The FTB has stated that California will conform to additional federal disaster-related postponement relief related to disasters that occurred outside California (see our October 15 Flash E-mail for earlier announced relief). This additional relief includes, but is not limited to, relief provided to victims of Hurricanes Helene and Milton.

For taxpayers filing California returns, California conforms to the postponement relief provided to affected taxpayers related to the disasters listed below.

Taxpayers should write the name of the disaster (for example, “Florida Hurricane Milton relief per FL- 2024-10”) in blue or black ink at the top of their tax return to alert the FTB. If taxpayers are filing electronically, they should follow the software instructions to enter disaster information.

See the following FTB webpage for additional information:

www.ftb.ca.gov/file/when-to-file/disasters-outside-california.html

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In IRS Notice 2024-80, the IRS announced the inflation-adjusted retirement figures for 2025. Key adjustments contained in the notice include, but are not limited to:

• The IRA contribution limit and catch-up contribution limit will remain at $7,000 and $1,000, respectively. Also included in the Notice are the increased income phase-out ranges;
• The SIMPLE contribution limit for businesses with 25 or more employees is increased from $16,000 to $16,500, while the catch-up contribution amount for most employees age 50 and older remains at $3,500 ($5,250 for employees aged 60, 61, 62, or 63). For businesses with fewer than 26 employees, the contribution limit is $17,600 and the general catch-up contribution limit remains at $3,850;
• The annual contribution limit for IRC §§401(k), 403(b), 457 governmental plans, and the federal government’s Thrift Savings Plan is increased from $23,000 to $23,500, while the catch-up contribution for most employees 50 and older remains at $7,500. However, employees aged 60, 61, 62, and 63 can make a catch-up contribution of up to $11,250; and
• The qualified charitable distribution limit is increased from $105,000 to $108,000.

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Effective November 23, 2024, FTB Secure E-mail users will no longer be required to register with the FTB or log in with a password to open an encrypted e-mail. (FTB Tax News, November 2024) Instead, to view a Secure E-mail message from the FTB, users will be told to click on a button to view the e-mail and then will be given the option to either:

• Re-sign in to their e-mail account; or
• Sign in with a one-time passcode that will be sent to their e-mail account (the one-time passcode will expire after 15 minutes).

Any existing e-mail messages received from, and replied to, the FTB through FTB Secure E-mail before the November 23, 2024, update will only be retrievable through December 8, 2024. After December 8, 2024, e-mail messages received and sent to the FTB before the update will be purged and will not be retrievable.

Tax professionals should ensure they print out or otherwise memorialize these e-mails prior to December 9, 2024.

Any encrypted e-mail messages received from, and replied to, the FTB on or after the November 23, 2024, update will be subject to a 90-day retention period unless deleted earlier by the user.

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FinCEN has announced filing postponement relief of up to six months for victims of five recent hurricanes. However, as noted below, the deadlines postponed vary depending on which hurricane is involved. Only victims of Hurricane Milton qualify for relief from the original filing deadline of January 1, 2025, for businesses that formed prior to January 1, 2024.

For all hurricanes listed below, to qualify for the postponement relief the reporting company must have its principal place of business in an area designated both by:

• The Federal Emergency Management Agency (FEMA) as qualifying for individual or public assistance (see www.fema.gov/disaster/current); and
• The IRS as eligible for tax filing relief (see www.irs.gov/newsroom/tax-relief-in-disaster-situations).

In addition, FinCEN will work with any reporting company whose principal place of business is outside the disaster areas but that must consult records located in the affected areas to meet the deadline. Reporting companies with a principal place of business outside the affected areas and that are seeking assistance in meeting their filing obligations should contact FinCEN at www.fincen.gov/boi.

The six-month postponement relief only applies to reporting companies with an initial or updated BOI filing deadline that falls within the periods listed below based on the hurricane involved:

• Hurricane Milton: Between October 4, 2024, and January 2, 2025 (see FIN-2024-NTC11);
• Hurricane Helene: Between September 22, 2024, and December 21, 2024 (see FIN-2024-NTC10);
• Hurricane Francine: Between September 8, 2024, and December 7, 2024 (see FIN-2024-NTC9);
• Hurricane Debby: Between July 31, 2024, and October 29, 2024 (see FIN-2024-NTC8); and
• Hurricane Beryl: Between July 4, 2024, and October 2, 2024 (see FIN-2024-NTC7).

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The IRS has released inflation adjustment figures for over 60 tax provisions, including the 2025 tax rate tables. (Rev. Proc. 2024-40) Other key adjustment figures include:

• Standard deduction: Increased to $30,000 for married filing joint (MFJ); $22,500 HOH, and $15,000 for single and married filing separate taxpayers;
• Estate tax basic exclusion amount: Increased to $13,990,000;
• Annual gift tax exclusion: Increased to $19,000;
• IRC §179 current expense limitations: The dollar limit is increased to $1,250,000 ($31,300 for sports utility vehicles) and the investment limit is increased to $3,130,000;
• IRC §199A threshold and phase-in range amounts: The threshold is increased to $197,300 ($394,600 MFJ). The phase-in range amount is also increased to $247,300 ($494,600 MFJ); and
• Excess business loss threshold: The threshold is increased to $313,000 ($626,000 MFJ).

The retirement-related inflation adjustment figures are not included in Rev. Proc. 2024-40. These are announced separately, usually in November.

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The FTB has confirmed that California will conform to 29 instances of federal disaster-related postponement relief related to disasters that occurred outside California. However, to date, the California Department of Finance has not determined whether California will conform to relief granted to taxpayers affected by Hurricanes Helene and Milton; the Washington wildfires; the recent storms, tornadoes, and flooding in Illinois; or the September 25, 2025, deadline for the victims of the terrorist attacks in Israel.

As we’ve previously reported, due to legislative changes made by SB 167 (Ch. 24-34), the Department of Finance is now responsible for determining whether, and to what extent, California will conform to federal disaster postponements.

For taxpayers filing California returns, California is conforming to the postponement relief provided to affected taxpayers related to the disasters listed below.

Taxpayers should write the name of the disaster (for example, Iowa storms per IA-2024-04) in blue or black ink at the top of their tax return to alert the FTB. If taxpayers are filing electronically, they should follow the software instructions to enter disaster information.

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California is launching the Home Electrification and Appliance Rebates (HEAR) portion of the federal Home Energy Rebates program, which provides savings on energy efficiency improvements. (U.S. DOE Office of State and Community Energy Programs e-mail (October 8, 2024) Available at: https://content.govdelivery.com/accounts/USDOESCEP/bulletins/3bac79b)  

The HEAR program is one of two Federal Home Energy Rebate programs. The first phase of the HEAR program will offer federal rebates that will expand state programs to provide additional support to low- and moderate-income households. 

Available now 

Eligible owners of multifamily buildings can save up to $14,000 per dwelling unit, including up to: 

• $8,000 for an ENERGY STAR-certified heat pump HVAC; 

• $4,000 for an electrical panel; 

• $2,500 for electrical wiring; 

• $1,750 for an ENERGY STAR-certified heat pump water heater; 

• $840 for an ENERGY STAR-certified electric stove, cooktop, range, or oven; and 

• $840 for an ENERGY STAR-certified electric heat pump clothes dryer. 

To apply for the HEAR multifamily program, visit:  

https://techcleanca.com/heehrarebates/  

Available soon 

Eligible owners of single-family homes will be able to save up to the following amounts on ENERGY STAR-certified heat pump HVAC units: 

• $8,000 for low-income households (i.e., those earning less than 80% of their area’s median income); and 

• $4,000 for middle-income households (i.e., those earning between 80–150% of their area’s median income). 

Second program launching in 2025 

There also is a second Home Energy Rebates program that California will launch in 2025. Under the Home Efficiency Rebates program, eligible Californians can save money on retrofits that reduce whole-home energy consumption.

With the January 1, 2025, beneficial ownership information (BOI) reporting deadline looming for those entities formed prior to January 1, 2024, FinCEN has released two dozen more FAQs.

Highlights of the FAQs address the following:

• Unauthorized practice of law: FinCEN confirms that state law generally governs whether a third-party service provider submitting a BOI report is engaged in the unauthorized practice of law. Spidell is unaware of any state taking the position that submitting a BOI report is the unauthorized practice of law. However, Spidell strongly encourages tax professionals to contact their malpractice insurance carriers to see if this service is included in professional liability coverage (FAQ B.9);
• Impact of community property laws: Businesses must look to each state’s community property law to determine whether a spouse of an owner with at least a 25% ownership interest in the reporting company is also a beneficial owner (Spidell note: Under California’s community property law, spouses each own an undivided interest in the whole of community property, so if one spouse owns a 25% interest in a company, both spouses are treated as if they own a 25% interest and should be reported as beneficial owners.) (FAQ D.18);
• Impact of entity conversions: An entity that undergoes a conversion must file a new BOI report if under the state law a conversion results in the creation of a “new” domestic reporting company. A new report is also required if an entity ceases to exist in one state and forms in another state. An updated report, and not a new initial report, must be filed if under state law a new entity is not created because of the conversion, but the entity’s name is changed (e.g. ABC, Corp. to ABC, LLC) (FAQ C.18); and
• Registration in other state(s): Once an entity files an initial BOI report in the jurisdiction in which it is formed or initially registers, it does not have to file another or updated report if it subsequently registers in another state(s) (FAQ C.19).

The updated FAQs are available at:

https://fincen.gov/boi-faqs

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The IRS is postponing various filing and payment deadlines to May 1, 2025, for affected taxpayers in the following states:

• Alabama (entire state): For deadlines that occurred beginning on September 22, 2024 (IRS AL-2024-05);
• Florida (41 counties): For deadlines that occurred beginning on September 23, 2024 (IRS FL-2024-08);
• Georgia (entire state):  For deadlines that occurred beginning on September 24, 2024 (IRS GA-2024-08;
• North Carolina (entire state): For deadlines that occurred beginning on September 25, 2024 (IRS NC-2024-08);
• South Carolina (entire state): For deadlines that occurred beginning on September 25, 2024 (IRS SC-2024-08);
• Tennessee (8 counties): For deadlines that occurred beginning on September 26, 2024 (IRS TN-2024-01); and
• Virginia (six counties and one city): For deadlines that occurred beginning on September 25, 2024 (IRS VA-2024-01).

The relief applies to, but is not limited to, the following deadlines:

• 2023 individual, business, and tax-exempt organization extended 2023 tax year filing deadlines;
• 2024 individual and business returns and payments normally due during March or April 2025;
• 2024 quarterly estimated income tax payments normally due on January 15, 2025, and 2025 estimated tax payments normally due on April 15, 2025; and
• Quarterly payroll and excise tax returns normally due on October 31, 2024, and January 31 and April 30, 2025.

In addition, businesses are also eligible for penalty relief related to payroll and excise tax deposits. This relief varies by state. Taxpayers can find additional information, organized by state, on the IRS Around the Nation webpage.

The IRS notes that many of the areas listed above had previously received relief following Tropical Storm Debby. These taxpayers’ filing and payment deadlines are now extended until May 1, 2025.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief. All other taxpayers who are not located in the disaster area but whose records or tax preparer is in the listed area should call the IRS Disaster Hotline at (866) 562-5227 for relief.

We have reached out to the California Franchise Tax Board to determine whether California will conform to this postponement relief for affected taxpayers who have California filing requirements.

The IRS announcement is available at:

www.irs.gov/newsroom/irs-provides-relief-for-helene-various-deadlines-postponed-to-may-1-2025-part-or-all-of-7-states-qualify

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SB 422, which clarifies the responsibilities of loan-out companies and motion picture payroll services companies for the purposes of remitting unemployment insurance taxes and related obligations, including income tax withholding, was signed by Governor Newsom today.

Under the legislation, the loan-out company, solely for the purpose of remitting employment taxes, is deemed to be the employer of the employee-owners or members who are engaged by the loan-out company to provide services to a motion picture production company or an allied motion picture services company. SB 422 does not alter or modify any other laws with regard to loan-out companies or their employees, meaning that the motion picture company would likely still be treated as the employer for items such as wage and hour laws, etc.

Earlier this year, we reported that the EDD had been auditing and assessing motion picture payroll services companies on the basis that the motion picture companies and not the loan-out corporations were the employers of the loan-out corporation shareholders/employees. After passage of AB 5 and its adoption of the ABC test for purposes of determining whether a worker is an independent contractor or an employee, it has been unclear who is the employer when a motion picture company hires a person to work on a production through a loan-out corporation.

The legislation states that the changes made by SB 422 regarding who is responsible for remitting the employment taxes “is declaratory of, and not a change in, existing law.”

The text of SB 422 is available at:

https://go.spidell.com/e/837113/t-xhtml-bill-id-202320240SB422/5ybq14/2235661320/h/LNOBHXfo3vt_R14tCe5LSBj4EGlHmwDDFKfn34TYqdM

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The IRS has announced a special process available only to third-party payers (TPPs) to resolve incorrect ERC claims. (IR-2024-246)

The new process allows TPPs that filed prior ERC claims with multiple clients to effectively withdraw ERC claims for only some clients while maintaining other ERC claims. One of the hurdles to other ERC relief announced by the IRS was that TPPs that wanted to withdraw claims had to do so for all clients included on a joint filing.

The supplemental claims process is only available for TPPs to which all of the following apply:

• The TPP has filed one or more ERC claims aggregating credits for itself and/or clients using the TPP’s EIN;
• The TPP made the claim on an amended payroll tax return; and
• The IRS has not processed any of the claims the TPP is including in the supplemental claim and is not auditing these claims.

When filed, the supplemental ERC claim replaces an outstanding (and unprocessed) ERC claim. The IRS will treat claims filed before the supplemental claim as if they were never filed. Supplemental claims can only be filed to replace claims filed on or before January 31, 2024.

TPPs who file supplemental claims must file a separate claim for each tax period (payroll quarter) and all supplemental claims must be filed by 11:59 p.m. on November 22, 2024, which is the same due date as the second ERC Voluntary Disclosure Program. TPPs file supplemental claims by filing another amended payroll tax return for the applicable quarter.

TPPs looking for more information about filing supplemental ERC claims should review the IRS’s dedicated webpage on the topic. Go to:

www.irs.gov/coronavirus/filing-a-supplemental-claim-for-the-employee-retention-credit

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Tax professionals may be randomly selected to take part in a voluntary survey to help the IRS improve services to the tax professional community and taxpayers. (IRS e-News for Tax Professionals 2024-38) Invitations to participate in the survey will be sent by mail with follow up via phone call from a Kansas City area code (816). The survey can be completed online or by mail in about 20 minutes.  

The survey will be conducted through December 6, 2024, by ICF, an independent research firm. It covers topics like e-filing, due diligence requirements, data security, and electronic document submission. All responses are anonymous and confidential, and the survey will not ask for personal information about tax professionals or their clients. 

For more information, e-mail or call:  

TaxProfessional@icfsurvey.com  

(888) 504-6387

Final regulations governing the requirement for estates and beneficiaries to consistently report basis were issued on September 17, 2024, by the IRS. (TD 9991)

The elimination of the zero-basis rule is great news for estate beneficiaries. It means those assets will no longer be inherited with zero basis, and instead will follow traditional inherited basis rules.​​​​​​

Sign up for Spidell’s 2024 Trust Webinar Series and get 17 hours of CPE that will help you understand and prepare trust returns. Courses are also available individually. Click here for details.

FinCEN has released new and updated FAQs regarding the beneficial ownership information (BOI) reporting requirements for entities that dissolve prior to their initial BOI reporting due date. The FAQs clarify:

• Reporting companies formed after 2023 must file their BOI reports even if they dissolve before their initial filing due date (90 days from date of formation for those entities formed in 2024 and 30 days for entities that form after 2024);
• These entities must still file their initial report, but there is no reporting requirement to file an additional report to report that the company has ceased to exist; and
• A foreign company is not required to file a BOI report if it ceased to be registered to do business in the United States before January 1, 2024. However, like domestic entities, a foreign company must file a report if it withdraws its registration at any time after 2023.

The FAQs are available at:

www.fincen.gov/sites/default/files/shared/BOI-FAQs-QA-508C.pdf

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The FTB’s webpage concerning automatic filing extensions for single-member LLCs (SMLLCs) to file their FTB Form 568, LLC Return of Income, has caused some confusion for taxpayers and their tax professionals. (www.ftb.ca.gov/file/when-to-file/due-dates-business.html)

The FTB’s webpage states that SMLLCs owned by passthrough entities receive a six-month extension (e.g., September 15 for calendar-year taxpayers). However, the six-month extension only applies to SMLLCs owned by an S corporation. SMLLCs owned by a partnership receive a seven-month extension (October 15 for calendar year taxpayers).

We have confirmed with the FTB that the webpage does not make this distinction, but the instructions to Form 568 clearly state that the filing extension period for SMLLCs owned by a partnership is seven months and six months for all other SMLLCs.

Bottom line, the filing extension period for SMLLCs to file a Form 568 is based on their ownership as follows:

• SMLLC owned by an individual (six-month extension): October 15 for a calendar-year filer (R&TC §18567);
• SMLLC owned by a partnership (seven-month extension): October 15 for a calendar-year filer (R&TC §18567(2)(B));
• SMLLC owned by an S corporation (six-month extension): September 15, for a calendar-year filer; see FTB Notice 2019-07)
• SMLLC owned by a C corporation (six-month extension): October 15 for a calendar-year filer. Note: This is different than the seven-month extension for corporations filing Form 100 that was granted by FTB Notice 2019-07. This is because FTB Notice 2019-07 specifically limits the seven-month extension period to Forms 100 and 100W.

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The BOE has released Publication 802, Information Guide for Disaster Relief for Damaged or Destroyed Property. Publication 802 is intended to help taxpayers understand the different types of property tax relief available if their property is damaged or destroyed from a natural disaster, such as a wildfire, flooding, or earthquake; or if their property is damaged or destroyed from a misfortune, such as an electrical fire. Publication 802 also describes what qualifies for relief under R&TC §170, how property taxes are adjusted to grant relief for the damaged or destroyed property, and how and when to apply for relief. It discusses available relief once the property is rebuilt or if the property owner decides to purchase a different property. 

The publication is available at: 

https://boe.ca.gov/pdf/pub802.pdf  

On Thursday, August 15, 2024, the Assembly Appropriations Committee voted to hold SB 1501 “under submission.” According to our sources at the Capitol, this means that the bill is essentially dead, although it won’t be “officially” dead until August 31, 2024, when the legislative session ends.

This means that the hoped-for fix to the June 15 passthrough entity elective tax prepayment requirement will not happen for the 2024 tax year. Therefore, if a taxpayer failed to pay the greater of $1,000 or 50% of the amount of passthrough entity tax due for the prior year by June 15 of the current tax year, it will be ineligible to qualify to make the election for the tax year.

The FTB does not have the authority to allow for any exceptions to this prepayment requirement.

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Today, the IRS announced a second Employee Retention Credit (ERC) Voluntary Disclosure Program (VDP). (IRS Announcement 2024-30) Notable aspects of this second ERC VDP are:

• The second ERC VDP is only available for ERC claims filed for tax periods in 2021 and for which the taxpayer received an ERC refund prior to August 15, 2024;
• Where the first ERC VDP allowed taxpayers to repay only 80% of their erroneously received ERC refunds, this second ERC VDP requires taxpayers to repay 85% of their erroneously received ERC refunds;
• Applications must be filed using IRS Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, on or before 11:59 p.m. local time on November 22, 2024; and
• Applications and any required attachments must be submitted using the IRS’s Document Upload Tool at irs.gov/dut.

Other details of the second ERC VDP are similar to the first ERC VDP, such as:

• Taxpayers must apply prior to being audited or otherwise investigated by the IRS for the ERC claimed;
• If a taxpayer used a third-party payer (e.g., a PEO) to apply for the credit, the third-party payer must submit the application for the VDP;
• Relief from civil, but not criminal, penalties for program participants;
• The requirement to execute a closing agreement; and
• The requirement to provide preparer/advisor information for those who helped prepare the taxpayer’s original ERC claim, among others.

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The FTB’s current SWIFT VeriSign certificate will expire on September 9, and the new VeriSign certificate will be installed on Tuesday, September 3, 2024, between 5:00 a.m. and 7:00 a.m. PST. (FTB e-File News (August 15, 2024)) When a user logs into the SWIFT system after the new certificate has been installed, they may receive a message requiring them to accept the new certificate. Once a user accepts the new certificate, they should not receive any further messages. 

VeriSign certificate information that is embedded into an automated file transfer process that uses SWIFT will need to be updated with the new certificate information. 

Questions or comments can be sent to the FTB’s e-file Coordinator at:  

e‑file.coordinator@ftb.ca.gov

The FTB uses the Secure Web Internet File Transfer (SWIFT) system to transmit and receive confidential information to and from taxpayers and their tax professionals. This system is used by tax professionals to e-file returns and information returns with the FTB that are not currently part of the Combined Federal/State Filing Program.

A new written information security plan (WISP) template has been issued by the IRS to help protect tax professionals, especially smaller practices, against continuing threats from identify thieves and data breaches. (IR-2024-208) Federal law requires that tax professionals have a WISP and they must affirmatively declare that they have one when they renew their PTIN each year. This new template can be used by tax professionals to meet this mandate.

The new version of the WISP includes several new information updates since the first version came out, including best practices for implementing multi-factor authentication for any individual accessing any information system.

The updated WISP, which is contained in IRS Publication 5708, Creating a Written Information Security Plan for your Tax & Accounting Practice, is available at:

www.irs.gov/pub/irs-pdf/p5708.pdf

The IRS also reminds tax professionals that they must report a security event affecting 500 or more people to the Federal Trade Commission (FTC) as soon as possible, but no later than 30 days from the date of discovery. This is in addition to reporting the incident to an IRS stakeholder liaison and state tax authorities. Stakeholder Liaison contact information is available at:

www.irs.gov/businesses/small-businesses-self-employed/stakeholder-liaison-local-contacts

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The IRS has announced that it will begin processing Employee Retention Credit (ERC) claims submitted prior to February 1, 2024. (IR-2024-203) Previously, the IRS had placed a moratorium on processing any claims submitted after September 13, 2023.

The IRS has also stated that:

• They will prioritize moving the outstanding “low-risk” claims out for payment and the “high-risk” claims out for denial, and will carefully examine the remaining claims;
• They have approved up to 50,000 “low-risk” ERC claims submitted prior to September 14, 2023, and will commence sending out payments on these claims starting in September;
• They have denied 28,000 “high-risk” claims representing over $5 billion in improper claims, but has confirmed that after receiving feedback from taxpayers and tax professionals approximately 10% of the denials issued were issued in error, but that the errors appear to be isolated instances; and
• Some of the denial notices failed to inform taxpayers of their appeals rights (they can request an administrative appeal or appeal directly to the U.S. District Court). The IRS has confirmed that standard appeals rights apply to these denials.

The announcement does not indicate how many backlogged ERC claims the IRS still has to process.

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The FTB has created an e-mail address exclusively for use by San Diego County taxpayers for account resolution related to disaster postponement. (FTB News Flash (August 8, 2024))

If San Diego County taxpayers received a penalty notice for the 2023 taxable year related to the disaster postponement, taxpayers or tax professionals can now submit an e-mail to:

FTBSanDiegoDisasterRelief@ftb.ca.gov

This e-mail address was designed exclusively for San Diego County taxpayers who received notices related to the disaster postponement. The following information is required to process the disaster relief request:

• Taxpayer name;
• Address during the disaster (must be principal residence or principal place of business);
• E-mail address;
• Telephone number; and
• 10-digit FTB identification number or 15-digit notice number.

Taxpayers and tax professionals can also check MyFTB for information or they may call the FTB.

Last month, tax professionals were commenting that many of their San Diego County clients were receiving balance due/penalty due notices even though they qualified for the June 17 disaster-related postponement and filed and paid the tax due by June 17. Spidell brought this issue to the FTB’s attention and the FTB confirmed these notices were sent out erroneously. The FTB stated that due to system processing issues, these notices were generated prior to the payments being posted to taxpayer accounts.

Sign up for Spidell’s 2024/25 Federal and California Tax Update and see why more than 18,000 tax pros choose Spidell each year. Click here for details.FTB creates dedicated e-mail address for San Diego County disaster notice assistance

The BOE has scheduled the 2024 Taxpayers’ Bill of Rights Hearing on August 27, 2024, beginning at 10:00 a.m. Taxpayers and stakeholders will have the opportunity to comment on the Taxpayers’ Rights Advocate’s Annual Report or share suggestions, comments, or concerns on California’s property tax system and the Alcoholic Beverage Tax. Taxpayers and stakeholders can participate in person, by phone, or submit written comments in advance. 

Details regarding the hearing are at:  

https://boe.ca.gov/pdf/pub317-BOE.PDF

Additional information can be found at: 

www.boe.ca.gov/tra/

Today the Senate failed to pass the American Families and Worker’s Act of 2024 (TRAFWA) by a vote of 48 to 44 (it required 60 votes to pass). This is the bill that was passed by the House in January 2024 on a vote of 357 to 70. At the time the bill passed the House, it had bi-partisan support, and commentators were expecting it to pass swiftly.

Had it passed, the bill would have, among other things:

• Increased the Child Tax Credit;
• Retroactively reinstated current expensing for domestic qualified research expenses, 100% bonus depreciation, and the larger business interest expense deduction;
• Significantly increased Employee Retention Credit (ERC) penalties and retroactively imposed a January 31, 2024, cutoff date for new ERC claims; and
• Provided additional disaster relief for those impacted by federally declared disasters occurring after 2019.

At this stage, it is highly unlikely that there will be any significant tax legislation passed until after the November 2024 election. However, we will keep you posted as any news develops.

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Recently we’ve heard from tax professionals with clients who mistakenly made an estimated tax payment on behalf of the entity rather than a passthrough entity elective tax payment — the question is whether these payments can be reapplied. Some FTB Tax Practitioner Hotline staff have been informing taxpayers and tax professionals that they can simply apply the estimated tax payments to the passthrough entity elective tax payment when they file the return.

We reached out to the FTB for clarification because they had previously informed us that this was not allowed. According to the FTB’s previous position, the passthrough entity elective tax payment would only be recognized if paid with Form 3893, via Web Pay as a passthrough entity elective tax payment, or by electronic funds withdrawal when using tax software.

We are pleased to report that the FTB is now allowing taxpayers to move these payments, and they stated:

“[W]hen the business representative inadvertently directs the application of a payment to be applied as an estimate payment, FTB can accommodate a request to correct the error in order to apply the payment as intended.

Any request should be submitted in writing and must include the business representative’s acknowledgment that reapplying the erroneous estimate payment to another liability may result in penalties and interest in the tax year where the payment was originally applied.

These requests can be submitted securely through a MyFTB account. Tax professionals may also contact the Tax Practitioner Hotline and speak with a representative to adjust the payment. A written request will still be required.”

The FTB recommends that the written request to reapply the estimated tax payment be done prior to the entity filing its return. The FTB will instruct Tax Practitioner Hotline staff accordingly.

This process is only available if the entity made the estimated tax payment. An individual owner’s estimated tax payment cannot be applied to the passthrough entity elective tax because that involves two different taxpayers.

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The IRS has issued final regulations updating the required minimum distribution (RMD) rules. (TD 10001; RIN 1545-BP82) The 260 pages of final regulations (including explanations) adopt most of the regulations as proposed in 2022, including the regulations that address the distribution rules for inherited IRAs.

The inherited IRA rules implementing changes made by the SECURE Act require designated beneficiaries to continue taking RMDs each year during their 10-year distribution period, ensuring that the entire account balance is distributed by the end of the 10-year period if:

• The deceased account owner had reached their required beginning date for taking RMDs at the time of their death; and
• The account beneficiaries are not one of the five types of eligible designated beneficiaries (surviving spouse, minor child, a person 10 years younger than the decedent, or a person who is disabled or chronically ill).

This rule applies to accounts inherited from decedents who passed away after 2019. However, the IRS provided transitional relief that postponed the RMD requirement prior to 2025. The final regulations make clear that that this transitional relief did not extend the 10-year deadline. This means, for example, that accounts inherited from a decedent who passed away in 2020 must be fully distributed prior to 2031.

We will be providing details on this new guidance in upcoming issues of Spidell’s Federal Taxletter® and our Tax Update Webinars.

The regulations are available at:

https://go.spidell.com/e/837113/2024-14542-pdf/5xtmmc/2133350314/h/uzzVuxE6slm-U8AHudxrPpbPfTXwrxHQB4o2Rctm90g

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Over the last week, we have been hearing from tax professionals that many of their San Diego County clients are receiving balance due/penalty due notices even though they qualified for the June 17 disaster-related postponement and filed and paid the tax due by June 17. Spidell brought this issue to the FTB’s attention and the FTB confirmed these notices were sent out erroneously. The FTB has stated that due to system processing issues, these notices were generated prior to the payments being posted to taxpayer accounts.

All payments have now been posted. Therefore, the FTB is advising taxpayers and tax professionals that they can sign in to their MyFTB accounts and verify that there is no balance due. For taxpayers who indicated on their returns that they were in the San Diego County disaster area, if no balance due is showing on the taxpayer’s account, then the taxpayer and their tax professional do not need to take any further action. However, taxpayers who did not indicate on their returns that they were located in the disaster area must still contact the FTB to have any penalties abated.

An FTB Tax News Flash on this issue is available at:

www.ftb.ca.gov/about-ftb/newsroom/news-releases/2024-18-erroneous-notice-of-tax-return-changes-for-tax-year-2023.html

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The FTB may contact tax professionals and taxpayers by text message for specific reasons (see list below); however, the FTB does not send text messages to request personal or financial information or account numbers.

One-time text

Individuals can call the FTB’s Liens Program Interactive Voice Response (IVR) at (916) 845-4350 and select the option to receive a text. The text will provide a link to ftb.ca.gov and instructions on how to make a payment.

Ongoing texts

Individuals and tax professional representatives can manage the text message notifications through their MyFTB account. They can choose to receive text messages, change which number the FTB sends texts to, or stop receiving text messages.

Individuals with a MyFTB account can update their profile to receive text message alerts from the FTB if one of the following activities occur on their account:

• A new notice or document is available to view online;
• The FTB approved a new Tax Information Authorization (TIA) relationship or approved a tax professional’s request to renew the TIA;
• A tax professional submitted a Power of Attorney (POA) declaration that needs to be approved or rejected;
• A tax professional with a TIA or POA relationship requested full access to their MyFTB online account pending authorization; and
• An update to contact preferences was made online to add, change, or remove SMS text notifications.

If an individual did not request to be contacted by text message, they should not respond or click on any links. The incident can be reported through the FTB’s Scams page.

Updated FAQs released by FinCEN clarify that business entities that ceased to exist prior to January 1, 2024, are not required to file beneficial ownership information (BOI) reports with FinCEN.

The relief from filing for dissolved entities only applies to entities that entirely completed the process of formally and irrevocably dissolving prior to January 1, 2024. Businesses that are administratively dissolved or suspended (e.g., for failure to pay a filing fee or comply with certain jurisdictional requirements), generally do not cease to exist as a legal entity unless the dissolution or suspension becomes permanent. Until dissolution or suspension becomes permanent, these entities must file BOI reports to avoid potential penalties.

An entity created after December 31, 2023, must still file a BOI report even if it dissolved prior to January 1, 2025. These reports must be filed within 90 days of receiving actual or public notice of creation or registration if the entity was created in 2024.

An entity that files an initial BOI report and then ceases to exist is not required to file an additional report to notify FinCEN that the company is no longer in existence.

The updated FinCEN FAQs are available at:

www.fincen.gov/boi-faqs

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In addition to the budget bills we covered in our June 14 Flash E-mail (see “California budget bills pass with major tax changes”), the California Legislature has sent SB 175 to Governor Newsom for his approval. If enacted, SB 175 would eliminate the 2025 and 2026 NOL suspension and the $5 million business credit limitations contained in SB 167 if in the tax year:

• The California Department of Finance determines that there is sufficient money in the General Fund over the multiyear forecast to eliminate the limitation for that tax year; and
• The annual Budget Act provides that the credit limitation will not apply during that tax year.

The bill would also allow a taxpayer to make an irrevocable election in a tax year in which the $5 million credit limitation applies to treat the suspended credit amounts as a refundable credit. The refundable credit would be claimed equally (20% per year) over a five-year period beginning with the third taxable year after the tax year the election is made.

The Governor is expected to sign this bill.

No extension of first-year exemption from $800 annual tax

In our June 14 Flash E-mail, we also stated that the budget bills would extend the exemption from the $800 annual tax for LLCs, LPs, and LLPs if they organize or register in 2024 during their first year of doing business in California. While AB 107 did allocate money to administer the exemption, the exemption itself was not extended. This means that, absent any additional legislation enacted this year, there is no exemption from the $800 annual tax for LLCs, LPs, and LLPs that organize or register with the California Secretary of State’s Office in 2024. The first-year exemption for corporations still remains in effect.

The text of SB 175 is available at:

http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB175

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On Monday, July 1, 2024, the Assembly Revenue and Taxation Committee will hear SB 1501, the bill that would provide a fix for the current “all or nothing” June 15 passthrough entity elective tax prepayment requirement. Amendments to the bill since it was passed by the Senate are being proposed to:

• Remove the proposed 5% penalty that would be imposed against passthrough entities that failed to timely make the required June 15 payment and replace it with a 10% reduction in the amount of credit that can be claimed by the participating passthrough entity owners; and
• Allow taxpayers to still make the election whether the prepayment was not paid at all by June 15 or was underpaid by June 15 (the original version of SB 1501 only allowed those taxpayers who made no payment at all by June 15 to qualify for relief).

Even if passed by the Revenue and Taxation Committee, the bill would have to pass several more steps before it becomes law. If enacted, these changes would be effective beginning with the 2024 taxable year.

As we’ve previously reported, under current law, taxpayers wanting to make a passthrough entity tax election for the tax year must make a prepayment of the tax by June 15 of the tax year equal to the greater of:

• $1,000; or
• 50% of the passthrough entity tax due for the prior tax year.

The text of the current version of the bill is available at:

https://go.spidell.com/e/837113/-xhtml-bill-id-202320240SB1501/5xn9l1/2100148716/h/Xp0sUVWmTEqyaI91C55nOdy_VcL1dzq7pGDRU0SqcO0

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As we previously reported, a California superior court has certified a class action suit that will provide relief to out-of-state LLCs, LPs, and corporations that were passive investors in an LLC doing business in California (see “Class action suit certified on behalf of out-of-state passive LLC investors” in the March 2024 issue of Spidell’s California Taxletter®).

The FTB has begun sending notices out to potential class members informing them that they will be part of the class unless they opt out by August 20, 2024. The notice is available on the FTB’s website at:

www.ftb.ca.gov/tax-pros/law/Bahl-Media-vs-FTB-Minimum-Tax-GateMarks-Duplex.pdf

Prior to the OTA’s precedential decision in Appeal of Jali (2019-OTA-204P), the FTB was erroneously imposing the $800 annual/minimum tax and penalties and interest against many of these taxpayers even though these entities were not considered to be “doing business” in California and were not subject to the tax.

It’s important to note that the class certified by the court only includes taxpayers that paid the tax and filed timely claims for refund. This is true even though in FTB Notice 2017-01 FTB told taxpayers that they were ineligible for refunds if they had more than a 0.2% interest in the LLC doing business in California.

The attorneys representing taxpayers in the class action suit, Amy Silverstein of Silverstein & Pomerants, LLP, and Alexandar Freeman of Calvo Fisher & Jabos, are encouraging any other taxpayers negatively impacted by the FTB’s treatment of passive activities as “doing business” to contact them. This may include taxpayers that paid the tax for any year but did not file a claim for refund, and taxpayers that did not pay the tax and have received notices from the FTB stating they owe the tax.

They can be reached at asilverstein@sptaxlaw.com and afreeman@calvojacob.com.

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The IRS is starting to process older ERC claims that were submitted prior to the September 15, 2023, moratorium date. (IR-2024-169) However, the IRS has identified tens of thousands of these pre-moratorium claims as improper claims. They will be denying those claims in the next few weeks. Then, during this summer, the IRS will begin releasing payments for the 10–20% of pre-moratorium claims that it has determined are low-risk and will begin processing the 60–70% non-high risk claims later this summer.

The IRS announcement also states:

• The moratorium placed on processing claims submitted after September 14, 2023, will remain in place for now;
• The IRS is considering reopening the Voluntary Disclosure Program at a reduced rate (aka, less favorable terms) for those with previously processed claims to avoid future compliance action by the IRS;
• There are still more than 1.4 million outstanding ERC claims, with approximately 17, 000 claims per week being filed since the moratorium was put in place; and
• Taxpayers and tax professionals should not call the IRS toll-free lines about the status of an ERC claim because IRS agents staffing these lines will not have any information concerning the status of these claims.

The IRS’s announcement is available at:

www.irs.gov/newsroom/irs-enters-next-stage-of-employee-retention-credit-work-review-indicates-vast-majority-show-risk-of-being-improper

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The Legislature has passed two budget bills (AB/SB 107 and AB/SB 167) with significant tax changes. These bills will be sent to the Governor, and he is expected to sign them. These bills include, but are not limited to, provisions that:

• Extend the first-year exemption from the $800 annual tax for LLCs, LPs, and LLPs that organize or register with the Secretary of State’s office in 2024 during their first taxable year;
• Suspend the net operating loss deduction for the 2024 through 2026 tax years for taxpayers with net business income or modified adjusted gross income of $1 million or more;
• Limit businesses from claiming more than $5 million in business credits per year during the 2024 through 2026 tax years;
• Allow cannabis businesses to continue to claim business deductions under the Personal Income Tax law for an additional five years (this is already allowed under the Corporation Tax Law);
• Clarify that businesses are prohibited from including in their sales factor apportionment formula any income or losses that are not included in the calculation of net income, effectively overruling the Office of Tax Appeals’ recent decision in Appeal of Microsoft, 2024-OTA-130; and
• Eliminate California’s automatic conformity to IRS disaster-related filing and payment postponements.

To read the text of the bills, search by bill number at:

https://go.spidell.com/e/837113/faces-billSearchClient-xhtml/5xkg9g/2083677850/h/y2SMEJjLhnhMxONQVU1aHDYTVkZMcFiLN1VbWNi-INY

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The CDTFA has announced that it will hold a second workshop on June 27 to allow interested parties to discuss and provide input on crafting a discussion paper on proposed regulatory changes to 18 Cal. Code Regs. §1507, related to technology transfer agreements (TTAs).  

Under California’s technology transfer agreement statutory and case law, the value of a copyright/patent holder’s transfer of the use of the copyright/patent can’t be included in the software’s taxable base even if it is sold or transferred on tangible personal property (TPP). How to determine whether a transaction involves a TTTA and to distinguish between the value of the intangible and tangible property has been an ongoing issue for over 10 years. 

The last interested parties meeting on proposed regulatory changes was held in late 2019 with no resolution. In early 2024, the first workshop was held and participants expressed interest in a second workshop.  

The topics for discussion at the second workshop include, but are not limited to:  

• Creating a rebuttable presumption that for consumer transactions the price charged for the transaction is equal to the value of the transferred TPP; 
• Creating a rebuttable presumption regarding intellectual property rights transferred with embedded software; 
• Establishing an auditable safe harbor;  
• How to determine if a separately stated price is reasonable; and 
• Any other TTA-related topic raised by participants. 

For more information, go to:

www.cdtfa.ca.gov/taxes-and-fees/TTAWorkshopPaperWeb061324.pdf

Monday, June 17, 2024, is the due date for the 2024 passthrough entity elective tax prepayment. Taxpayers must make the prepayment in order to preserve their right to make the passthrough entity tax election on their 2024 tax return.

Remember that making the June 17 payment does not lock in the taxpayer to actually making the election on their return. If the taxpayer decides not to make the election, they can apply the prepayment to other taxes owed on their return. Any amount remaining will be refunded after the entity’s return is processed.

The prepayment must equal the greater of:

• $1,000; or
• 50% of the passthrough entity tax due for the prior year.

If the entity did not make the election in the prior year, they only have to pay the $1,000 amount.

If the taxpayer did make the election in 2023, we recommend that the taxpayer add a “cushion” to the 50% amount for the prior year in case the taxpayer discovers that they underpaid the amount due for the prior year.

As the law is currently written, there is no exception to the 50% threshold or for late payments, no matter the reason and no matter how small the shortfall. Although SB 1501, if enacted, would provide some relief from the 50% threshold requirement, it has not yet passed the California Assembly, and after that would still need to be signed by the Governor to become law. In the interim, taxpayers should plan on complying with the law as is currently in effect.

The payment can only be made by:

• Check, with Form FTB 3893, Pass-Through Entity Elective Tax Payment;
• Web-Pay (make sure the taxpayer indicates the payment is for the 2024 passthrough entity tax); or
• Electronic funds withdrawal, using tax preparation software.

For additional information on SB 1501, see our previous Flash E-mail, “Passthrough entity elective tax prepayment fix may be coming.”

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We’ve received inquiries from numerous tax professionals asking why their clients are receiving CP14 notices indicating a balance due even though the clients can substantiate they timely paid all tax due.

The IRS has confirmed that there is a nationwide delay in processing payments, resulting in erroneous balance due notices being sent when there is in fact no tax due.

The IRS is advising tax professionals and their clients to wait six to eight weeks to see if the payments are posted before contacting the IRS. If payments are not posted after this six- to eight-week period, the tax professional or client will have to provide proof of payment to the IRS to ensure that no penalties are imposed.

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In response to entertainment and tax industry inquiries regarding loan-out corporations, the EDD has clarified that it “is not taking action to ban these companies in California.” However, the EDD failed to provide any real guidance as to how owners of the loan-out corporations can qualify to be treated as employees of the loan out corporation and not the employee of the business that contracts with the loan-out corporation.​​​​​

California’s ABC test was designed to ensure that most workers are classified as employees of hiring businesses, unless specified exemptions apply. For purposes of loan-out corporations involved in the entertainment industry, the business-to-business exemption and the professional services exemption may possibly apply in various scenarios. There are also provisions of California’s Unemployment Insurance Code that may provide some relief. However, these exemptions are very fact specific and leave many loan-out corporations targets for extensive and costly audits.

We will cover the various options that loan out corporation owners may want to explore to ensure they are complying with California law in terms of ensuring that they are not treated as employees of hiring businesses in an upcoming issue of Spidell’s California Taxletter® as well as our Federal and California Tax Update seminars and webinars. Nonetheless, this is clearly a very gray area, and we will continue to report as news develops.

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Last week, several tax professionals reached out to us concerning communications their clients had received from a chapter of the International Alliance of Theatrical Stage Employees.

Cast & Crew Payroll had been told by the EDD that EDD is refusing to recognize the use of loan out corporations and that the payments to the loan out corporations should have been treated as wages to the loan out corporation owners. Cast & Crew Payroll stated that this will force payroll providers to treat loan out corporation owners in California as employees and pay the loan out corporation owners directly for their services, with full income tax withholding and payment of employee and employer taxes on all income the owners earn.

Since the enactment of AB 5 and its adoption of the ABC worker classification test, there has been a lot of speculation as to the impact of AB 5 on payments to loan out corporations.

We have reached out to the EDD to see if there is any official guidance on this issue and are awaiting a response. We will send a Flash E-mail as soon as we receive additional information from the EDD.

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As we previously reported, for San Diego County storm victims, the FTB is reinstating the pre-2023 disaster relief postponement procedures. Taxpayers who qualify for the June 17, 2024, disaster-related filing and payment postponement for San Diego County (due to the storms and flooding in January 2024) must indicate when they file their California tax return that they qualify for relief by either:

• Following the instructions in their tax software to enter disaster information; or
• For those paper filing, by writing “San Diego flood disaster” in blue or black ink at the top of their tax return.
  (FTB Tax News Flash (May 17, 2024))

• Go to Screen 4, Electronic Filing;
• Go to the e-file PDF/Miscellaneous section;
• Under the Miscellaneous subsection, enter the disaster relief explanation (e.g., San Diego County flood) in the Disaster relief explanation field.

Note: The entry above will be passed into the electronic California individual tax return when the state return is electronically filed.

In the Lacerte business, fiduciary, and exempt entity products, the user input is in a similar location as the above. However, the e-file capability for the Disaster relief explanation field for these entities will be added on an upcoming production release currently planned for Thursday, May 30th.

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The U.S. House of Representatives has passed the Federal Disaster Tax Relief Act of 2023 (H.R. 5863). If enacted, the bill would:

• Allow taxpayers who were subject to damages from hurricanes, wildfires and other federally declared disasters that occurred after February 25, 2021, to claim disaster-related losses without itemizing such deductions;
• Remove the requirement that such losses must exceed 10% of a claimant’s adjusted gross income to claim the disaster-related loss;
• Exclude from gross income any amount received by an individual after 2019 and before 2025 as compensation for expenses or losses incurred due to a qualified wildfire disaster, to the extent the losses were not already covered by insurance or other sources; and
• Exclude specified relief payments received by taxpayers for losses resulting from the East Palestine, Ohio, train derailment on February 3, 2023.

Similar provisions are also contained in the Tax Relief for American Families and Workers Act (TRAFWA). However, given the lack of movement in the Senate on the TRAFWA, the disaster relief provisions were moved separately out of the House in H.R. 5863. According to news sources, there is support to pass H.R. 5863 in the Senate. We will send another Flash E-mail should this occur.

The text of the bill is available at: www.congress.gov/bill/118th-congress/house-bill/5863/text

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