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Federal Headlines
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By a vote of 74 to 25, the Senate on October 1 overwhelmingly approved a multi-billion dollar financial rescue package (HR 1424) consisting of the Emergency Economic Stabilization Bill of 2008, Senate-passed tax extenders and an increase in federal insurance of bank deposits to $250,000. However, House Democrats' resistance to revenue offsets could lead to defeat of the revised plan. The House defeated a previous version of the rescue package by a vote of 228 to 205 on September 29 (TAXDAY, 2008/09/30, C.1).
President Bush, in a written statement, applauded passage of the rescue package and said the Senate amendments should help to win bipartisan support in the House. Bush said the bill will provide "financial security for all Americans," noting it will help those who need to borrow money to purchase a car or to pay for college education. The $700 billion measure also is designed to assist state and local governments that rely on the credit markets to fund basic services, the president said.
House Republicans prefer the Senate tax package, which is only partially offset, to the one offered by House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y. His proposal calls for offsets for all but disaster tax relief and a one-year patch for the alternative minimum tax (AMT). Rangel charged that Senate leadership's decision to add their extenders package to the rescue bill was an "unprecedented gamble" that would most likely lead to failure in the House. House Majority Leader Steny L. Hoyer, D-Md., said that House leadership on both sides of the aisle would talk to members and, if there is bipartisan, majority support for the Senate package, they would most likely vote on the measure on October 3. If not, the House might vote over the weekend, he said.
The Senate strategy for a revised rescue bill included an increase in FDIC insurance for bank account deposits from $100,000 to $250,000 plus the entire text of HR 6049, as amended by the Senate on September 23 (TAXDAY, 2008/09/24, C.1), including clean energy tax incentives, AMT relief, extensions of expiring business and family tax cuts, disaster relief, mental health parity and other provisions. The combined cost for all measures, energy, AMT, extenders and other provisions, is $150.496 billion, and the offsets in the package total $43.504 billion.
Energy provisions are completely offset while extenders and other provisions are partially offset. The $64.1 billion cost of the AMT fix is not offset. Both the House and Senate have previously passed AMT relief without offsets in 2008.
Senate Finance Committee Chairman Max Baucus, D-Mont., defended the addition of the tax legislation to the rescue plan, saying it would "ensure that regular working Americans get the financial help they need in this time of crisis." Senate Majority Leader Harry Reid, D-Nev., expressed optimism that the Senate's revised rescue plan, which was offered as a substitute amendment to a House-passed mental health parity bill (HR 1424), would ultimately garner the full support of all parties involved in the negotiations. "We are all committed to keeping the progress of the rescue package moving forward. I am hopeful and confident that all sides, the House, the Senate and the White House, will continue working together toward that goal," said Reid.
House Reaction to Senate Package
Prior to the vote, Hoyer and Rangel criticized the Senate's attempt to pass the tax extenders bill by adding it to the economic bailout measure. The legislative strategy, while possibly gaining GOP votes in the House, will likely run afoul of the group of 49 fiscally conservative Democrats known as the Blue Dogs. That group has maintained that the House's pay-as-you-go budget rules require that tax cuts be offset by revenue increases or spending cuts. Hoyer told reporters that the decision to add extenders, AMT and energy tax provisions was controversial and could result in lower Democratic support.
Rangel was blunter in his criticism of the Senate action. "Apparently, in the Senate, they just decide what can get 60 votes and insist the House follow suit," he said. "There is something wrong with this, not just for this Congress, but for those to follow." Rangel said House Democrats support the tax incentives, but do not want to increase the federal budget deficit. He hinted that the measure should be sweetened to win Democratic votes in the House by extending unemployment insurance benefits, food stamps and help for families facing higher fuel costs this winter.
By Jeff Carlson, Stephen K. Cooper and Paula Cruickshank, CCH News Staff
Emergency Economic Stabilization Act of 2008, Senate Amendment in the Nature of a Substitute,
HR 1424
JCT Estimated Revenue Effects of the Tax Provisions Contained in an Amendment in the Nature of a Substitute to HR 1424, Scheduled for Consideration on the Senate Floor on October 1, 2008, JCX-78-08
SFC Staff Summary: Tax Proposals in Troubled Asset Relief Program (TARP)
SFC Press Release: Baucus Comments on Next Steps on Legislation Containing Energy Tax Incentives, AMT Relief, Extensions of Expiring Tax Cuts
House Ways and Means Committee Release: Rangel Statement on Senate Financial Rescue Bill
SAP on Senate Amendments to HR 1424, Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of 2008, and Tax Extenders and Alternative Minimum Tax Relief Act of 2008
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State Headlines
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California Gov. Arnold Schwarzenegger has signed two bills that were enacted as part of the budget compromise deal that impact corporation franchise and income, personal income, and sales and use taxes.
As reported earlier (TAXDAY, 2008/09/18, S.4), one of the budget trailer bills (A.B. 1452) limits corporation franchise and income tax and personal income tax business credits; allows unitary group members to assign corporation franchise and income tax credits to other members of the unitary group; temporarily suspends net operating losses (NOLs), but thereafter conforms to the federal NOL carryback and carryover provisions; authorizes an amnesty program for unpaid corporation franchise and income and personal income taxes; requires limited liability companies (LLCs) to make estimated LLC fee payments; and expands the existing rebuttable presumption that a vehicle shipped or brought into California within 90 days from the purchase date is subject to use tax to apply to vehicles, vessels, and aircraft purchased out of state within 12 months of the purchase date.
However, as a result of the budget negotiations between the governor and key California legislative leaders entered into after the governor threatened to veto the budget bill passed by the California Legislature, the governor has also signed another bill (SBx1 28) that repeals the tax amnesty program enacted by A.B. 1452, accelerates the collection of estimated corporation franchise and income and personal income taxes, enacts a 20% underpayment penalty for businesses with corporation franchise and income tax underpayments exceeding $1 million, clarifies the business credit limitation enacted by A.B. 1452, and specifies an operative date for the LLC estimated tax payment provisions enacted by A.B. 1452.
Below is a summary of the provisions contained in both A.B. 1452 and SBx1 28.
Business Credit Limitations
Business credits that may be claimed against personal income and corporation franchise and income taxes are limited to 50% of a taxpayer's net tax during the 2008 and 2009 tax years. Thereafter, the credits may be claimed in full. Any unused credit may be carried over and the carryover period is extended by the number of taxable years the credit, or any portion thereof, was not allowed as a result of the 50% limitation. A taxpayer with net business income of less than $500,000 for the taxable year is exempt from the 50% limitation.
Unitary Group Credits
Beginning with the 2010 taxable year, members of a unitary group included in a combined report may assign corporation franchise and income tax credits to other eligible members of the unitary group. The members may assign any credit earned by the taxpayer in a taxable year beginning after 2007 or any credit earned in any taxable year beginning before July 1, 2008, that is eligible to be carried forward to the taxpayer's first taxable year beginning after June 30, 2008.
To be eligible to receive the credit, the assignee must have been a member of the assigning taxpayer's unitary combined group on (1) the last day of the first taxable year in which the credit was allowed to the taxpayer (June 30, 2008, in the case of credits earned in taxable years beginning before July 1, 2008), and (2) the last day of the taxable year of the assigning taxpayer in which the eligible credit is assigned. The taxpayer must make an irrevocable election on its original return for the taxable year in which the assignment is made. Any credit limitations that would apply to the assigning taxpayer in the absence of an assignment also apply to the same extent to the assignee.
Net Operating Losses
Most taxpayers are prohibited from claiming personal income tax or corporation franchise or income tax NOLs during the 2008 and 2009 taxable years. As is the case with the business credit limitations, a taxpayer with net business income of less than $500,000 for the taxable year is exempt from the NOL suspension.
Although the NOL is suspended during the 2008 and 2009 taxable years, the carryover period is extended from 10 years to 20 years for all losses incurred after the 2007 taxable year, and this carryover period is additionally extended for the period in which an NOL was suspended during the 2008 and 2009 taxable years.
In addition, beginning with the 2011 taxable year, California taxpayers may carry back NOL losses to the two preceding taxable years. However, the amount of the NOL carryback will be limited to (1) 50% of the NOL for losses incurred in 2011 and (2) 75% of the NOL for losses incurred in 2012. Thereafter, the full amount of the NOL may be carried back two years. In addition, California conforms to federal provisions that disallow NOL carrybacks for real estate investment trusts (REITs) and limit the amount of loss that may be carried back by corporations involved in corporate equity reduction transactions.
Estimated Tax Installments
Applicable to installments due for each taxable year beginning after 2008, the amount of the estimated corporation franchise and income tax and estimated personal income tax installment payments will no longer be 25% of the estimated amount due. Rather, the first and second installments will increase to 30% of the estimated amount, and the third and fourth installments will decrease to 20% of the estimated amount due for the taxable year. In addition, the safe harbor provision from the estimated tax underpayment penalty for individuals who pay 100% of their prior year tax liability will no longer be available to individuals with adjusted gross incomes for the taxable year that equal or exceed $1 million ($500,000 in the case of a married individual filing a separate return).
Limited Liability Company Fee
Beginning with the 2009 taxable year, LLCs are required to make an estimated LLC fee payment by the 15th day of the sixth month of the current taxable year. A 10% underpayment penalty will be imposed if the estimated fee paid by the LLC is less than the amount of the fee actually due and payable with the LLC's return. However, no penalty will be imposed if the estimated fee equals or exceeds the amount of the fee paid by the LLC in the preceding taxable year.
Large Corporate Underpayment
Business entities that underpay their corporation franchise or income tax liability by more than $1 million for any taxable year are subject to a new 20% underpayment penalty, in addition to any other penalty that may be imposed. For taxpayers required or allowed to be included in a combined report, the underpayments of all the group members are aggregated for purposes of determining whether the $1 million threshold has been reached. The penalty applies retroactively to each taxable year beginning after 2002, for which the statute of limitations on assessment has not expired. However, taxpayers will have until March 1, 2009, to report and pay outstanding taxes in order to avoid the imposition of this penalty.
The penalty does not apply to understatements attributable to a change in law that is enacted, promulgated, issued, or becomes final after the earlier of either (1) the date the taxpayer files the return for the taxable year for which the change is operative, or (2) the extended due date for the taxpayer's return or the taxable year for which the change is operative. Nor can the penalty be imposed if the understatement resulted from the taxpayer's reliance on written advice contained in a Franchise Tax Board (FTB) Chief Counsel Ruling.
The Revenue and Taxation Code provisions governing deficiency assessment notices and hearing rights are inapplicable to the assessment and collection of this penalty. Furthermore, credits and refunds of the penalty are limited to the amount improperly calculated by the FTB.
Use Tax Provisions
The existing presumption that a vehicle shipped or brought into the state within 90 days from the date of its purchase was purchased from a retailer for storage, use, or other consumption in California, and is therefore subject to use tax, is expanded to apply to a vehicle, vessel, or aircraft brought into California within 12 months from the date of its purchase provided such a vehicle, vessel, or aircraft is:
-- purchased by a California resident;
-- subject to California's registration or property tax laws during the first 12 months of ownership; or
-- used or stored in California more than half the time during the first 12 months of ownership.
The presumption may be controverted by documentary evidence, as provided. Moreover, the presumption is inapplicable to: (1) any vehicle, vessel, or aircraft used in interstate or foreign commerce, as provided; and (2) any aircraft or vessel brought into California for the purpose of repair, retrofit, or modification.
Ch. 763 (A.B. 1452), Laws 2008, effective September 30, 2008, and applicable as noted above;
SBx1 28, Laws 2008, applicable as noted above.
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