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By Nicolas Waldenmayer, CPA, MBA, MBT | 

In December 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, representing the most significant tax code overhaul in over three decades. Until recently, California has not conformed to any part of the TCJA leading to two different sets of tax laws applying to certain elements of the same income tax return. Fortunately, California taxpayers will now see relief as the Legislature has passed AB 91, titled the “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019,” which conforms to some of the provisions of the TCJA. Governor Newsom signed the bill into law on July 2, 2019.

Conformity Provisions

The bill conforms to portions of TCJA and Consolidated Appropriations Act of 2016 (CAA) provisions. Highlights are listed below, and click here for a more detailed listing. Except as noted in the chart, the provisions are effective beginning with the 2019 taxable year. Retroactive relief is available for accounting method changes and partnership terminations.

      • Cash method of accounting for small businesses under $25M
      • Elimination of Net Operating Loss carrybacks
      • Limitation on excessive business losses for non-corporate taxpayers
      • Like-kind exchanges are limited to exchanges of real property

Conformity Provisions That Did Not Make It

Some items that were included in the Governor’s original conformity proposal did not make the final cut. As a result, California will not conform to the:

      • Federal limit on fringe benefit deductions for meals and entertainment expenses, or
      • Limit on transportation and parking benefits, or
      • Gain deferrals and capital gain exclusions for investments in Qualified Opportunity Zones

Earned Income Tax Credit and Young Child Tax Credit

The bill also makes the following changes to the California Earned Income Tax Credit (CA EITC):

      • Increases the maximum eligible earned income to $30,000 to match the $15 minimum wage going into effect; and
      • Revises the phaseout provisions so more taxpayers receive a higher credit.

The bill also enacts a new Young Child Tax Credit that provides up to a $1,000 maximum refundable credit to taxpayers with $25,000 or less in qualified earned income who are eligible for the EITC and have at least one child younger than six years old. The credit is capped at $1,000 regardless of the number of children.

© 2019

Contact Nic at (714) 505-9000 or nicolas.waldenmayer@hmwccpa.com

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