Chapter 1 2014 Tax Legislation Summary... Page 1-3 What Did Pass... Page 1-3 Repeal Clarification of Enterprise Zone Credit Carryover...Page 1-3 Fines By Professional Sports Leagues Not Deductible...Page 1-3 Mortgage Debt Forgiveness Exclusion Extended...Page 1-4 Tax Forms to Provide Scholarshare Information...Page 1-4 Motion Picture Credit Expanded and Improved...Page 1-4 New Advanced Aircraft Credit...Page 1-7 Exclusion of Rebates for Removing Turf...Page 1-8 Business Entities Required to E-File...Page 1-8 Dependent ID Numbers Required on Returns...Page 1-9 Go-Biz Credit Not Blocked By AMT...Page 1-9 Charitable Remainder Trust Conformity...Page 1-9 Use Tax Is First Priority on Tax Return...Page 1-10 Credit for Contributions to College Access Fund...Page 1-10 Student Loan Debt Relief...Page 1-10 Partial Exclusion for Small Business Stock... Page 1-8 Chapter 2 Introduction to California Taxation History of California Tax... Page 2-3 California Tax System... Page 2-3 Administration of Tax... Page 2-3 Imposition of Tax... Page 2-3 Federal Conformity... Page 2-3 IRC Operative and Inoperative Dates Application... Page 2-4 Exceptions to IRC Adoption... Page 2-4 California and Federal Regulations... Page 2-4 Elections... Page 2-5 New California Residents... Page 2-5 Application or Consent... Page 2-5 Statute of Limitations... Page 2-5 Secretary Franchise Tax Board... Page 2-5 Adjusted Gross Income... Page 2-5 Application of IRC... Page 2-6 Chapter 3 Who Must File Residents... Page 3-3 Nonresidents... Page 3-3
Chapter 4 Tax Rates, Standard Deduction and Exemption Credit Tax Rates... Page 4-3 Additional 1% Mental Health Services Tax... Page 4-4 Standard Deduction... Page 4-4 Limitation on Itemized Deductions... Page 4-5 Personal Exemption Credits... Page 4-7 Corporate Tax Rates... Page 4-8 LLC Fees Unchanged... Page 4-9 Chapter 5 Nonresident Issues Determination of Residency... Page 5-3 Nonresidents and Part-Year Residents... Page 5-7 California Source Income... Page 5-9 540NR Adjustments, Deductions and Credits... Page 5-13 Change of Residency Status... Page 5-14 Chapter 6 Income Inclusions Gross Income... Page 6-3 Compensation for Personal Services... Page 6-4 Compensation Distinguished From Gift... Page 6-5 Qualified Scholarships... Page 6-6 Employer Educational Assistance Programs... Page 6-6 Military Pay... Page 6-7 Bargain Purchases... Page 6-8 Services of a Child... Page 6-8 Pensions and Other Payments to Retired Employees... Page 6-8 Non-Exempt Trust or Plan... Page 6-9 Annuities... Page 6-9 Employee Annuities... Page 6-10 Interest... Page 6-10 Dividends... Page 6-11 Alimony... Page 6-12 Commodity Credit Loans... Page 6-12 Cancellation of Indebtedness... Page 6-12 Restricted Property... Page 6-13 Rents... Page 6-14 Illegal Payments, Bribes and Kickbacks... Page 6-14 Credits and Treatment of Credit Carryovers... Page 6-14
Other Items of Gross Income... Page 6-14 Chapter 7 Income Exclusions What Are Exclusions From Gross Income?... Page 7-3 Life Insurance... Page 7-4 Gifts and Inheritance... Page 7-5 Compensation for Injury or Sickness... Page 7-6 Amounts Received Under Accident and Health Plans... Page 7-7 Rental Value of Parsonages... Page 7-8 Income From Discharge of Indebtedness... Page 7-8 Lessee s Improvements on Lessor s Property... Page 7-9 Recovery of Tax Benefit Items... Page 7-9 Sale or Exchange of Residence... Page 7-10 Living Expense Insurance Payments... Page 7-11 Meals and Lodging Furnished By Employer... Page 7-11 Cafeteria Plans... Page 7-12 Cancellation of Student Loan... Page 7-12 Adoption Assistance Programs... Page 7-13 Payments to Vacate Real Property... Page 7-13 Educational Assistance Programs... Page 7-13 Conservation Cost-Sharing Program Payments... Page 7-13 Grants Under Assistance Programs... Page 7-14 Dependent Care Assistance Programs... Page 7-14 Cash or Deferred Profit-Sharing Arrangement 401(k) Plans... Page 7-14 Boundary Waters Canoe Act Payments... Page 7-14 Fringe Benefits... Page 7-14 Ridesharing... Page 7-15 Empty Beverage Containers... Page 7-15 Water Conservation Water Closet Expenses... Page 7-15 Foster Care Payments... Page 7-16 Energy Subsidies Paid By Public Utilities... Page 7-16 Cost-Share Payments Received By Forest Landowners... Page 7-16 Crime Hotline Awards... Page 7-16 Payments Under German Act Regulating Unresolved Property Claims... Page 7-16 Energy Conservation Rebates... Page 7-16 Restitution Payments... Page 7-17 Military Benefits... Page 7-17 Federal Subsidies for Prescription Drug Plans... Page 7-17 Chapter 8 Adjustments to Income Deductions for Adjusted Gross Income... Page 8-3 Business Expenses... Page 8-3 Rent or Royalty Expenses... Page 8-7
Losses on Business Property... Page 8-8 Net Operating Losses... Page 8-8 Moving Expenses... Page 8-10 Interest Penalty Due to Early Withdrawal of Savings... Page 8-10 Individual Retirement Arrangements... Page 8-10 Keogh Plans... Page 8-14 Alimony Payments... Page 8-16 Business Use of Home... Page 8-16 Circulation Expenditures... Page 8-17 Research and Experimental Expenditures... Page 8-17 Farmers Expenses... Page 8-18 Amortization of Pollution Control Facility... Page 8-18 Activities Not Engaged in for Profit (Hobby Losses)... Page 8-18 Employee Stock Options... Page 8-19 California Qualified Stock Option... Page 8-21 Welfare Benefit Plans... Page 8-21 Medical Savings Plans... Page 8-21 Health Savings Accounts... Page 8-22 Chapter 9 Itemized Deductions General... Page 9-3 Standard Deduction... Page 9-4 Medical Expenses... Page 9-4 Taxes... Page 9-5 Interest... Page 9-7 Charitable Contributions... Page 9-10 Casualty Losses... Page 9-12 Miscellaneous Deductions... Page 9-16 Chapter 10 Accounting Periods, Sales and Exchanges Tax Year for Recognizing Income... Page 10-3 Tax Year for Taking Deductions... Page 10-5 Sales and Exchanges... Page 10-6 Chapter 11 Tax Credits for Individuals Tax Credits Generally... Page 11-3 Personal and Dependency Credits (Exemption Credits)... Page 11-5 New Homeowner s Credit... Page 11-5 Credit for Adoption Costs... Page 11-8 Other State Net Income Tax Credit... Page 11-8 Teacher Retention Credit... Page 11-11
Renter s Credit... Page 11-12 Excess State Disability Insurance... Page 11-12 Head of Household and Dependent Parent Credits... Page 11-13 Low-Income Housing Credit... Page 11-14 Transportation Costs of Donated Agricultural Products... Page 11-16 Donation of Fruits and Vegetables... Page 11-16 Other Tax Credits... Page 11-17 Natural Heritage Preservation Tax Credit... Page 11-17 Household Child and Dependent Care Credit... Page 11-17 Solar and Wind Energy System Credit... Page 11-18 Chapter 12 Accounting Periods, Methods, Inventory, Etc. Accounting Period... Page 12-3 Change of Accounting Period... Page 12-4 Accounting Methods... Page 12-5 Change of Accounting Method... Page 12-6 Tax Year of Inclusion of Items of Gross Income... Page 12-7 Tax Year for Taking Deductions... Page 12-10 Special Rules for Tax Shelters... Page 12-10 Inventories... Page 12-11 Uniform Capitalization Rules... Page 12-12 Accounting for Inventories... Page 12-12 Valuation of Inventories... Page 12-14 Specialized Businesses Valuation Methods... Page 12-15 Chapter 13 Depreciation, Amortization, Depletion, Bad Debts Depreciation and Amortization... Page 13-3 Amortization of Intangible Property... Page 13-6 Basis for Depreciation... Page 13-6 Methods for Figuring Depreciation... Page 13-7 Available Methods... Page 13-9 Accounting for Depreciable Property... Page 13-10 Retirement of Assets... Page 13-11 Expensing Qualified Property... Page 13-12 Clean-Fuel Vehicles and Refueling Property... Page 13-12 Useful Life and Class Life Asset Depreciation Range System... Page 13-12 Demolition of Structures... Page 13-13 Child Care Centers... Page 13-13 Business Start-Up Expenses... Page 13-13 Expensing Property in Business Incentive Areas... Page 13-13
Luxury Automobiles and Mixed-Use Property... Page 13-14 Depreciation Recapture... Page 13-15 Depletion... Page 13-17 Bad Debts... Page 13-19 Chapter 14 Corporations Corporations Liable for Tax General... Page 14-3 Franchise Tax on Corporations... Page 14-3 Corporation Income Tax... Page 14-4 Foreign Corporations... Page 14-4 Banks and Financial Corporations... Page 14-8 Corporations Commencing to Do Business... Page 14-8 Corporations Discontinuing Business... Page 14-8 Change of Tax Status... Page 14-9 Corporate Organization... Page 14-9 Corporate Reorganizations... Page 14-10 Complete Liquidation of Corporation... Page 14-11 Basis of Property Received in Liquidation... Page 14-11 Gain Realized on Liquidation... Page 14-11 Chapter 15 S Corporations, LLCs and Other Entities S Corporations... Page 15-3 Professional Corporations... Page 15-7 Personal Holding Companies... Page 15-7 Holding Companies... Page 15-7 Limited Liability Partnerships... Page 15-7 Exempt Organizations... Page 15-7 Limited Liability Companies... Page 15-8 Chapter 16 Quitting Business in California Corporate Dissolutions and Withdrawals... Page 16-3 Corporations Discontinuing Business... Page 16-3 Corporate Suspension and Revivor... Page 16-4 Chapter 17 Gross Income Basis of Tax... Page 17-3 Gross Income Defined... Page 17-3 Gross Income From Business... Page 17-3 Dividends... Page 17-4
Interest... Page 17-4 Rents and Royalties... Page 17-5 Patronage Dividends... Page 17-5 Life Insurance Proceeds... Page 17-6 Income of Certain Foreign Aircraft and Ships... Page 17-6 Income From Discharge of Indebtedness... Page 17-6 Recovery of Bad Tax Benefit Items... Page 17-7 Capital Losses... Page 17-7 Empty Beverage Containers... Page 17-7 Annuity Contracts Not Held By Natural Persons... Page 17-7 Chapter 18 Deductions and Net Operating Loss Ordinary and Necessary Business Expenses... Page 18-3 Interest... Page 18-8 Taxes... Page 18-9 Charitable Contributions... Page 18-10 Research and Experimental Expenditures... Page 18-12 Dividends... Page 18-12 Organizational Expenditures... Page 18-13 Losses... Page 18-14 Capital Losses... Page 18-14 Chapter 19 Multistate Taxation New Development... Page 19-3 Introduction... Page 19-3 Basic Law for Allocation and Apportionment... Page 19-3 Federal Law Protecting Interstate Businesses... Page 19-4 Multistate Tax Compact... Page 19-6 Unitary Businesses... Page 19-6 Combined Reporting Affiliated Corporations... Page 19-11 Business Income Apportionment Formula... Page 19-12 Special Apportionment Formulas... Page 19-22 Separate Accounting... Page 19-22 Alternative Minimum Tax... Page 19-22 Chapter 20 Pass-Through Entities Partnerships... Page 20-3 Limited Liability Companies... Page 20-4
Classification of Pass-Through Entities... Page 20-7 Taxation of Partnerships... Page 20-7 Partnership Taxable Income... Page 20-9 Partnership Capital Gains and Losses... Page 20-10 Dissolving Limited Liability Pass-Through Entities... Page 20-10 Taxation of Partners/LLC Members... Page 20-10 Contributions to Partnership... Page 20-11 Basis of Partner s Interest... Page 20-12 Partner s Distributive Share... Page 20-14 Withholding on Distributions to Partners... Page 20-15 Partner s Dealings With Partnership... Page 20-15 Sale or Exchange of Partner s Interest... Page 20-16 Retiring Partner s Interest... Page 20-17 Gain or Loss on Distribution... Page 20-18 Special Basis to Transferee in Distributions... Page 20-18 Adjustment to Basis of Partnership Assets... Page 20-19 Estate or Other Successor as Partner... Page 20-21 Partnership Income of Nonresidents... Page 20-21 Chapter 21 Tax Credits for Businesses Investment Tax Credit for Manufacturing Equipment (Repealed)... Page 21-3 Employers Child Care Credit... Page 21-3 Employers Qualified Dependent Care Plan Credit... Page 21-4 Research Expenditures Credit... Page 21-4 Enterprise Zones Credits... Page 21-5 Hiring and Financial Incentive Credits... Page 21-7 Prison Inmate Labor... Page 21-9 Local Agency Military Base Recovery Area Incentives... Page 21-9 Enhanced Oil Recovery Credit... Page 21-11 Expenditures to Provide Access to Disabled Individuals... Page 21-11 Rice Straw Credit... Page 21-11 Qualified Farmworker Housing... Page 21-12 Environmental Tax Credit for Small Refiners... Page 21-12 Motion Picture Credit... Page 21-12 New Hiring Tax Credit... Page 21-13 California Competes Tax Credit... Page 21-15 Overall Limit on Business Credits... Page 21-16 Affiliated Corporations May Share Credits... Page 21-17 Chapter 22 Alternative Minimum Tax/Premature Distributions Alternative Minimum Tax Personal Income Tax... Page 22-3 Alternative Minimum Tax Rate Corporation Tax... Page 22-5 Tax on Premature Distributions... Page 22-7
Income Splitting... Page 22-7 Chapter 23 Interest and Penalties Statute of Limitations... Page 23-3 Penalties... Page 23-3 Interest... Page 23-8 Chapter 24 Property Tax Background... Page 24-3 New Construction... Page 24-3 New Construction Exclusions... Page 24-4 Change in Ownership... Page 24-6 Change in Ownership Exceptions... Page 24-7 Decline in Market Value... Page 24-8 Exemptions... Page 24-9 Proposition 13 Base Year Value Transfers to Replacement Properties... Page 24-11 Base Year Value Transfers for Property Taken By Eminent Domain or Acquired By a Government Entity (Proposition 3)... Page 24-11 Property Acquired or Constructed to Replace Disaster Area Property... Page 24-11 Business Personal Property... Page 24-12 Property Tax Assistance... Page 24-12 Fire Prevention Fee... Page 24-13 Index Index... Page 25-1