and the pay is earned in California. The military taxpayer could be living in California but not be domiciled in California. An individual could be domiciled somewhere else if somewhere else is where they do business such as their banking and where they pay a mortgage and where they have their vehicles registered. Being a soldier sometimes involves coming to California from another state and this does not necessarily mean that this soldier is a California resident.

For the most part, sick pay is not taxable, but it could be. Do your homework and make sure that your sick pay is not taxable before you decide not to include on your federal tax return. If you received sick pay benefits, you must report the amount received for personal injury or sickness if the insurance was paid for by your employer. Amounts received from plans paid for by you are usually not taxable for federal tax purposes. If both you and your employer paid for the plan, only the amount received that pertains to what your employer paid is taxable. However, this is true only for your federal tax return. California does not tax any income received due to sick pay under the Federal Insurance Contributions Act or the Railroad Retirement Act. This also holds true for any social security benefits you receive. These amounts must be adjusted on Schedule CA of Form 540. Usually you show an adjustment for any of these amounts since they are not taxable for your California tax return on line 7, column C of Schedule CA of Form 540 or 540NR. You know how these could be taxable on your federal tax return depending on who paid for the plan? Well, for California, it does not matter if the amounts are taxable or nontaxable for federal tax purposes, or if the employer paid for the plan or not, the amounts are nontaxable for California regardless. Therefore, whatever amount that pertains to qualifying sick pay that was included on the federal tax return must be excluded from your California tax return by using Schedule CA. California excludes from income any kind of sick pay that is included on your federal tax return. Then exclude this amount from your California tax return since it is not a taxable item for California.

U.S. tax treaties are there for a reason and usually they benefit people who have a stake in other countries. The United States goal is to have strong relations with other countries. Everyone is better off with more friends that will hopefully be there for you in case of trouble. The U.S. has treaties with several countries. Usually part of the various treaties is to offer tax breaks to residents of that country who derive income from the United States. The treaties listed usually state which breaks are to be allowed and along with that declaration there is usually the tax savings that will be received by the resident of those countries with which the United States has treaties. If no treaties exist between the United States and the country the resident of that country who is doing business and deriving income from the United States, that individual will have to pay taxes accordingly by filling our Form 1040NR. Most individual U.S. states honor the treaty provisions that the United States may have with the certain countries. However, California has certain limitations and income derived that is normally exempt by U.S. treaties could be taxable for California. Any income derived that is normally exempt by U.S. treaties may be excludable for California only if it is specifically stated in the treaty that the income is exempt income from state income tax. Remember, California taxes adjusted gross income from all sources. Once you figure the amount to be excluded from federal that is not excludable for California, enter is on line 7 of Schedule CA of Form 540 or Form 540NR. Tax matters that have to do with the United States doing business internationally will be most of the time be a nonconformity item for California tax purposes.

Ridesharing saves the taxpayer a lot of money and it also saves a lot of headaches for many drivers trying to get to and from work. Under federal tax law, if you give your employee transportation money that is so small that it is impractical to keep track of it in your accounting records, you can exclude it from income. This is considered a de minimis transportation benefit. There are other qualified transportation benefits. You can exclude from income any benefits you received such as a transit pass, qualified parking, rides in commuter highway vehicles between employee’s home and the work place and qualified bicycle commuting reimbursements. Transit passes qualify only if a voucher is readily available for direct distribution and from a voucher provider who does not impose fare media charges or other restrictions. Qualified bicycle commuting reimbursements cannot be excluded if the reimbursements are provided in place of pay. A commuter highway vehicle is a vehicle which seats at least six adults besides the driver. Qualified parking is parking you provide to your employee on or near your business or parking on or near the place your employee take public transportation such as public parking near the bus or train station. This is true as long as the parking is not near the employee’s home. This is quite obvious, the parking should not be near your home and there is probably a mention in the tax rules for this because some taxpayer have already tried doing this. 

When you own stock in a company, you become a stakeholder in such company in the hope that someday you will get paid for your efforts. Getting paid in more stock is fine too, as long as you do get paid. Some companies give you the option to get paid with stock instead of a paycheck. When you report the income that you did not receive depends on when you received the option, when you exercise the option, or on when you sell the stock received. Getting paid with qualified stock options is considered a stock option. There are statutory stock options and nonstatutory stock options. If you receive a statutory stock option, you normally don’t include any amount in your gross income when you receive or exercise your stock option. However, if you are granted a nonstatutory stock option, you may have to include the amount in income, but this would depend on whether the value of the option can be readily determined. If the option is traded on an established market then this should not be any problem. However, most nonstatutory stock options are not readily determinable so you must include in income the fair market value of the stock received when you exercise the option or when you sell the stock received.

Native Americans have endured many prejudice situations. In a way it is good that Native Americans are also subject to taxation for federal tax purposes. At least if Native Americans pay taxes, hopefully the prejudice towards them will stop. Earnings of American Indians are subject to federal taxation and many of the taxation rules are specifically written for them. Federally recognized tribes are their own legal entities established similar to the way states are established. They are set up like states and are given rights similar to rights given to state entities. Therefore, similar to the residents of the states, the residents of the Indian tribes are liable for taxes just as other residents. Income received by Indians from reservations sources is usually taxable for federal tax purposes. However, California does not tax the income of tribal members who live in Indian reservations and who receive income from their tribal sources. Any income received for services performed by tribal members while living or being domiciled on their reservation is nontaxable for California tax purposes regardless of who paid it. If the earnings from a Native American are taxable by federal you must make them excludable by California by entering them on line 7, column B to exclude them from the total income reported to California. The earnings of American Indians are usually subject to federal taxation similarly to income of residents from the fifty U.S. states, but are usually not subject to California taxation and therefore it must be subtracted from your California gross income total. It is important to note that if the Native American is not domicile or residing in a reservation, he or she will owe California tax. In this case the income would be the same as the federal amount and just transfer over from the federal tax return to the California tax return. There are many rules in place for Native American when it comes to California taxation matters. California taxation of natives is based on whether the Native American lives in or outside of the reservation.

Ministers and religious leaders can be found everywhere. These religious leaders are there to provide guidance to individuals who seek advice. Usually if there is family crisis, the family will go to these religious leaders to help them get through it and hopefully find solutions. It seems that everywhere you look there is a minister from one religion and another religion. For federal tax purposes a minister may be exclude from the income the fair rental value of a home or housing allowance plus utilities provided as compensation for his or her ministerial services. The minister needs to report the income received from the religious organization for his or her services. If the minister is self employed, he or she can file an application so that he or she does not have to pay social security tax on his or her self employment income. In order to qualify for this exception, the individual must be opposed to certain public insurance for religious or conscientious reasons but not for economic reasons. This can be done by filing IRS Form 4361.

Some religious workers or clergy are stated-employed. Allowance for state-employed clergy is a little different. Starting January 1, 2003, up to 50% of gross salary may be allocated for either the rental value of a home or the rental value allowance provided to rent a home. If the amount of the federal exclusion for members of the clergy is less than the California allowable amount, enter the difference on Schedule CA, line 7, column B. Likewise if the amount of the federal exclusion is greater than that of California enter the difference on Schedule CA line 7, column C. California has limits set for exclusion of the rental value of state-employed clergy and it looks like they are less of a benefit than what federal tax law allows.

Merchant seamen and others such as rail carriers, motor carries, and air carriers are in a special classification for federal tax purposes. If you are a nonresident of California, you may exclude from your income compensation for the performance of duties of certain merchant seamen. If you are nonresident of California, you may also exclude from your gross income compensation of an employee of a rail carrier, motor carrier, or air carrier. In preparation of a tax return for a nonresident employee of merchant seaman, rail carrier, motor carrier, or air carrier, enter any amount which you included in federal income which does not qualify for the California exclusion on Schedule CA of Form 540NR, line 7, column B.

Certain individuals need special care and more often require their caretakers to live with them in the home. In-home supportive services (IHSS) supplementary payments are payments funded by the government for in home care of certain individuals. This is one of the jobs that takes a very special and patient person to perform. The question of “difficult of care” makes these payments received by qualified care facilities nontaxable for federal tax purposes. The rule applies mainly to care provider facilities but also to individual care providers. If an individual has his or her own home and only stays a few nights at the care recipient’s home, the payments received are taxable to the recipient. However, if the individual that provides the care does not have his or her separate home and lives in the care recipient’s home, the payments are completely tax free to the IHSS provider for federal tax purposes. On the other hand, California law allows an exclusion from gross income of IHSS supplementary payments received by providers. California allows a complete exclusion of IHSS payments due to the fact that the IHSS providers only received these supplementary payments if they paid a sales tax on the IHSS services they provide. Usually, the supplementary payments are equal to the sales tax paid. Therefore, including supplementary payments in income and paying California personal income tax on these amounts would be considered double taxation. If you included any IHSS supplementary payments in federal wages, enter the amount on Schedule CA line 7, column B to exclude them from California gross income since those payments are not taxable for California tax purposes. There should not be any double taxation for amounts which the recipient already paid a state tax.

Most taxpayers are on the cash basis of accounting and don’t even know it. Some including many corporations are on the accrual basis of accounting. If you own U.S. savings bonds, you must pay federal tax on the interest received from these bonds. When you report the interest, depends on which type of taxpayer you are. Normally, there are two kinds of taxpayers. One is the accrual method taxpayer and the other is the cash method taxpayer. Most taxpayers are cash method taxpayers. Many large businesses and corporations are accrual method taxpayers. If you are an accrual method taxpayer, you report interest on the bond when the interest is earned. If you are a cash method taxpayer, you report interest on these bonds when the interest is available to you or when you receive it. Most interest income received regardless of when you need to pay tax on the interest is taxable for federal tax purposes. However, for California tax purposes any interest received from United States bonds (or obligations) are nontaxable. It is important to note though, that California does not consider Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) to be federal obligations. Therefore, interest you receive from these investments are taxable to California. The interest on United States bonds that is included in your federal income must be adjusted for California tax purposes on Schedule CA of Form 540 or Form 540NR, line 8, column B. Making this adjustment on Schedule CA will exclude the interest from being included in the total California taxable gross income amount. When it comes to investments and United States savings bonds, your basis of accounting could make a different on the timing of your tax obligation.  

Non-California bonds from other states are taxable for California tax purposes. If you received interest from your investments in bonds from state or localities, you will not need to pay tax on these bonds for federal tax purposes because federal does not tax them. Usually this is true if the bonds were issued by one of the fifty states, Washington D.C., any of the possessions of the United States. Also some of the bonds issued by Indian tribal governments are treated as if they were issued by a state and thus are not taxable. However, the Indian tribal bonds that are not taxable for federal tax purposes are only those bonds which are issued after 1982.

California allows an interest net interest deduction on business loans and mortgage loans. You must meet certain criteria in order to qualify for the net interest deduction on business loans within a designated enterprise zone. First, the funds must be loaned within the time period allowed for designation of the enterprise zone. This is the time that includes the date of designation and after this date, and the period before the designation expires. The business must be located within the designated enterprise zone. Furthermore, the loan proceeds must be used only for the purpose of the business within the enterprise zone. Finally, the business owners must not also be the lenders. If the loan takes longer to pay that the designated time of doing business within stipulated time and once the designation period expires, you can no longer deduct interest for the loans. If you have this kind of interest deduction for your California tax return, you must make an adjustment since federal does not have such deduction to use on your federal tax return. You must fill out Form FTB 3805Z to claim this incentive on your California tax return. You must first fill out Form 3805Z and then transfer the amounts to your Schedule CA of Form 540 or 540NR, line 8, column B along with “FTB 3805Z” net to the dotted line on Form 540 or 540NR, line 14 to indicate you are claiming the a net interest deduction for a business operated within an enterprise zone. It may be worthwhile to look into making business loans to businesses located in certain enterprise zones.

However, any eligible individual who was persecuted during the Ottoman Turkish Empire and who receives interest income from settlement payments may exclude the interest income from California gross income. This exclusion applies for any of the victims directly affected or for the heirs of these persecuted victims. The Ottoman Turkish Empire persecution occurred from 1915 until 1923. The individual or their heirs would be the qualifying individuals for the California exclusion from their gross income. Enter the interest received from settlement payments from persecution during the Ottoman Turkish Empire on Schedule CA of Form 540 or Form 540NR, line 8, column B to deduct it from the amount reported on your federal gross income. As with all differences in tax treatment, if there is nonconformity with credits and deductions, you note this nonconformity by filling out California Schedule CA and deducting it or adding it to California gross income. Settlement payment interest from persecution during Ottoman Turkish Empire must be deducted from federal gross income by filling out California CA. If you have settlement payments from persecution during the Ottoman Turkish Empire, benefit from being able to exclude the interest from these on your California tax return.

People who are mutually associated in their trade will often do better in their business due to the mutual cooperation of various members. The more people involved, the stronger the association will become. Mutual associations are especially useful in pooling money together to promote products. It is a common practice for farmer’s to join together and form such mutual associations for marketing and distribution of their produce. Taxability of patronage dividends depends on when you receive it or on when you redeem them. Patronage dividends you receive in cash from a cooperative organization are includable in your income. However, you do not have to include patronage dividends which were received on property bought for your personal use, or on capital assets or depreciable property bought for business use. However, you must take into account the adjusted basis and if the dividend is more, you will need to report the excess to the Internal Revenue Service. These rules apply to both taxable and tax-exempt cooperatives.

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 year 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.

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.

Investing in a regulated investment company can be a very beneficial investment and tax saving move for many taxpayers. Capital gain distributions are always reported as long-term capital gains on your federal tax return. You must also report any undistributed capital gain that a Regulated Investment Company has designated to you. The Internal Revenue will tax your undistributed capital gain from a Regulated Investment Company the year when you have earned the income. However, California will tax the distribution from a RIC in the year distributed not the year it was earned. If the year in which it was distributed turns out to also be the year it was earned, then there will not be any need for any adjustment on Schedule CA of Form 540. If on the other hand, the capital gain from a Regulated Investment Company is earned in one year and distributed in a later year, enter the amount which was included in your federal tax return for year earned to adjust it from California on Schedule CA, line 9, Column B. Enter the amount not yet reported on your federal tax return for the year it was distributed on Schedule CA of Form 540 or Form 540NR, line 9, column C. This will reconcile the income to meet the California requirement of reporting the RIC in the year distributed rather than in the year it was earned. Remember, you will only do this if the year distributed and the year earned are different years. If they are not different, there is no need for an adjustment on California Schedule CA.

Federal tax withholding is not deductible on your federal tax return because it is money placed in advance of the anticipated money due on your taxes. California tax withholding is state withholding and the federal tax system considers it a tax expense and allows a deduction on Schedule A of Form 1040. The Internal Revenue Service taxes any California tax refund from which you have gained a tax benefit. If there was no tax benefit from the state refund, then it is usually nontaxable on your federal tax return. If you filed form 1040A in the previous year or you did not itemize your deductions in the previous year, you usually do not need to worry about including your state refund in your federal tax return. If the client itemized last year and you are trying to include the state refund in the taxable wages for federal, complete the worksheet and double check before you do include it. You can fill out the worksheet to make sure on the amount if any which would be taxable. You only need to worry about including your California refund on your federal tax return when you itemize in the previous year. The only manner in which you can benefit from a deduction on any state or local taxes paid is by itemizing your deductible expenses and the state and local taxes paid is one of the deductions you can take. If you paid any state or local taxes in the previous year, you usually calculate the state and local taxes paid and get a tax deduction for these on Schedule A of Form 1040. You only need to worry about the determination of whether your California state refund is taxable or not taxable for your federal income tax return. If you did include any California state income tax refund in your federal tax return because it was taxable to federal, then you need to exclude it from your California state tax return. Regardless, if this calculation was correct on your federal tax return or not correct, if you calculated an amount of the California state refund received as taxable for federal, you need to reverse that amount for California tax purposes. California state refund is not taxable income on you California tax return. Enter this amount on Schedule CA of Form 540 or Form 540NR, line 10, column B to reverse it from the federal adjusted gross income amount. If California taxed your state refund, it would be considered double taxation and double taxation is usually not allowed. When double taxation happens, there is usually a credit to compensate for the extra expense (or the double expense).

Alimony is usually taxable by the recipient and deductible by the payer for federal tax purposes. It should be taxable regardless if the recipient includes the alimony on his or her tax return or even if the recipient did not have a filing obligation. If you make payments to a spouse or former spouse under a divorce or separate maintenance decree or written separation agreement, you are considered to made alimony payments for federal tax purposes. As long as the payment divorce or separate maintenance decrees or written separation agreements do not say that the payment is not alimony, the payment is alimony. If you have a liability which will continue to make payments after the death of your spouse or former spouse, then the payments are not alimony. In order for the payments to be considered alimony, they must not be treated as child support or a property settlement. Just because the payments are under a divorce or separation instrument does not mean that they are alimony. The payments called for in the agreement could be child support, noncash property settlements, payments due to community property income, payments that are for the payer’s property upkeep or for the use of the payer’s property. The payments could also be voluntary payments made by the payer and thus are considered a gifted item.  

Any business, trade, or profession which is conducted partially in California will go through an apportionment formula. For the most part California is in conformity with federal as to what income received is taxable income. Mainly, all income received for all sources is taxable income for both Federal and California and they coincide with this rule. However, there are few differences that are due to income earned outside of California or income earned by California partial year residents. It could be an adjustment due to a military pay adjustment issue. Compensation for military service members who are domiciled outside of California is exempt from California tax, for example. If a nonresident owns a business carried on within California such income has a source in California and it is taxable for California. Thus, gross income for this business would be included in the nonresident’s adjusted gross income from all sources for federal purposes. The amount that applies to California will have to be figured out by using an apportionment formula dependent on the percentage of income that was derived from California sources. The nonresident is not normally liable for income earned outside of California but he or she does need to pay tax on income earned from California sources as a nonresident of California. This is different from residents of California who are liable for tax on all income regardless of source. Some states offer a credit for taxes paid to others states in an effort to avoid double taxation of the same income. Most state, including California, offer a credit for taxes paid to other states. This is similar to the credit available by federal for taxes paid to other countries. Credits for taxes paid to other states in the case of California, and credit offered by federal for taxes paid to other countries, is to alleviate any double taxation involved. 

The amounts allowed for a section 179 deduction have increased tremendously in the past few years. For federal tax purposes and in accordance with IRC section 179, you can opt for an asset expense election. When you depreciate property you need to recover the cost of property that will have useful life of more than one year. You don’t have a choice really. When you buy property, your property will be useful for many years. So it is only fair that you expense the item over the time for which it will be useful. This is called depreciation. Many expenses need to be matched to the income that it generates. If you buy property to be used in your business, the cost of this property needs to be spread out to the periods in which it was used. This concept of matching expenses to the income generated can be seen in other items too, such prepaid items. So if you prepay your rent, for example, it only makes sense that the rent be match to the corresponding periods. The same is true for property that you will use for a number of years. All that said, there is a special rule when it comes depreciating property. You can elect to recover the cost of property ahead of time. Both federal and California have this benefit available. This is called section 179 deduction. You elect to deduct the entire cost of the property or you can elect to deduct only a part of it. However, for federal there is a maximum limit that you can deduct and this limit usually cannot be over $500,000. There are other limitations you must obey. For example, if the value of the property exceeds $2,000,000, you must reduce your section 179 by the amount that is over $2,000,000 and your section 179 deduction will be reduced to zero if the value of your property placed in service in 2014 is more than $2,500,000. This is for federal tax purposes though.

MACRS stands for Modified Accelerated Cost Recovery System. Most property is subject to MACRS depreciation deduction and must be depreciated according to the schedule set by the Internal Revenue Service. MACRS is the accelerated depreciation system used for assets placed in service after 1986. It stands for Modified Accelerated Cost Recovery System. This depreciation system is composed of two other depreciation systems and they are the General Depreciation Systems (GDS) and the Alternative Depreciation System (ADS). You have a choice if you want to use these systems instead of the MACRS system. There are limitations on which properties can be depreciated using the MACRS depreciation system so pay close attention when you are depreciating your property to make sure you are indeed using the correct depreciation system.

There have been many differences in the manner of depreciation between California and the federal tax system over the years. It seems as if there was a lack of communication between the Internal Revenue Service and the state of California before. Now they are more in sync with each other and seem to be more conformity than before (before the internet era). As a result of the differences in the past, if you have assets that you are currently depreciating which were acquired before January 1, 1987, there are special adjustments that must be made for California. Federal allows a rapid write-off of tangible personal property and buildings over recovery periods which were shorter than economic useful lives under the Accelerated Cost Recovery System (ARS). California law generally did not conform to federal law but did allow ACRS for certain residential rental property constructed in California on or after July 1, 1985, and before January 1, 1987. Use form 3885A to figure the depreciation adjustment and the transfer amount to include on Schedule CA of Form 540 or Form 540NR).

Compared to California, the Internal Revenue service is very generous with its depreciation allowance for its taxpayers. Federal law allows an additional 30% first year depreciation deduction and AMT depreciation adjustment for property placed in service after September 10, 2001 and this amount is increased to 50% for property placed in service after May 5, 2003. California did not conform to provisions for assets placed in service on or after September 11, 2011, and before January 1, 2005. Furthermore, federal law allows an additional 50% first year special depreciation for certain qualified property acquired on or after January 1, 2007, and before January 1, 2015 but California does not conform to this provision. You need to use Form FTB 3885A to figure the adjustment to make on Schedule CA of Form 540 or Form 540NR. California is not as generous in its depreciation allowance and therefore you must make an adjustment to account for the differences.

California leasehold improvements must be recovered within 39 years and not 15 year like the Internal Revenue Service has in place. Improvements you make to property which you lease are deductible business expenses. However, expenses that you incur before the start of business must be amortized just like when you depreciate property. Treat these expenses as capital expenditures. Any leasehold improvements and qualified restaurant property must be recovered within 15 years. Federal law requires a 15 year recovery period. However, for California tax purposes, qualified leasehold improvements and qualified restaurant property must be recovered over a 39 year recovery period. If you have this sort of amortization requirement, use Form FTB 3885A to figure your adjustments that must be made on Schedule CA of Form 540 or Form 540NR. California tax law allows a less rapid recovery period than the Internal Revenue Service allows.

Goodwill is an intangible which possesses no physical form and so do other intangibles. Intangibles real but formless and they are usually deductible through a process similar to depreciation called amortization. Amortization is a way of deducting capital expenditures over a fixed number of years. Deducting amortization costs over a period of time is similar to deducting depreciation costs over a period of time. Examples of items that can be amortized are goodwill and other intangibles which are similar to goodwill. A value is placed on a business over time and customer loyalty over time. Goodwill is usually built up as customers get to know the business as a result the business providing a great service. Goodwill of a business and customer loyalty comes with a good name, a good reputation and other factors that have to do with the way the business treats its customers. Goodwill is also the trust that customers place on the business and how the customers add a certain value to the manner in which the business conducts itself. Other intangibles are items that are on paper similar to goodwill. Intangibles are more virtual such as going concern value, workforce in place, patents and licenses to name a few. These don’t have any physicality to them but they are often very valuable. Intangible (section 197 intangibles) such as goodwill must be amortized over 180 months per federal rules.

When you move your business to California, you must adjust to the beautiful capricious weather and make certain other adjustments to your business such as your depreciation methods. However, if the method of depreciation used in the other state is a California acceptable method, there is nothing to worry about. You can just continue using it as if you never moved. Your depreciation may be different if you lived in a state other than California. All depreciation methods used must be acceptable to California. If you moved your business property to California, you must adjust your depreciation and the useful life of the property to acceptable California methods. If you were using an unacceptable depreciation method before your move into California, use the straight-line method to compute the basis in the property.

For federal purposes, you can take a section 179 deduction for any assets that qualify for the section 179 deduction. Federal has no deduction or similar deduction for the enterprise zone or LAMBRA business. California has a section 179 deduction for qualified business property. However, the deduction is a different amount than that of federal. If you take a section 179 deduction for California tax purposes, you may not use that property to calculate either the Enterprise Zone (EZ) or the Local Agency Military Base Recovery Area (LAMBRA) business expense deduction. By the way, you can only take an EZ or LAMBRA business expense deduction on property purchased or placed in service on or before December 31, 2013. To calculate these business expense deductions use Form FTB 3805Z or Form FTB 3807. Once you calculate the business deductions on these forms, transfer the amounts over to Schedule CA of Form 540 or Form 540NR, line 12, line 17 or line 18, column B. If you have any depreciation deduction to make, use Form FTB 3885A and then transfer the amounts to Schedule CA of Form 540 or Form 540NR. In the form of tax breaks or incentives, California is able to fortify certain communities and their businesses.

The Internal Revenue code offers faster accelerated depreciation periods for property placed in service in Indian reservations. Recovery periods for qualified property placed in service on an Indian reservation after 1993 and before 2015 are shorter than those listed in previous years. For example, if the property class 3-year property, the recovery period for the property placed in service in an Indian reservation is only 2 years. Furthermore, if the property is a 15-year property, the recovery period for this property if it is placed in service in an Indian reservation is only 9 years. The property must be used in an active business in operation in an Indian reservation for the property to be qualified property. Property that would not be qualified would be property that is used or located outside an Indian reservation on a regular basis, unless it is infrastructure property that is available to the general public. Property that is depreciated under ADS, would not be qualifying property either.

All pollution control facilities should be offered generous tax breaks for their part in controlling pollution. A pollution control facility is a facility to rid of or control pollution or contamination by removing or altering or preventing the omission of pollutants, contaminants, wastes or heat and which the government has jurisdiction and control. Federal tax law provides for accelerated write-off of pollution control facilities. California also provides a write-off just like federal but only for facilities located in California. Use Form FTB 3885A to enter an amortization deduction on your California tax return. You will have amounts in your federal tax return and if the federal amount and the California amounts are different you need to make an adjustment on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. It only makes sense that California only offers tax breaks for pollution control facilities located in California. Regardless of where the pollution control facility is located, it is beneficial to the entire world since everything is interconnected.  

California only allows a depreciation deduction if the tertiary injectant qualifies as property used in a trade or business or is held for the production of income. If you have deducted tertiary injectant amounts on your federal tax return which do not qualify for the California allowable deductions, enter the amounts on Schedule CA of Form 540 or Form 540NR, line 12, column C. You should attach any schedules used in the calculations of the tertiary injectants placed in service during the tax year. You should also complete the California depreciation form FTB 3885A to take any of the California allowed deductions.

Phylloxera and Pierce’s disease infestation of grape crops rapidly destroyed many grape farmers’ businesses.  Pierce’s disease and phylloxera infestations are the nightmares which preoccupy grape farmer’s minds. These diseases can cause the grape farmers to go bankrupt in a short period of time. When Phylloxera disease first was discovered, it ruined many European families and nearly destroyed every wine producing grape vine in the world. In an attempt to find a cure, the Phylloxera disease spread to the United States and destroyed many grape vines in Napa California. Pierce’s disease seems to be spread or transmitted by the Phylloxera microscopic louse and other larve types of insects. Federal tax law has allowed for accelerated recovery periods for grapevines replaced in California vineyards on or after January 1, 1992 as a result of the phylloxera infestation on or after January 1, 1997 and as a result of Pierce’s disease. Federal law requires a 10-year recovery period for fruit bearing vines for purposes of accelerated cost recovery and a 20-year recovery period for an alternative depreciation system. However, California only allows 5 years for accelerated depreciation cost recovery and 10-year recovery periods for alternative depreciation systems. For phylloxera infestation prepare a schedule for depreciation computations of grapevines placed in service on or after January 1, 1992 and also for grapevines placed in service on or after January 1, 1997 for Pierce’s disease. Then, fill out Form FTB 3885A and attach both Form 3885A and the schedules showing your calculations to your California tax return. Many grape farms are in northern California’s Napa county. It behooves California to offer tax incentives to ameliorate the farmer’s situation for a faster recovery. A disaster in the grape industry can drastically devastate the California economy.

If you have clients who are in the entertainment industry, you need to know how to depreciate certain intangibles such as films and sound recordings which are customary in the entertainment industry. If you are taking depreciation deductions for certain intangibles such as films, videos, sound recordings, copyrights, books or patents, you can choose the income forecast method of depreciation. The other option is to use the straight line depreciation method. The entertainment industry products usually generate most of their income in the first years of its inception and for that reason using the forecast method of depreciation is more advantageous that using the straight line depreciation option. If you have assets which are placed in service after August 5, 1997, federal only allows the income forecast method of depreciation on films, video tapes, sound recordings, copyrights, books, patents and certain other specified similar property. California did not conform to this requirement only for assets placed in service after December 31, 1997. If you have any depreciation for California property which is placed in service before December 31, 1997 and which deviate from the federal, use form FTB 3885A to figure the depreciation adjustment to enter on Schedule CA of Form 540 or Form 540NR. You only need to worry about using the income forecast method of depreciation for certain depreciable intangibles that are common in the media and the entertainment industry. The income forecast method of depreciation is more advantageous over the straight line method of depreciation due to the nature of entertainment products being depreciated. If you have tax clients in the entertainment business, make sure you allow them the most advantageous depreciation method to use and most of the time it will be the income forecast method of depreciation.

Electric run vehicles is the thing of the now present and production of such keeps improving. Federal and California are offering every incentive possible to accelerate the more modern process. You can get a higher depreciation deduction for automobiles that run primarily on electricity. To get the maximum depreciation deduction for these automobiles, they must be passenger vehicles and they must mainly run on electricity. For Internal Revenue Service purposes, the original purchaser of a qualifying gas-electric car was able to deduct $2,000 for the year the vehicle was first used and that was before 2006. Many models qualified for the clean-fuel vehicle deduction. Except that California does not conform to federal tax law for the first year deduction on clean air fuel.

There are vehicles which are equipped to qualify as clean burning fuel vehicles. Most of these vehicles are electric vehicles or a hybrids which most operate on plug-in electricity. Federal law allows a modified depreciation limitation equivalent to triple the normal limitations for other luxury vehicles for vehicles which were placed in service after August 5, 1997 and before January 1, 2005. California conforms to this provision but only for vehicles placed in service after December 31, 1997. If the federal amounts you calculate for these credits differ from federal, you must account for the deference on form FTB 3885A and make the adjustment on Schedule CA of Form 540 or Form 540NR. In addition, if you have a first year clean air fuel deduction for federal, add the amount deducted back to California by enter the deduction on Schedule CA of Form 540 or Form 540NR, line 36, column B.

What is IRC Section 195? Section 195(b) provides that start-up expenditures that may be allowed as a deduction spread equally over a period of not less than 60 months that begins when the business begins. The start expenses include practically any expense that occurs before the day the business started transacting its business. These expenses include items like investigation costs and other necessary expenses such as legal fees to get the business started on the right track. There are certain limitations such as not being able to deduct an expense for which you will get a credit or deduction in another part of your federal tax return. For tax years after January 1, 2010, you can claim a deduction for start-up expenses of $10,000 which is an increase the former $5,000 allowed. The phaseout threshold was increase too from $50,000 to $60,000. However, California does not conform with the increase and the maximum allowable deduction for start-up expenses for California stays at $5,000. So what happens to the excess if you have expenses that are more than federal or California permits to be deducted? You amortized the excess expenses over a 180-month period. What this means is that California and federal amounts will be different so you have to make an adjustment on Form FTB 3885A to figure the depreciation adjustment to enter on Schedule CA of Form 540 or Form 540NR. If the California allowable expenses match with the federal amount at no more than $5,000, then there is no adjustment needed on Schedule CA of Form 540 or Form 540NR. California is low on the deduction allowed of $5,000 when federal allows double the amount.  

Owning a cell phone now is like owning a microwave. It is so inconvenient to not own one. For the longest time, cellular phones were treated as listed property for federal depreciation purposes. We can only guess that this action was due to the fact that cellphones nowadays are such as necessity just like shoes are a necessity that we simply cannot live without. The IRS stipulates that if your employer provides you with a cell phone or reimburses you for use of your cellphone in your business, it is a nontaxable transaction as long as the use of the phone is primarily for business. It goes without saying that if the cellphone use of an employer provided cellphone or reimbursement is not primarily for business use, the reimbursement or the employer provided cellphone use would generally be taxable. Recordkeeping requirements have also become more lax under the new federal tax rule. There are certain increases with which California does not conform. Use Form FTB 3885A to figure the amortization adjustment that differs with federal regard cellular phone use and allowable deductions to enter on Schedule CA of Form 540 or Form 540NR.

For federal practically every expenses which is necessary for the performance of your business is a deductible expense. No quite though, there are few exceptions. You cannot deduct illegal bribes or outright breaking of the law, for instance. Certain penalties and fines are deductible as business expenses for federal tax purposes and others are not. For example, a penalty for late performance or nonperformance of a contract is a deductible penalty. However, penalties paid for violation of laws are not deductible. A penalty or fine paid by an owner of a professional sports franchise imposed by the professional sports league is a deductible business expense for federal tax purposes but not for California. Enter any amount for this kind of deduction permitted by federal but not by California on Schedule CA of Form 540 or Form 540NR, line 12, column C to reverse the deduction on your California tax return.

If your credit card company cancels all or part of your debt to amicably settle what you owe them, there may some tax implications. The money forgone by the credit card company is most likely taxable income. You must include the canceled amount of the debt in gross income unless you qualify to exclude it. Some people may not be aware that they have a taxable transaction when they have a forgiven debt. Many of these debts are specifically excludable such as when your home gets repossessed by the bank. If this home is your principal residence then any amount still owed on the home repo is cancelled debt which qualifies for exclusion from gross income. Federal elected under IRC Section 108(i) to defer recognition of cancellation of debt income in connection with the reacquisition of an applicable debt instrument after December 31, 2008 and before January 1, 2011. The deferral period is five taxable year for cancellation of debt income which occurred in 2009, or four taxable year for a cancellation of debt income that occurred in 2010. However, California did not conform to this recognition of cancelation of debt income. Therefore, you must make adjustments in your California tax return. For federal tax purposes, income has been ratably taxed over five years and for California the income has been included in income during the previous taxable years and you recognized the CODI for federal tax purposes in the current year. You must enter the federal cancellation of income amount Schedule CA, line 12, column B to adjust it for California tax purposes.

Depending on your tax rate and tax bracket, you may donate agricultural products and get a credit for transporting it. Use FTB Form 3547 to figure the Donated Agricultural Products Transportation Credit. This credit is a credit for transportation of agricultural products which you donate to nonprofit charitable organizations. The FTB Form 3547 is use on your personal California tax return as well as on your pass through entities such as S corporation, estates, trusts, partnerships and your limited liability companies (LLCs) which are treated as partnerships. When you claim the Donated Agricultural Products Transportation Credit, you are allowed a credit of 50% of the eligible transportation costs paid or incurred in connection with transporting of any donated agricultural products donated to nonprofit charitable organizations. Federal does not allow such a credit. Also, you cannot claim a credit on your California tax return for any expenses for which you claim a deduction on parts of your tax return such as your itemized deductions. If you claimed any of these items on other parts of your federal tax return, you need to adjust the amounts on your California tax return for the same items. Make the adjustments on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. 

Only imagine how frustrating it would be to have to miss going to work because you don’t have a babysitter for your children. Many single moms go through this sad experience too many times. What is even worst is actually leaving your kids locked up in your home alone in order for you to go to work. If anyone finds out that you have left your children unattended, they will most probably notify the child protective services and then you would be obligated to miss work to take care of the legal troubles. Luckily, many employers now provide child care facilities for their employees’ children in order to help the employee with the high cost of child care. There are tax breaks for having a child care center to which the employee can take their children to and not worry about missing work due to not being able to find a babysitter for their child. Employers can claim an employer-provided childcare facilities and services on their federal tax returns. The credit is 25% of the qualified childcare facility expenditures plus 10% of qualified childcare resource and referral expenditures paid or incurred during the tax year. There is a credit limit of $150,000 per year. However, for California tax purposes the credit for employer-paid child care center and service and employer-paid child care plan have expired. The credits started in 1994 and were allowed for expenses incurred before January 1, 2012. In dealing with California tax returns, you need to watch for this because there are credit carryovers allowed and for which you must make adjustments if there are credit carryovers. You need to fill out From FTB 3540 which is the form used for Credit Carryover and Recapture Summary.

Depending on what type of business you have or which kind of services you offer, you may be forced by the licensing authorities to install the necessary equipment or make the necessary changes to your building before the start of business to allow ease of access to the physically challenged. Some businesses may make the adjustments voluntarily and other businesses such as schools may be forced to renovate with the disabled access changes. The disabled access credit is available for small businesses. For federal tax purposes, small businesses can take up to 50% credit on qualified business expenditures made for the benefit of disabled individuals. Therefore, when a small business adapts their facilities to make it more accessible to disabled individuals, they get regarded with a disabled access credit of 50% of the cost of the expenses to do so. Small business must fall under the eligibility requirements in order to take the disabled access credit such having gross receipts for the preceding tax year that does not exceed $1 million or which had no more than 30 full-time employees in that preceding year. If the expense is used toward calculating the disabled access credit, then this same expense cannot be used to get a business deduction which would be considered receiving double benefit for the same expense. That is for federal tax purposes. That is true for California tax purposes as California conforms to this provision too. However, for California tax purposes, the maximum disabled access credit can only be $125. Use Form FTB 3548 to take the disabled access credit for eligible small business on your California tax return.

The federal government and tax law offer many incentives to employer to hire Native Americans. These incentives are in the form of an Indian Employment credit. To provide employers an incentive to hire Native Americans who live on or near an Indian Reservation, employers are given an Indian Employment Credit. There are many rules which must be followed in order to take the credit. For example, you must hire Native Americans who can prove their blood lines or enrolled members of certain tribes. There must be some sort of proof of enrollment status. Second, all services performed by the employee must be performed within an Indian reservation. Third, the employee must maintain his or her principal residence on or near the Indian reservation where the services are performed. These are only a few requirements in order to claim the Indian Employment Credit for federal tax purposes. The credit is a nonrefundable credit available to employers for wages and health insurance costs paid or incurred by the employer after January 1, 1994. However, California does not conform to the federal Indian employment credit. You can make an adjustment on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B for any business expenses denied under federal tax law because the expenses used for the credit cannot be used for a double deduction for federal tax purposes.

The above are the rules for real estate professionals to receive special tax treatment as professionals that are in the business real property for federal tax purposes. For federal tax purposes, rental real estate activities are not automatically considered passive activities. California does not conform to federal in this aspect of the tax law and these activities are automatically considered passive under California tax law. Use FTB Form 3801 to figure out which adjustments to make on Schedule CA of Form 540 or Form 540NR, line 12 or line 17. You must complete the California passive activity worksheet and the California adjustment worksheet to ease through the correct items to include as passive activities for your California tax return.

Nowadays it is all about technology. If you are in the business of finding new ways to improve technology and ultimately improve the way to do business, you are in for this research credit. An individual can received a credit for increased research activities. The credit is extended to other organizations such as estates, trusts and corporations. For federal tax returns, the credit is claimed on Form 6765. The research credit is only for expenses paid for qualified research. The type of research conducted for credit qualifications is usually research for discovering information which is technological in nature and the discovery is usually intended for the improvement of the taxpayers business. All of the activities conducted in the research must be part of the process of acquiring the new technology to improve the taxpayer’s business or business function. Furthermore, the research credit would normally not be allowed for certain activities such drug testing, or research in the arts or humanities. Additionally, federal tax law requires that any deductions for research expenses be reduced by the amount of the credit allowed. California conforms to federal tax law with the exception that any research expenses be reduced only by the part of the credit that pertains to the California credit. Also, California requires that the California tax bracket be used for calculating the elective research credit amount. Make the adjustment for the research expenses which were deducted on the federal tax return but which don’t apply to California on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. In addition, enter the California research expenses after any reduction adjustment for California on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B. Remember adjustments must only be made to reflect the differences between California and federal.

Another big one on the list of improvements is energy conservation. You have an energy conservation project goin on, there is probably a credit for that. You may be able claim certain credit on your federal tax return for residential energy conservation. There are credits from the Internal Revenue Service for property you buy with the purpose of conserving energy. You can get a credit of 10 percent of the cost of qualified energy-saving equipment you add to your main home. There is also another credit called the Energy Efficient Property Credit which is 30 percent of the cost of energy saving equipment installed on or in your home such solar panels for water heaters, and solar electric equipment.

You as the taxpayer can benefit further by taking energy saving measures in your home. For example, federal tax law allows you to excludes certain subsidy received directly or indirectly by a public utility for the purchase or installation of energy conservation equipment for your home, minus the adjusted basis of the property received. For California, however, there is nonconformity for amounts received after December 31, 1994 and before January 1, 1997. If the federal amounts and the California amounts are the same and the both federal and California coincide with the credit, then there would be not adjustment needed on Schedule CA of Form 540 or Form 540NR. On the other hand, if you have to make adjustments use Form FTB 3885A to figure the adjustment to enter on the California Schedule CA.    

There are certain employee groups who need that extra push in order to gain employment. If you employee is part of a targeted group, you will be able to claim a credit for offering work opportunity for these employee groups. For federal tax law employers can claim the Work Opportunity Tax Credit (WOTC) for all targeted group employees listed. The employer can claim the WOTC if they targeted employees began work after December 31, 2013 and before January 1, 2015. The employer must obtain certification that the hired individual is a member of the targeted group before the employer can claim the WOTC. The employer can obtain such certification by filing Form 8850 with the employer’s state workforce agency within 28 days after the targeted worker begins work. The employer who claims the credit must reduce their wage expense by the amount of the credits. California does not conform to federal on this and has no similar credit. If the wage expenses were reduced due to the federal Work Opportunity Tax Credit, you need to add them back to the California wage deductions by entering the amount of the federal Work Opportunity Credit that reduced the federal wage deductions on California Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B. You don’t need to worry about the WOTC itself since California has no such credit. You just need to make sure you receive the wage expense deductions against your California wages since you cannot just transfer the wage expense totals from federal as when the credit is not claimed.

In order to motivate companies to make treatment drugs that would otherwise would not yield a profit, the Orphan Drug credit has been created. The Orphan Drug credit is geared more towards pharmaceutical companies than to individual taxpayers. The drugs created are the type of drug that would cure rare conditions. Taxpayers can claim the Orphan Drug Credit which gives them a 50% credit for having qualified clinical testing expenses for testing drugs to cure rare diseases or conditions. For federal tax purposes, you cannot use the same expenses you use for the credit as a deduction in other parts of your tax return. Doing so would trigger a double credit for the same items. Since California does not have an Orphan Drug Credit, any expenses that were used for the credit must be reversed in order to benefit from these expenses on your California tax return. To do this, you must enter the amounts that reduced the federal deduction for qualified clinical testing expenses on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B. Although California does not have such a credit, it is important to consider this credit in your California tax calculations since some of the expenses that are deductible toward your federal taxes are used in a different manner for California tax purposes. 

Clubs which discriminate should not be allowed to be open. However, every club has the right to do business as they which under federal tax law. Unfortunately, discrimination is a freedom exercised by many. There is not much any of us can do about clubs that discriminate. According to the law, clubs can discriminate as long as they are truly private. What constitutes a public club and a private clubs is where it gets a bit more complex. The Supreme Court forced the Boys Clubs to admit girls and now the Boys Clubs is known as the Boys and Girls Clubs. The rule change was because the boys accepts all boys into the clubs, therefore it was really public. For federal tax purposes, any reasonable expense incurred necessary to perform your business, it a deductible expense for your federal tax return. It is not taken into account whether the club discriminates or not, but rather if the club is conducive for business communication or negotiation talks between partners or between the business and the clients. There are limitations in place to ensure that the deduction will not be abused. For example, expenses of taking your wife along will be allowed as business deductions for tax purposes if the client takes his wife along and the presence of your wife at the meeting would be an acceptable norm. To elaborate further, if you invite the client to dinner, it would probably be impractical not to invite his or her spouse. Therefore, you would have to take your spouse along and can deduct the cost for the client’s spouse’s dinner and your spouse’s dinner as well. Smart. You can have the IRS pay the bill. That’s what many people think, isn’t it? Not quite true. The IRS and California help you with part of the bill through a tax deduction on your tax return. You can go out to dinner all the time and make it tax deductible for both federal and California tax purposes if your meal expense meets the requirements.

The federal government has set certain provisions to designate certain communities as renewal communities. Once the area is designated as a renewal community, the community is eligible for certain tax incentives which include a commercial revitalization deduction under section 14001. As a renewal community which has met certain criteria, federal law allows a deduction of 50% of any qualified revitalization expenses to any qualified revitalization building in the year in which the building is placed in service or a deduction of those expenditures ratably over 120 months that begins with the months that the building is placed in service. Not for California though. If you have such a deduction which is allowed on your federal tax return, you must make an adjustment on your California tax return on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. California should have such a credit, but it does not. There are many buildings and communities in California in great need of rehabilitation.

If you qualify as a small business employer, you have an incentive under federal tax law to offer your employees health insurance coverage. For federal tax purposes, a small employer can be eligible for a small business health care tax credit. In order to be eligible, the employer must have fewer than 25 full-time equivalent employees, average annual wages of its employees that are less than $50,000, paid a uniform percentage for all employees that is equal to at least 50% of the premium cost of employee-only insurance coverage. By equivalent employee it means that any employees who are not fulltime count as a fraction of an employee. For example, a half time employee counts as 50% of an employee. Most organizations can be eligible employers, even exempt organizations. The employer must reduce any insurance deductions for the amount of the credit. However, for California purposes you don’t need to reduce your insurance deductions and the entire amount of insurance is deductible. To make the adjustment on your California tax return, enter any insurance deductions not permitted on federal on you California tax return by filling out Schedule CA of Form 540 and Form 540NR, line 12, column B. California adds an additional incentive for small business employers to offer health insurance to their employees by placing less restrictions on health insurance deductibility.

A long time ago you were allowed to take a federal tax deduction only once in your lifetime on the sale of your principal residence. Since then, the rules have softened. Now you are able to qualify to exclude the gain on your home as many times as you need to exclude the gain as long as you meet the requirements and not just once in your lifetime as was required before. You may qualify to exclude up to $250,000 of the gain of your personal residence from your income. This amount goes up to $500,000 if you are filing a joint tax return. You can qualify for the exclusion if you meet the ownership test and the use test. To meet the ownership and use tests, you must have owned and used your home as you main home for at least two years of five years prior to date of sale. You should be able to exclude the entire amount if you have not excluded any gains on the sale of your personal home in the two year period prior to the sale of home. California conforms to this provision except that California offers an additional perk to the deal. California taxpayers serving in the Peace Corps during the 5 year period ending on the date of the sale may reduce the two year period by the period of service that does not exceed 18 months. You can report any differences in the amounts reported by federal and California by completing California Schedule D of Form 540 or Form 540NR. After you complete schedule D, transfer the amounts to Schedule of Form 540 or Form 540NR, line 13, column B if the gain is less than that reported to federal. If the gain is more than that reported on your federal tax return, then transfer the amount to schedule CA of Form 540 or Form 540NR, line 13, column C.

You must report amounts received from Regulated Investment Companies in your income even if you have not constructively received them. Constructive receipt means you actually have the money at hand meaning that it is made the income is made available to you without restrictions. If the RIC paid a tax on the capital gain, you can receive a credit for the tax since it is considered paid by you. You will see all these transactions on Form 2439 sent to you by the mutual fund. There you will see the amount of the undistributed capital gains and the tax paid by them, if any. To claim the credit you must attach Copy B of Form 2439 to your federal tax return. Not for California though. For California, do not enter any of the amounts of the undistributed capital gains on California Schedule D of Form 540 or Form 540NR.

Almost all your personal use items that are used for personal or investment purposes are considered a capital asset. This would include everything from your home, furniture, stocks and bonds that have as investments. If you sell your car, for example, you could have a capital gain from the sale. Once you sell your capital asset, the difference between your basis in the assets and the amount you sell it for is either a capital gain or capital loss. The cost would normally be the amount you paid for the item. However, there are other things to take into consideration especially if the item was received as a gift and you did not pay anything for or you don’t know the cost. The time you held the item will determine if it is long term or if it is short term. The gain or loss is considered long term capital gain or loss if it is held for more than one year. Therefore, if the item is held for less than one year, it is considered short term.

An IRA may be a great way to save for your retirement. There are many tax savings and benefits in place for investing in an individual retirement account. The cost basis of your traditional IRA is the sum of any nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Cost basis in your traditional IRA is dependent on whether or not you made any nondeductible contributions to the traditional IRA. You may have differences between federal and California depending on when contributions were made to your IRA. You may also have differences between federal and California amounts if you changed residency. Your amounts could also be different due to differences in California and federal self-employment income. You may need to calculate your IRA basic for California differently than what you have calculated for federal.

There are benefits offered by investing in a Roth IRA which you may not get when you invest in a traditional individual retirement account. You can make contributions to a Roth IRA regardless of your age. You may also be able to claim a credit for federal for contributions you make to your Roth IRA. If you contribute too much to a Roth IRA, you may be liable for a 6% excise tax penalty. California conforms to federal tax law on contributions, conversions, and distributions of Roth IRAs. The only thing that could be different is the taxable amount of a distribution due to basis differences. Compare the benefits of investing in a Roth IRA and the benefits of investing in a traditional individual retirement account and choose the one the gives you the greater tax benefit.

Usually filing a tax return is not required if your only income for the tax year is only from Social Security benefits or Railroad Retirement benefits. Not always though and you must know the maximum amounts in order to avoid any errors when reporting your social security or railroad retirement benefits. Your Social Security or railroad retirement benefits may be taxable if you have other income and your income goes over a certain amount or the base amount for your filing status. Social Security and railroad retirement benefits can only be taxable for federal though, not California. These also include Annuities or Pensions by the Railroad Retirement board or any payments by the Railroad Retirement Board. If after calculating your Social security or railroad retirement benefits and any amount is taxable for federal and thus included in federal income, you must make an adjustment to reverse it on your California tax return. Do this on California Schedule CA of Form 540 or Form 540NR, line 16, column B. Social security and railroad retirement benefits are never included in your income for California tax purposes.

Pension plan – small business tax credit for new retirement plan expenses

If you are a small business, you can enjoy the benefits of starting a pension plan for your employees. By doing so, you will be able to take a small business tax credit for your new retirement plan expenses. Federal tax law allows you to claim a tax credit for the ordinary and necessary costs of starting a business retirement plan. If you qualify you can use Form 8881 to claim the Credit for Small Employer Pension Plan Startup Costs. You would qualify for this credit if you had 100 or fewer employees who received at least $5,000 from you for the preceding year. The federal credit is 50% of you ordinary and necessary eligible startup costs. The maximum amount of the credit is $500. California does not have a credit like this. The federal deduction is reduced by the amount of the credit. Therefore, you must enter the amount of the income tax credit on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B to reverse it on your California tax return. Any deductions against gross income for that federal allows and for which California does not conform to, need to be excluded from California gross income.

There are some U.S. taxpayers who hold interest in two popular Canadian retirement plans to get favorable U.S. tax treatment and therefore save money on their federal tax return. In 2014, the Internal Revenue Service eliminated the special annual reporting requirements that taxpayers with Canadian retirement plans. The two most popular Canadian retirement plans are the Canadian Registered Retirement Savings Plan (RRSP0 and the Registered Retirement Income Fund (RRIF). With the new tax change, many Americans and Canadians with these retirement plans can now automatically qualify for tax deferral in a similar manner that is available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. American citizens and resident aliens can continue to enjoy the special tax treatments as long as they continue to be tax compliant and continue to include any distributions as income on their U.S. tax returns. This is not to say that the tax treatment is the same as those with IRAs, just similar. Federal tax law allows taxpayers to defer taxation on their RRSP earnings until the time of distribution. These provisions do not apply for California tax purposes. Therefore, California residents with RRSP earnings must include these earnings in their taxable income in the year earned. Include these earnings from RRSP distributions on Schedule CA of Form 540 or Form 540NR, line 8, line 9, or line 13, column C.

People acquire group term life insurance because this type of insurance is less expensive than individual insurance coverage. There are benefits for tax purposes in acquiring this type of insurance. You can exclude the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by your employer. If the amount goes over the $50,000, the amount in excess must be included in income and according to the Internal Revenue Service Premium Table. The amounts in excess are also subject to social security and Medicare taxes. If the employer pays any cost of the life insurance, or the employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee, a taxable fringe benefit arises once coverage exceeds $50,000. This is called the straddle rule.

You can claim a tax deduction for contributions you or anyone other than your employer makes to your HSA account. You don’t have to itemize your deductions in order to claim a deduction for your contributions to an HSA. If your employer makes the contributions, you may exclude it from gross income. Not for California though. You cannot exclude the contributions from W-2 wages which were made by your employer. California simply does not conform to this. Enter the amount of California nonconformity on Schedule CA of Form 540 or Form 540NR, line 7, column C. Also enter the amount from Schedule CA of Form 540 or Form 540NR, column A, line 25, in column B, line 25.

Another benefit of an HSA is that interest or other earnings from the HSA assets in the account is that they are tax free. If you leave your job, you can take the HSA with you to your other job or even if you leave the work force. Your distributions could be tax free if you pay for qualified medical expenses. Therefore, any distributions not used for qualified medical expenses are includable in federal gross income. Consequently, the amount that is taxable by federal tax law is not taxable for California. Enter an adjustment to reflect this on Schedule CA, line 21f, column A, in line 21f, column B to exclude the amount from the taxable federal amount.

Interest or dividend income on the assets of the HSA accounts are tax free. However, California wants you to pay tax on the interest from HSAs. These interest amounts and taxable dividends earned on any HSAs are taxable for California in the year earned. Due to this treatment of interest or dividends earned and the fact that they are not taxable to California but are taxable to federal, California has a basis in the HSA account. You will need to make the adjustment on the flow thorough amounts from federal to California by entering the amounts of interest earned on Schedule CA, line 8, column C. Any taxable dividends earned for the current year need to be entered on Schedule CA, line 9, column C.

You must be able to identity what constitutes unemployment compensation and what does not. Usually it is very simple. You go to the unemployment office and you seek compensation because you are out of work. If you are out of work and cannot work because you were injured or are handicapped, then that is another story. Your benefits received from the unemployment office in this case could be completely tax free for federal and California tax purposes. Unemployment compensation includes amounts received by the United States or California. Unemployment compensation does not included amounts such as worker’s compensation payments, supplemental unemployment benefits and unemployment benefits from a private club to which you voluntarily contribute. You must include your unemployment compensation in your gross income. Some folks receive hefty amounts in unemployment compensation and it would be best for them to have federal withholding taken out of the amounts received. You should opt for withholding so that you don’t end up short when you file their federal tax return. Withholding is voluntary and at one point in the employment process someone will ask you if you would like to have money withheld from your unemployment compensation checks. As far as California is concerned, unemployment is not taxable so you don’t have to worry about asking for California tax withholding from your unemployment compensation. Unemployment compensation is not taxable on your California tax return. For California, you need to adjust your federal gross income which includes the unemployment part. Whatever amount of unemployment compensation you have included in your federal tax return comes right out by entering it as an adjustment on California Schedule CA, line 19, column B. The unemployment compensation is not taxable to California therefore it should not be included in your California gross income.

If you have a family emergency, you should be able to leave work without suffering any repercussions. The Paid Family Leave (PFL) program allows employees to leave work for a specified amount of time for family emergencies. An employee can ask for time off to tend to the birth of his or her child and to take care of a newborn. Another occasion which qualifies for the family leave is when a placement agency places a child with the employee and the employee needs time to get adjusted to the new situation and better care for the child. Furthermore, if the employee has a spouse, child or parent whom has serious health conditions, he or she can take time off to take care of them. If the employer is unable to work due to some illness he or she can request some time off under the family leave act to request time off to care for the illness. You basically can take a leave of absence under the family leave act for any emergency that arises involving your immediate family or yourself. Your immediate family is your spouse, your son or daughter, or your parents.

You see commercials on the incentives for removal of your water wasting landscape. There are many incentives in place for water conservation projects. It seems that almost every water department is promoting the conservation of water. There are number of things you can do to conserve water. You can get rid of your beautiful lawn, change your toilets for more water efficient ones, and get of hold of this, you can get rail barrels installed. Apparently, the reason that turf removal has gained popularity is due to the high advertising place on this process and the especially the high incentives given for switching from grass and the greens to the dry stuff. California offers rebates, vouchers and other water conservation plans such as turf removal water conservation programs. If you get any kind of incentive in cash and this amount was taxable for federal, you can deduct it from your California tax return by entering the amount on Schedule CA of Form 540 or 540NR, line 21f, column B. Any of these items are not taxable for California tax purposes.

For federal tax purposes, gambling and lottery winnings are taxable on your tax return. Anything that is considered gambling is taxable for federal tax purposes. Gambling could be in the form of lotteries, horse races, raffles, casinos, California lottery winnings, and any prizes that you win. You can deduct gambling expenses up to the gambling winnings for federal tax purposes. For California tax purpose, essentially the rules are the same as federal and gambling winnings are taxable and the expenses of gambling are deductible up to the winnings. This is true, unless the winnings are from the California lottery. Winnings from the California lottery are not taxable for California and therefore any gambling expenses you have for these California lottery winnings are not deductible expenses. When you prepare your California tax return, make sure you include gambling winnings that are not from the California lottery. If you had California lottery tickets and you have included them in your federal tax return because they are taxable for federal, you must make an adjustment for California. Enter the amounts that are not taxable for California on line 21a, column B of Schedule CA to subtract the winnings from your California gross income. You also need to make sure that you have adjusted any gambling expenses claimed on your federal Schedule A that pertain to California lottery winnings. If you are not claiming the income, you cannot claim the expenses that pertain to that income.  

Are you a whistleblower? Believe it or not, claiming rewards for reporting a crime is a profession for some. Like in every profession, you get compensated for your services. Just like there are bounty hunters, there are people who are pros at doing this kind of work. For example, did you know that the Internal Revenue Service, the IRS Whistleblower Office, to be more specific, pays you up to 30 percent of the additional money it collects from its clients for your whistleblower services? This sounds very much like a commission. You only get paid if you deliver results! Then you have to pay taxes to the Internal Revenue Service on the amounts you received from the Internal Revenue Service for your services. Amounts you receive for reporting crime are taxable by the Internal Revenue Service.

Just imagine how horrible it must be to incarcerated for any crime. Now, imagine how much more horrible it would be to be incarcerated for something you did not do. No compensation or tax deduction would ever be enough to repay the victim of wrongful incarceration. To top it off, once you do receive this compensation for this horrendous crime against you, you have to pay taxes on it. Imagine that. Well, unfortunately, this is true. You have to pay taxes on wrongful incarceration payments for federal tax purposes. This is simply disgraceful. In order to receive a completely tax free treatment for your compensation for incarceration, you must have “suffered physical injuries and physical sickness while incarcerated.” What!? No, this is just not right! The state of California does not think this is right either. You can exclude 100% of the wrongful incarceration compensation amount for California tax purposes. Thank G-d someone is using their brain and thinking right. Enter whatever wrongful incarceration amount which is taxable for federal tax purposes on your California Schedule CA, line 21f, column B.      

Many individuals start out in life as low income individuals. There are many low income families doing their best to send their kids to school. Any help available to these low income families will make a difference in their lives. Every tax season, for example, there are many low income families who anticipate the Earned Income Credit to catch up on bills incurred during the holidays. There are grants offered to low income taxpayers by the Internal Revenue Service. These grants are available to taxpayers who usually don’t have a filing obligation. This payment offered by the Internal Revenue Service and it is called Stimulus payment. To qualify for the stimulus payment, your income has to be at least $3,000. In addition, the taxpayer can qualify for a payment of $300 for each child who meets the requirements and is under 17 years old.

California pays death benefits to families for military members killed in military duty. Death benefits paid to the members of a military member killed in the line of duty is nontaxable income and excluded from federal gross income. Section 1477 of Title 10 of the U.S. code and the HEART Act of 2008 (Heroes Earnings Assistance and Relief Tax Act) provides that any money received by survivors as a result of death of a military member will be excludable from federal taxation. This income is excludable under Section 134 of the IRS Code. California conforms with the federal HEART Act of 2008 with respect to the rollover of death gratuity payments into a retirement account such as an IRA without applying any contribution limits to the amounts. This means that there would not be any penalties for exceeding the contribution IRA or retirement plan limits.

If you are experiencing problems with your mortgage payments there is a plethora of assistance from many organizations. The United States economy has been shaky for a while now and all this help available is a result of the bad U.S. economy. All this trouble seems to have started on September 11, 2001, but maybe it started before then. The Internal Revenue Service passed the Mortgage Debt Relief Act of 2007 to ameliorate the situation. With a few requirements and restrictions, basically this act allows you to exclude much, if not all, of the mortgage debt cancellation. Remember, debt cancellation is usually includable in income for federal tax purposes and for California tax purposes too. California conforms to federal tax law to a certain extent. After January 1, 2014, you are not allowed by California to exclude the cancelation of debt for your principal home. Therefore, once you complete your federal tax return and exercise your legal right under the Mortgage Debt Relief Act of 2007 to exclude your mortgage debt on your main home, you need to reverse this exclusion from your California tax return. Enter the exclusion amount from your federal tax return on your California Schedule CA of Form 540 or Form 540NR, line 21f, column C.

If you have excluded any federal subsidies for prescription drug plan from your federal tax return, you need to reverse the exclusion for California tax purposes. California does not conform to federal tax law for this provision. Therefore, enter any amounts excluded for federal tax law on Schedule CA of Form 540 or Form 540NR, line 21f, column C.

The Per Capita Act and the Indian Tribal Judgement Funds Use or Distribution Act allow for Indian tribes to make payments to Indian tribe members. There are regulations in place that state that interest and investment income from the funds while held in a trust will not be subject to federal taxation. These regulations also state that per capital distributions from tribal trusts are to be excluded from taxation. However, if per capita payments that do not meet certain requirements and are made from an Indian tribe’s private bank account are taxable to the Indian tribe member receiving the per capita payments. The state of California does not agree on taxing Indian tribe members who live in Indian tribes that are affiliated with their tribe which are sourced from the same Indian tribe in which they are a member. In addition, California does not tax per capita payments received by a nonresident of California. On the other hand, if the Indian tribe member resides outside their affiliated reservation, California will tax those per capita benefits received by the tribal member who is residing outside their tribal country. Whatever amounts that are included in your federal tax reports and which are excludable for California must be entered on Schedule CA, line 21f, column B to exclude them from California taxable income. Calculations must be figure out carefully and care must be exercised as to the source of the tribal payments and also take into consideration where the tribal member resides.

Some schools are not able to fully provide teachers with the proper teaching supplies such as paper, chalk, or whiteboard markers. The educator is left with having to pay for these supplies out of his or her own pocket. For federal tax purposes, you can deduct up to $250 of any unreimbursed expenses for books, supplies, and other items such as equipment that needs to be used in the classroom. The expenses are qualified expenses only if they are necessary for you to perform your work as an eligible educator. Only expenses that are incurred in the tax year are deductible. Not for California though. California does not conform to the federal deduction for educator expenses. Enter any educator credit amount on your California Schedule CA, line 23, column B to put it back in the gross income total.

Self-employed individuals usually have to get their health insurance coverage. Many jobs offer health insurance coverage and many job acceptance decisions are based on whether the employer offers health insurance or not. Health insurance is quite expensive and some self employed individuals must usually get their own health insurance coverage. Currently California conforms to federal tax law on almost every aspect of the self-employment health insurance deduction. California conforms to items which include items such as the IRC Section 36B refundable credit of coverage under a qualified health plan and the deductions allowed on federal Schedule A for out-of-pocket expenses. As a self employed individual you can generally take a deduction for medical, dental or long term care insurance premiums that you as a self employed person are obligated to pay for yourself since you have no employer to cover you. California conforms to most of the federal self-employed insurance deduction except for one thing. California does not allow a deduction for adult children who provide more than half of their own support. You do qualify to include coverage for your adult children under federal tax law and if you do have such a deduction on your federal tax return, you must adjust your California tax return by entering the amount of the federal deduction which pertains to the adult child’s amount of the medical insurance expense on the California Schedule CA, line 33, column C.

Student loans can help can be a huge help when attending school. With the high cost of attending college, many times being able to receive these student loans will determine if you will pursue your higher education or not. If you have student loans, keep track of your interest paid on those student loans so you can deduct the interest on your federal tax return. You may be able to deduct up to $2,500 of the interest you actually paid for the year. You have a gross income limitation which means that your interest deduction may be reduced if your gross income goes over a certain amount. Other than that, the other qualifications in order to claim the deduction are not too harsh. As long as you don’t file married filing separately or be able to be claimed on someone else’s tax return, you should be fine to claim the deduction. California mainly conforms to the federal tax law, except for issues involving residency status. If the taxpayer is a not a California domiciled military taxpayer, or a spouse of a non-California domiciled military taxpayer who resides in a community property state. If your student loan deduction for federal tax purposes involves any of these, enter the corresponding amounts on your California Schedule CA, line 33, column C to exclude the deduction from your California tax return.

Talking about students and the tax benefits of being a student, federal tax law also allows another deduction for tuition and fees paid. In addition to claiming the tuition and fees deduction, you can use your fees expenses to claim the American opportunity tax credit or lifetime learning credit. If you have a business, you can also use these fees to claim a business expense and these expenses would otherwise qualify as a business expense for your business. As with the student loan interest deduction, you cannot be able to be claimed as a dependent by someone else or use the married filing separately filing status to claim the tuition and fees deduction. Anyways, this is all true for federal tax purposes and the maximum amount you can claim is $4,000 for qualified education expenses. However, this is not true for California. California does not have such a deduction. Therefore, if you have such a deduction on your federal tax return, you must reverse it for California tax purposes by entering the federal deducted amount on your California Schedule CA, line 34, column B.

Every country prefers their products to be produced domestically. Producing products at home means that more people will gain employment and more businesses will do business with each other at the local level. If you are a business owner, you may want to take advantage of the domestic production activities deduction. If you have qualified production activities within the United States including Puerto Rico, you have adjusted gross income, and you have paid W-2 wages to your employees, you may qualify for the domestic production activities deduction (DPAD) for federal tax purposes. However, for California tax purpose this deduction is not possible since California has not conformed to federal tax law in regard to this deduction. Enter any amounts of the DPAD that you may have from your federal tax return on your California Schedule CA, line 35, column B to reverse the deduction for California tax purposes.

A partnership is easier to create and get started than many of the other business organizations available to business owners. A partnership issues a K-1 form to its partners to report the income that pertains to each. Schedule K-1 is similar to Form W-2 or more like a Form 1099-Misc to report miscellaneous income for nonemployees. One individual alone cannot be a partnership. In order for a partnership to be a partnership, there has to be at least two individuals partaking in this type of business risk. The partnership is an entity that passes through income to the owners. The owners of the partnership include their share of income on their individual tax returns. When a partnership is a limited partnership and it pays its annual tax, federal tax law allows for a deduction. If you have such a deduction on your federal tax return, you need to exclude it for California tax purposes. Do this by entering the deduction amount on your California tax return Schedule CA, line 39. California specifically disallows a deduction for annual tax paid by a limited partnership.

The same thing goes for benefits of setting up an S corporation if you are able to meet the requirements for S corporation status. An S corporation is technically a corporation but it operates more like a partnership. The income from the S corporation passes through to its shareholders in the same manner in which it passes through to the owners of a partnership. You must pass certain qualification in order to be considered an S corporation. Not only must you meet certain qualifications to be an S corporation, but you must also maintain your qualifications. If you fall short of the qualifications, your corporation will revert to a C corporation and you will lose your S corporation status. You entire tax situation and set will change as a result of failure to maintain your S corporation status. If you have a franchise tax or income tax incurred in your S corporation, you can deduct them as a deduction on your federal tax return. California does not conform to such benefit and specifically disallows the deduction. You must reverse the deduction on your California Schedule CA, line 39 to adjust this disagreement between federal and California.

Some people pay taxes and don’t even know it. Their employer deducts a certain amount from their check and these amounts are distributed to the different tax agencies such as California withholding, local tax SDI, federal and social security taxes. Other individuals or businesses which transact business overseas, will probably have paid some form of foreign tax to the foreign government. You can deduct payments you make for deductible taxes on your federal tax return. A deductible tax is one that you are responsible to pay and one that you actually paid. You can deduct state, local and foreign taxes, real estate taxes, taxes paid for personal property and general sales taxes that you paid for in the year. You can also deduct estimated taxes paid. If you have any amounts which for these types of taxes on your federal tax return, you need to make an adjustment on your California tax return. You must include these amounts on your California tax return to exclude them because California does not allow a deduction for any of these taxes, not even for taxes paid for State Disability Insurance (SDI). Just like you cannot your federal tax withholding on your federal tax return, you cannot deduct any state taxes paid on your California tax return. So it is not really that California does not conform to federal, it is just that these are usually taxes withheld at the California level. If you have any of these taxes on your federal tax return for which you qualified to take a deduction, enter them on your California Schedule CA, line 39 to reverse the deduction from your California tax return.

There are so many other deductions which cannot be covered in this short tax course. If you have any other adjustments for which you can take a federal deduction but not for California, you enter it on your California Schedule CA to either remove it from California or to add to California. Once you review Schedule CA, you will become familiar with where every possible deduction goes. Sometimes federal tax law allows a deduction for a natural disaster such as the recent Philippines Disaster Contribution for which California has no such deduction, you need to know where on your California tax return to make the adjustment. These types of other adjustments usually go on your California Schedule CA, line 41. Every time you have a certain deduction or credit for federal tax purposes, you should always find out if California conforms to the federal deduction or credit and if not, you must make adjustments accordingly. 

The Head of Household (HOH) filing status gives you the benefit of a lower tax and a higher standard deduction than that of a Single or Married Filing separate filing status. The head of household filing status is probably the filing status with which the state of California is most preoccupied. This is for good reason too. This is the most abused filing status of all the filing statuses. Many people are too liberal when it comes to applying the Head of household rules for either federal or California tax filings. To qualify for the head of household filing status benefit, you must have a child whom qualifies you to claim the head of household filing status. You must be unmarried or be considered unmarried on the last day of the year. You must have paid for more than half the cost of keeping up a home. Furthermore, you must have a child who lived with you for more than half of the year or a qualifying person such as your parent who does not need to live with you. People seek to receive the lowest possible tax rate available to them. If you qualify for the head of household filing status, you rate will be lower than that of a single or married filing separate taxpayer. Also, taxpayers who use the head of household filing status qualify for certain credits that they may not qualify for if they are single or if they file married filing separate. Married taxpayers want to file head of household instead of married to get credits offered by federal.

The person who qualifies you does not have to be a child. That person can be your parent whom does not have to live with you in order to qualify you. You do however have to provide more than half the upkeep of that person’s home. If you pay for more than half the cost of the upkeep of that person’s home, you have provided more than half the upkeep. In determining if you provided more than half the upkeep of the home, you only consider items for the home itself, such as utilities and repairs. Any  expenses for which you have paid for that persons clothing, education, medical, vacations, life insurance or transportation are deductible expenses. There expenses are geared toward calculating if you can claim an exemption for the person instead. For the home, you include only costs paid for rent, mortgage interest, real estate taxes, insurance, repairs, utilities and the food eaten in the home. You must support a home for the qualifying individual and must have paid more than half of that support for the individual.

There are many taxpayers who break the tax rules every year. They contend that no one knows that their spouse did indeed live with them. Some people go as far as getting separate addresses in order to try to hide the fact that they lived together. Sometimes with the help of a little know how from the tax preparer, the taxpayer goes around the rules and files as he or she wishes to file. If the taxpayer was married at the end of the year and the spouse was a nonresident alien at any time during the year, then this would be the only way that they can be considered unmarried for tax purposes or for head of household purposes. Other than this, they are pretty much set to be considered married and they would have to file a married filing jointly or married filing separately tax return for the year. Otherwise, it would be considered breaking the rules and this is the reason California has come up with tougher enforcement efforts on head of household tax returns. If two or more taxpayers including a parent claim the same child as a qualifying child for a particular tax year, the person shall be treated as the qualifying child of the taxpayer who is the parent. However, if none of the taxpayers is the parent, then the taxpayer with the highest adjusted gross income for taxable year shall be able to claim the head of household filing status. 

Generally, if two or more people keep up the same home, only one of the people could pay more than half the costs and qualify for the head of household filing status. When two or more families occupy the same dwelling, each family may be treated as keeping up a separate home if each family maintains separate finances and neither contributes to the support of the other family. The taxpayer who provides more than half the cost of maintaining a separate home is treated as keeping up that separate home. To determine whether you paid more than half the cost of keeping up your home do not include costs of clothing and vacations, costs for education and transportation, or costs for medical treatment and life insurance.

If someone lived with you for exactly six months does not mean that the person lived with you more than half the year for head of household purposes. The rule is the the individual must have lived with you for more than half of the year. If the child lived with you exactly six months and exactly six months with another person, you cannot choose who will be able to claim head of household for that child. The rule is that the child must have lived with you for more than six months and exactly six months is not considered more than six months. It is such a weird concept that just one day would make such a huge difference. 

You must meet the same head of household requirements that married individuals meet to be considered head of household for tax purposes or to be considered not in a registered domestic partnership. These requirements include not having lived with your partner at any time during the last six months of the year. You must have a qualifying child or qualifying relative who qualifies you to claim the head of household filing status. The child must have lived with you for more than six months of the year and you must be able to claim an exemption for the qualifying child. If you have a qualifying person instead, your qualifying can be a parent who does not have to live with you. In either case, you must have supported a home for the qualifying person for more than 50 percent of the support of the home. If the qualifying person is your parent, the parent can be your qualifying relative even if you cannot claim an exemption for your parent if the only reason that keeps you from claiming the parent is the fact that the parent earned more than the amount allowed to claim an exemption. 

If you claim your parent for head of household purposes, you must be entitled to claim a dependent exemption credit for your parent to be head of household. That is true if your parent meets the requirements of a qualifying relative. That is also true if you have paid more than half the cost of keeping up a home that was your parent's main home for the entire year. Your parent's main home could have been his or her own home or any other living accommodation.

There are rules for determining the support of the home and there are rules for determining support of an individual to meet the support test. The items considered to be support items for upkeep of the home are home things such as electricity, gardening, cleaning, maid service and rent or mortgage. Items for support of a dependent are items that are strictly just for the dependent in meeting the support test. These items that only pertain to the individual are items such as clothing, vacations, medical insurance, education and any medical treatment. Cost of food pertains to the support of the household, unless the food is specific for the dependent. This could be the case when the dependent needs special food due to allergies or for medical reasons. Other than that, food is considered a household expense that goes toward the calculations you make for support of the home. This is similar to buying a television set for your child and your treatment of this television set depends on where in the house you hook it up to. If you place the set in the living room, then the TV is household expense that goes in the calculation of support of the home. However, if the set is placed in the dependents room, then it can be considered in the calculation of support for the child.

You are considered to have chosen to treat your nonresident alien spouse as a resident alien if you and your nonresident alien spouse or RDP filed a joint tax return in a previous year. You are also considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you choose to treat your nonresident alien spouse/RDP as a resident so you can file a joint tax return. Furthermore, you are considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you have not revoked the choice by the extended due date for filing the tax return at issue.

You can be considered unmarried for tax filing purposes. To be considered unmarried for tax filing purposes is not a choice if you lived with your spouse at any time during the last six months of the tax year. The basic tax rule is that if you are married on the last day of the year, you are married. If you are single, then of course you are considered unmarried for tax filing purposes. So once you determine that you are indeed able to be considered unmarried for tax purposes. What then? You want to be able to qualify for Head of household filing status, so you must also meet the other requirements. You must meet other tests such as filing a separate tax return, paying more than half of the upkeep of your home which is the main home for you child for more than half the year, and you must be able to claim that child as a dependent by claiming their exemption. 

If you pay someone for child care expenses which you incur which allow you and your spouse to work or look for work will qualify you to take a child and dependent care expenses credit on your California tax return. You can take the credit if you file as single, married filing jointly, qualifying widow or widower, head of household filing status. However, you cannot take the child and dependent care expenses credit if your filing status is married filing separately. Your child and dependent care expenses credit is a percentage of the federal credit and it depends on your income. In order to figure out the California amount, you must first figure out the federal amount and then apply the percentage to the federal child and dependent care expenses credit amount. The rules for federal and California concerning the child and dependent care expenses credit are very much alike. For example, both federal and California require that your dependent qualifying child be under age 13 at the time child care is provided. If the care is provided for another person, such as a handicapped individual, then of course, the age requirement is disregarded. 

The Internal Revenue should enact a renter's credit just like California allows. For California, you qualify for the Nonrefundable Renter's Credit if you rented a property for more than half the year that was not exempt from California property tax in 2015. Rents are getting very high and many cannot afford to pay rent anymore. The Internal Revenue Service allows for mortgage interest deductions and it is only fair that this same benefit be allowed in form of a renter's credit for the ones who cannot qualify or who don't care to buy a home and pay a mortgage.

The nonrefundable renter's credit, as with the other credits, must be carefully substantiated. With the California nonrefundable renter's credit it is little simpler as it basically only requires that you answer a few questions as to the qualifications. There is a qualification record which you must fill out and keep for your records. If you are preparer, you should be able to present this qualification record to the Franchise Tax Board individual inquiring about how you determine that the taxpayer qualified for the renter's credit. As with other credit, you must ask the right questions to make sure your client qualifies for the nonrefundable renter's credit. For most of us, the computer produces a qualification record automatically. However, we cannot just tell an auditor that the computer created the qualification record automatically. You must make sure you ask the taxpayer the questions presented in the qualification record. Otherwise, what good is it for? It does nobody any good to just print the qualification record. The non-refundable renter's credit qualification record must be kept with your records; therefore, you should not mail it.

If a single employer withheld California State Disability Insurance (SDI) from your wages at more than .9% of your gross wages you should contact the employer for a refund. The key to claiming the credit for excess SDI withheld is how many employers you worked for. If you just worked for one employer, you will not be able to claim the credit for excess SDI withholding. If your taxpayer client wants you to give him or her a credit for excess SDI withheld and they only had one employer, tell him or her that they cannot claim a credit for excess SDI withheld. As a good tax preparer, you need to always make sure the figures from the Form W-2s are calculated correctly. This is especially true if you know that the Form W-2 tax forms are from a small company or if they were handwritten or if they are basically prepared by hand as when they are typewritten instead of computer generated. Not that computers are perfect, but it is more assuring to see forms which are generated by a payroll software.

If you discover that you made an error on your California income tax return after you filed it, use Form 540X to amend your tax return. You should amend your tax return if you forgot to claim a credit, a deduction or if you simply made an adding error. Adding errors are usually caught right away by the Franchise Tax Board and maybe you don't need to file an amended return for that. You should file a Form 540X return to fix your return if the Franchise Tax Board already issued your refund or processed your return and they did not catch the error. If you missed the credit for excess SDI withholding credit for example, you can file the amended Form 540X return to claim the credit or any missed credit for that matter. Many will tell you that filing an amended California tax return is not a good idea. Maybe it is not a good idea if you are committing tax fraud or are trying to hide income to avoid paying tax. However, if everything is as it should be, with the taxpayer reporting only the correct items, credit or deductions, then there is nothing to worry about. If someone tells you that filing an amended tax return is not a good idea, tell them that you don't worry about stuff like since you don't commit tax fraud.

Beginning in taxable year 2010, persons who have entered into a same-sex marriage outside the State of California that is valid according to the laws of the jurisdiction in which the marriage was contracted must file their California income tax return using either the joint or separate filing status. Starting in 2013, this same rule or tax benefit also applies for federal tax returns. A same sex couple can be in a registered domestic partnership if the individual files the appropriate paperwork with the State of California. A registered domestic partner is a person who has filed a Declaration of Domestic Partnership with the California Secretary of State. A person is a registered domestic partnership has the same benefits and rights as do married individuals in the State of California. Therefore, same sex individuals can file their returns as married individual and enjoy the same tax benefits as married individuals who file as married filing jointly.

Slowly the IRS is coinciding with the state of California in tax rules. For the longest time, California has been allowing same sex couples to file their tax returns jointly. In California, all domestic partners are required to either file joint or separate tax returns under the new law. Now, under the federal new law, same sex couples can file jointly for federal tax purposes. Now the way same sex couples file for federal will just transfer over to California tax returns and adjustments or filing status are no longer needed in the California tax return. That sure makes every one's job easier.

Effective for taxable years beginning on or after January 1, 2007, RDPs under California law must file their California income tax returns using either the married/RDP filing jointly or married/RDP filing separately filing status. If you are in a registered domestic partnership, you may qualify to use the head of household filing status if you are in the process of ending your relationship or you meet the requirements to be considered not in a registered domestic partnership.

Starting in January 1, 2014, California has made it a new requirement for taxpayers to report like-kind exchanges of real or tangible property on FTB Form 3840. Thus California has new stipulations and reporting requirements for like-kind property which is exchanged for other like-kind property especially if the property is in California and exchange for property which is located outside of California. In order for the exchange to be considered a tax free transaction for California tax purposes you must meet the requirements of section 1031. First, there must be a true exchange and not a sale of the property. Second, the property you are trading for the other property must be like-kind property. Third, both properties must be for the sole purpose of conducting business or for investment purposes. The properties should not be any property that is part of inventory available for resale or that is held for personal use.

If there is no difference between your federal and California income or deductions, do not file a Schedule CA (540). Only file California Schedule CA if there are differences with California and federal deductions or income differences. Your federal return may be allowing or disallowing certain credit or deductions which California does not conform to. Remember that you only file California Schedule CA to make adjustments for nonconformity items on your federal tax return. There is a long list of items for which California does not conform to and therefore you must account for these nonconformity adjustment items on your California Schedule CA.

California and federal coincide with many credits, deductions and tax rules. For example, both California and federal obligate you to timely pay 100% of your tax or you will be faced interest and penalty charges. On time filing for both entities is usually April 15th of every year. You can always pay later, but if you do, you must know that you will be responsible for interest and penalties on the unpaid amounts.

Another credit to look into for California is the Credit for Dependent Parent. You may not claim the Credit for Dependent Parent if you used the single, head of household, qualifying widow (er), or married/RDP filing jointly filing status. Claim this credit only if you were married at the end of 2015 and you used the married filing separately, qualifying widow(er) filing status. In order to claim this credit, you spouse must not have been a member of your household during the last six months of the year. Additionally, you must have furnished over one-half the household expenses for your dependent mother's or father's home, whether or not they lived in your home.

If you and your spouse paid joint estimated taxes but are now filing separate income tax returns, one of you may claim the entire amount paid or both can split the amounts in whichever way you wish. You have the freedom to contribute to your account as your wish. Things do happen. If you and your spouse are both contributing by making estimated tax payments and then later divorce or file your tax returns as married filing separately, you can decide how to treat the estimated payments made to the account. The problem would arise when the married couple is fighting or don't agree as to how to allocate the payments.

If all your Form W-2s were not received by January 31, 2016, you need to file your tax return with the Forms W-2 you receive and also with the Form W-2s you did not received. You should be able to get a copy by visiting your employer. If, after you tried to get the form, you were not successful, then you can file a substitute Form W2. This substitute Form W-2 can be used for both your federal tax return and your state tax return. Therefore, if you never received a Form W-2 and you asked your employer for one and employer refuses to issue a form, you should complete Form FTB 3525 with your wage and withholding information in order for you to file your tax return.

Attach a doctor's statement to the back of Form 540 indicating that you or your spouse are visually impaired the first time you file a tax return to claim the blind exemption credit. If you attach a doctor's statement every time you file your tax return, you will just be creating extra work for everyone. Once you attach the doctor's statement the first time, you will have set a trigger in the account and therefore, there is no need for any more attachments.

There are five tests which you must normally meet in order claim a dependent on your tax return. You must meet the support test, gross income test, member of household or relationship test, the joint return test and the citizenship or residency test. The support test is met if you provide more than 50 percent of the persons support in the year. The gross income test is met if your child does not make more than the federal personal exemption amount for the year. If your child makes more than this amount which is $4,000 for tax year 2015, then you usually cannot claim this child’s exemption or claim the child as a dependent. The child must usually be related to you legally or by blood and live in your household for more than six months of the year. Furthermore, the child must not have file a joint tax return if done so, there would not be any additional tax owed than if the child filed as single. The residency test is met if your child is a citizen of the United States, a U.S. resident alien or a resident of Canada or Mexico. In meeting the residency test, a temporary absence may be due to illness, education, business vacation or military service. A temporary absence can also due to incarceration.

When counting the amount of time which a dependent lives with you, you don't count time away from home due to temporary absences. Time away for certain things such as school is considered temporary absence and this time would count as time in home. If the individual is gone for military purposes, this is also considered a temporary absence. If your dependent is away due medical or vacation then this is also considered to be away on temporary absence and these count as time spent in the home. The other temporary absences are time away due to business, illness and education. The person is temporarily absent if it is reasonable to assume that the person will return after the temporary absence and you continue to keep up the home for this person after the absence. For example, you temporary absent child is away on temporary absence and his or her room is waiting for him or for her to return home. You probably should not rent out your dependent's room it the child is temporarily absent from home.

Sometimes you have a choice of filing status. Many times you don't have a choice. The five filing status options are single, married filing jointly, married filing separately, head of household, and qualifying widow or widower. Each filing status gives you a different standard deduction amount on your federal tax return and at two different standard deduction amounts on your California tax return. If you are single and qualify for the head of household filing status, your standard deduction for California is $7,984 which is the married filing jointly standard deduction amount. This amount is better than the $3,992 amount for a single or married filing jointly taxpayer for 2014. The head of household filing status gives you a better tax rate and this filing status also allows you to claim some credit or deductions which are not allowed if you choose the married filing separate filing status. Therefore, for California it is worth the extra effort to gather the qualification requirements for the head of household filing status.

For 2015, you are considered to be married or an RDP at the end of the year if you were married, of course. You are not considered married at the end of 2015 if you received a domestic partnership, or you filed a Notice of Termination of Domestic Partnership with the California Secretary of State and the six-month waiting period for the notice to become final has passed. You are considered married if your spouse/RDP died in 2015 and you did not remarry or enter into another registered domestic partnership.

You don't always have to prepare your tax return in the same manner as your prepare your federal. For example, if you didn't itemize deductions on your federal tax return it is possible to itemize deductions on your California tax return. For example, your standard deduction for federal is $6,300 if you are single, and your itemized deductions equal $5,000. The $5,000 itemize deduction amount is less than your federal standard deduction of $6,300 so of course you will use the $6,300 because it gives you a better tax benefit. However, for your state the standard deduction amount is less than the $5,000 so of course you will itemize your deductions on your California tax return because $5,000 itemize deduction amount gives your a better tax benefit. Therefore, in this case your would use your standard deduction for your federal tax return but your will itemize your deductions for California.