Foreign Tax Reform – California Businesses May Be Hit Hardest
By Douglas M. Sayuk, Matthew H. Fricke, & Shamen R. Dugger
1
I.
INTRODUCTION
On August 10, 2010, President Obama approved the Education Jobs and Medicaid
Assistance Act,2 which helps fund education/Medicaid relief but at the expense of corporations
via stricter international tax provisions. This foreign tax reform primarily focuses on the foreign
tax credit ("FTC") and preventing abuse of mechanisms, like the FTC, created to mitigate double
taxation between U.S. and foreign jurisdictions. As California’s economy is the eighth largest in
the world based on 2010 statistics3 and is headquarters to many Fortune 500 multinational
companies,4 the question becomes to what extent this legislation will impact California
businesses. Moreover, California’s tax rate is one of the highest in the nation,5 which raises the
question of how this tax reform will impact the overall U.S. effective tax rates for California
businesses relative to their foreign-based competitors.
In this article we attempt to answer these questions by first providing the reader with a
general background on foreign taxation, the potential for abuse, and how the new legislative
changes aim to curtail this abuse. We then address the impacts of this legislation on California
businesses from both a financial statement and income tax return perspective. Finally, we
compare the statutory tax rates of California businesses post foreign tax reform with those of
their foreign based competitors to determine whether the reform, although perhaps stimulative in
the short-run, hinders the long-term ability for California businesses to compete globally.
II.
BACKGROUND
It is important to first understand the key fundamentals of foreign taxation in order to
grasp the impact of Obama’s foreign tax reform on California’s business sector. Following is a
high level primer of relevant foreign taxation concepts, along with an analysis of their potential
for abuse, and a summary of how the new legislation attempts to prevent such abuse.
A.
The Objective of Foreign Taxation Rules
A primary objective of foreign taxation rules is to ensure that all worldwide income is
taxed in the appropriate jurisdiction, but no more than once.6 When a company operates in both
U.S. and foreign jurisdictions, the company is subject to U.S. and foreign taxes. Foreign taxation
rules attempt to eliminate, or at the very least mitigate, the imposition of both U.S. and foreign
taxes on the same income. Although foreign taxation is a vast topic, there are three primary
means of double taxation relief addressed by Obama’s foreign tax reform: 1) foreign tax credits;
2) tax exemption for reinvested foreign earnings; and 3) “check-the-box” classification of foreign
entities.7
1.
Foreign Tax Credits
Foreign tax credits attempt to eliminate double taxation by allowing a company a credit
against U.S. federal tax for foreign taxes already paid on income. 8 For example, Company A
earns $100 of income from one of its foreign subsidiaries. Assuming the tax rate in the foreign
jurisdiction is 30 percent, the subsidiary remits $30 of tax to the foreign jurisdiction. The
subsidiary then remits the $100 to its U.S. parent company upon which the typical 35 percent
federal tax rate is assessed, i.e., $35. The U.S. parent would receive a foreign tax credit of $30
offsetting the $35 federal income tax, thereby resulting in net U.S. federal income tax of $5.
This result accomplishes the intent of the foreign taxation rules, which is for Company A to pay
the higher tax of the two jurisdictions without being taxed twice on the same income.9
2.
Tax Exemption for Reinvested Foreign Earnings
Generally if a U.S. corporation conducts its foreign business through a foreign subsidiary,
its overseas earnings are not subject to U.S. tax as long as the income remains in the hands of the
foreign subsidiary and is not subject to anti-deferral rules of the Internal Revenue Code (IRC).
In addition, these U.S. corporations operating overseas may immediately deduct their expenses
supporting their foreign investment even though the related income is not subject to U.S. tax
until it is repatriated.10
3.
Classification of Foreign Entities
“Check-the-box rules” were issued in 1996 allowing corporations to identify a qualified
entity as a separate corporation or to “disregard” it as the unincorporated branch of another
corporation for U.S. tax purposes by simply checking a box on a tax form.11 This relatively
simple reclassification from one entity for U.S. tax purposes to another has been used by
businesses for foreign tax relief. Specifically, the time at which a firm pays U.S. taxes on
foreign profits depends on how the company’s foreign operations are structured. Unlike
subsidiaries, if foreign operations are organized as branches (i.e., not separately incorporated in
the foreign country), then the foreign profits are taxed in the U.S. when they are earned. 12 These
rules allow companies to create “hybrid” entities that are considered a corporation by the foreign
country but an unincorporated branch by the U.S., thereby giving rise to corporate structural
opportunities to reduce double taxation.13
B.
Potential Abuse of Foreign Taxation Rules
As with many tax laws focused on equitable results, the U.S. foreign tax laws also create
opportunities for abuse. All three double taxation relief mechanisms described above can be
manipulated beyond their intended results.
1.
Foreign Tax Credits
Foreign tax credits may be used to offset income of other company subsidiaries instead of
for their intended purpose of avoiding double taxation, in effect providing companies with an
unintentional tax break.14 For example, Company A in the scenario above earns the same $100
from its foreign subsidiary but now the subsidiary is located in a foreign jurisdiction with a tax
rate of 40 percent. In this case, the foreign subsidiary remits $40 of tax to the foreign
jurisdiction. The subsidiary then remits the $100 to its U.S. parent upon which a 35 percent
federal tax is assessed, i.e., $35. The foreign tax credit of $40 is more than what is required to
offset the U.S. federal tax liability of $35. Some circumstances allowed excess credits from one
source of foreign income to offset U.S. taxes on income from another foreign source in a
procedure called "cross-crediting." Cross-crediting often results in no U.S. federal tax liability in
situations where the intended result, no double taxation on income, in reality warrants some U.S.
federal tax due.15
2.
Tax Exemption for Reinvested Foreign Earnings
Under the former foreign tax rules, in certain circumstances U.S. companies could
receive U.S. tax deductions without paying U.S. tax on related income, as long as that income
was reinvested in the respective foreign country. This treatment creates less incentive for
companies to repatriate foreign earnings back to the U.S. and pay the related U.S. tax. The result
is oftentimes indefinite income tax deferral periods for many companies.
3.
Classification of Foreign Entities
Check-the-box rules allow U.S. multinationals to lower their taxes in high-tax countries
by creating “hybrid” entities.16 A hybrid entity is one classified differently for U.S. and foreign
purposes, such as an entity classified as a subsidiary for U.S. purposes and a branch for foreign
purposes.17
For example, assume Company A invests in a high tax jurisdiction like Japan. In some
instances, check-the-box may allow Company A to cut its tax bill by routing capital used to
finance the investment through a financing affiliate in a low tax jurisdiction with a good tax
treaty network such as Singapore or Luxemburg (“Country L”). Company A first sends
investment funds to a wholly-owned financing affiliate in Country L, which lends the money to a
second wholly-owned affiliate in a high tax jurisdiction (“Country H”). The affiliate in Country
H uses the loan for an investment project and pays interest to the affiliate in Country L. The U.S.
parent “checks the box” on the affiliate in Country H, making it an unincorporated branch of the
Country L subsidiary for U.S. tax purposes. But Country H’s government considers the affiliate
operating within its borders to be a separate corporation.18
As a result, the interest payment from the Country H affiliate to the Country L subsidiary
is not taxed anywhere. The payment is deductible in Country H. The interest is not taxed in the
U.S. because with check-the-box the U.S. regards the combined high tax jurisdiction affiliate/low
tax jurisdiction affiliate operation as a single corporation. The interest is taxed at a low rate (or
not at all in some jurisdictions) in the low tax jurisdiction. Under the former foreign tax rules,
the interest payment will not be taxed until it is paid back to the U.S. parent.19
C.
Foreign Tax Reform Changes to Eliminate Abuse
The new rules under Obama’s foreign tax reform attempt to prevent abuse of these
foreign tax relief mechanisms by refocusing the rules on their intended purpose, i.e., eliminating
double taxation. The rules remove unintended tax benefits of the former foreign tax laws.
1.
Foreign Tax Credits
The new rules create a variety of limitations on the foreign tax credit all with the general
purpose of matching the foreign tax credits to the same income being taxed for U.S. purposes.
To that effect, taxpayers no longer will be able to “split” excess credits among different
subsidiaries; rather, the credits will be allowed only once the foreign income associated with the
credit is recognized for U.S. federal tax purposes.20 The new rules further require separate
application of foreign tax credit limitations where a tax treaty results in foreign-source income
that would otherwise be considered U.S.-source income.21 Finally, the new rules limit the
amount of deemed paid foreign tax credit that may be claimed through the use of IRC section
95622 to cause a deemed dividend from a lower-tier controlled foreign corporation directly to the
U.S. shareholders.23
The new rules also limit the foreign tax credit via a regulation that expands the definition
of an affiliated group to include certain foreign corporations as well as U.S. corporations. 24 The
effect of this change is to eliminate any foreign assets in the foreign corporation from the group’s
interest expense apportionment fraction, resulting in less interest expense apportioned to reduce
foreign source income and the potentially allowable foreign tax credit.25
2.
Tax Exemption for Reinvested Foreign Earnings
Similar to the foreign tax credit limitations, the new foreign tax rules attempt to ensure
the exemption for reinvested foreign earnings is utilized by taxpayers within the spirit of the law,
i.e., to prevent double taxation rather than create unintentional tax benefits. Specifically, the new
rules seek to expose more of those foreign profits to immediate U.S. tax regardless of whether a
company intends to return those profits to the U.S. or reinvest them abroad.26
For example, a new limitation has been created where the earnings and profits (E&P) of a
foreign acquiring corporation in an IRC section 30427 related party stock redemption are taken
into account. The perceived abuse was that companies could use an IRC section 304 redemption
to remove the E&P of U.S.-owned foreign subsidiaries outside of the U.S. tax system without
incurring any U.S. tax cost. The new rules prevent this abuse by requiring that no E&P would be
considered sourced from the acquiring corporation if more than 50 percent of the dividends
arising from the transaction would not be subject to U.S. federal income tax in the tax year they
arise or included in the E&P of a controlled foreign corporation. This change will generally
result in the imposition of a U.S. withholding tax on a foreign corporation that sells stock in a
U.S. subsidiary to the U.S. subsidiary’s foreign subsidiary to the extent that the U.S. subsidiary
has earnings and profits.28
Along the same lines of restricting exemptions for reinvested foreign earnings, the new
rules also eliminate (or in some circumstances restrict) the beneficial “80/20” provisions.
Previously, under these rules, U.S. corporations that generated at least 80 percent of their gross
income from active foreign business treated all or a portion of any interest received as foreign
source not subject to U.S. withholding tax.29
3.
Classification of Foreign Entities
Foreign tax credits also will be limited with respect to income derived from assets related
to a “covered asset acquisition,” e.g., a deemed asset acquisition of a hybrid entity that is treated
as a corporation for foreign tax purposes, but as a partnership or disregarded entity for U.S. tax
purposes. This type of transaction generally creates tax basis deductible in the U.S., but not in
the foreign jurisdiction, resulting in foreign tax credit on foreign income which will never be
taxed in the U.S. (due to offsetting depreciation and amortization deductions). The new rules
provide that in this instance no double taxation relief is required as the income is not taxed in the
U.S. and thus no foreign tax credit will be allowed.30
III.
FOREIGN REFORM IMPACTS ON CALIFORNIA BUSINESS
While California generally conforms to federal tax law, it does not have a foreign tax
credit regime so many of these rules will not have a direct impact on the state income tax
liability. Nonetheless, we expect these tax reforms to have a disproportionate federal tax impact
on California businesses due to the state’s high concentration of multinational companies.31
Fortunately, these tax reforms will not be effective on a prospective basis until 2011, providing
companies time to reevaluate their global structure and transactional flows.32 Below we examine
both the financial statement and tax compliance impacts of the new law.
A.
Financial Statement Impacts
There are no immediate financial statement impacts from this new legislation other than
disclosure of the international reform in a company’s Management’s Discussion & Analysis
(“MD&A”) section. Generally the new rules become effective on a prospective basis for tax
years beginning after December 31, 2010, so resulting impacts will begin to emerge in financial
statements issued during 2011.33
1.
ASC 740 (formerly FAS 109)34
The anticipated 2011 impacts of the foreign tax reform on a California business’ financial
statements are largely dependent on whether the business is operating at a loss or a profit. If the
business is operating at a U.S. tax loss, then likely any foreign tax credits generated are not being
utilized and generally will be offset by valuation allowance without any financial statement
impact other than footnote disclosure. That being said, even a loss company should evaluate its
current global organizational structure to mitigate the future tax impact of the new law.
Profitable California businesses that are multinational have much to consider and account
for with respect to the foreign tax reform. Foreign tax credits should be evaluated for accuracy
based on the changes summarized above, as well as any U.S. tax exemptions for reinvested
earnings. All 80/20 companies should be evaluated for elimination/restriction as well as general
corporate organizational structure evaluated for problematic hybrid entities. All requisite
changes based on this analysis should be reflected accordingly in the deferred tax asset inventory
and corresponding balance sheet. In addition, application of these changes may result in impacts
to current tax expense and/or deferred tax expense.
2.
ASC 740-10 (formerly FIN 48)35
As the international tax reform creates a host of new guidelines and revisions to existing
law without substantial clarifying publications, income tax uncertainties may arise in applying
the new rules. ASC 740-10 (formerly FIN 48) reserves may be required to account for these
uncertainties until further analysis by government and industry has been performed.
B.
Tax Compliance Impacts
Any tax return impacts from the international tax reform are even farther off than the
financial statement impacts. Generally the new rules will apply, for tax return purposes, to tax
years beginning after December 31, 2010.36 Assuming a California calendar year end company
that files applicable extensions, the 2011 federal income tax returns will not become due until
September 2012. Irrespective of this time lag, companies should be considering federal income
tax return implications sooner rather than later.
1.
Federal Income Tax Return Implications
Since the proposed rules predominately impact the foreign tax credit, we anticipate that
the IRS may issue a revised Form 1118, Foreign Tax Credits – Corporations,37 and Form 5471,
Information Return of U.S. Persons with Respect to Certain Foreign Corporations,38 to
incorporate the law change. Additional disclosure information also may be requested on Form
1120, Schedule N, Foreign Operations of U.S. Corporations.39 It appears likely that the IRS
Schedule UTP, Uncertain Tax Position Statement, will apply to all Federal Form 1120 filers with
both uncertain tax positions and assets equal to or exceeding $10 million beginning with 2010
federal income tax returns.40 Therefore, any ASC 740-10 exposures related to the foreign tax
reform likely will require disclosure for tax return purposes beginning with 2011 federal income
tax returns.
2.
California Income Tax Return Implications
There are no significant implications to California income tax returns as the foreign tax
reform is focused primarily on changes to the foreign tax credit. Oftentimes federal tax law
changes will impact state taxable income as many states begin their state taxable income
computations with federal taxable income. However, the foreign tax credit offsets federal
income tax without any impact to federal taxable income.
IV. GLOBAL EFFECTIVE TAX RATE COMPARISON
The scope of the new international tax provision is fairly limited (estimated to generate
only $9 billion of revenue over a ten-year period).41 The provision represents a small fraction of
the comprehensive international tax reform desired by the Obama Administration.42 Although
we commend the closure of abusive tax “loopholes,” from a broader perspective we believe the
legislation is yet another step in the continued erosion of California’s ability to compete globally.
Such statements are typically little more than rhetoric with scant evidence to support the
underlying argument, but in the case of effective tax rates in general there is much factual
corroboration.
A.
U.S./California Statutory Tax Rate is Second Highest in the World
A review of global effective tax rates as of August 25, 2010 indicates that California
based corporations have the second highest statutory tax rate in the world at roughly 40 percent
trailing only Japan at 41 percent.43 Although not the only consideration of businesses when
deciding where to locate (or whether to remain at their current location), the tax burden,
especially at California levels, is certainly a factor. High tax rates coupled with increasing
capital costs in California are reaching debilitating levels to say the least.
Unlike the United States, various high tax rate jurisdictions are recognizing the negative
impact on businesses that high tax rates have and are imposing positive tax reform to reduce
these rates.44 Considering such positive tax reform from U.S. competitors through lower tax
rates and other incentives, we find it difficult to justify an increased absolute tax burden. Rather
we believe comprehensive tax reform including the closure of “loopholes” to fund lower
statutory tax rates would be a welcome shift in U.S. tax policy.
B.
U.S. Business Incentives Lag Behind Foreign Competitors
Generally high tax rates can be mitigated by business incentives such as credits,
exemptions, abatements, tax holidays, etc. However, the United States fails to provide much
relief through such federal programs. One of our most lucrative incentives for business, the
federal research credit, has expired as of December 31, 2009. 45 Legislation to extend the credit
does exist but currently has stagnated in Congress without a clear future.46 In addition, even
those federal incentive programs still in existence often falter in meeting their objectives as they
provide benefits that companies, due to their loss position, company structure, etc., cannot
utilize.47
Unlike the United States, various high tax rate jurisdictions offer attractive incentives that
mitigate, at least for a while, such high tax rates. For example, India, while at a relatively high
statutory rate of 33 percent,48 offers an attractive tax holiday that virtually eliminates income tax
for a certain number of tax years.
We believe that the current lack of a focused growth-oriented corporate tax policy
relative to other nations will unfortunately lead to the continued erosion of the U.S. tax base.
C.
California Incentives May Be Repealed
California’s budgetary problems in recent years have led to corporate tax increases, most
recently the suspension of the net operating loss carryover.49 Despite this, California does offer
various business incentives at the state level, which somewhat mitigate the high effective tax rate
for California businesses (currently the fifth highest state rate at 8.84 percent). 50 California’s
research credit, for example, has been made permanent thereby immune to the status of its
federal counterpart.51 In addition, during 2008 significant legislation was passed liberalizing
utilization of the California net operating loss carryover and allowing combined groups to share
various California credits.52 Unfortunately, the 2008 incentives may fall victim to the latest
budgetary malaise and repeal will be included on the November 2010 ballot.53
V. CONCLUSION
The short-term impact of Obama’s foreign tax reform is relatively benign. However,
long-term, if such legislation is not balanced with some combination of a lower overall U.S.
statutory tax rate and increased utilizable business incentives, U.S. businesses (including to a
large extent California businesses) will suffer in terms of global competitiveness.
1
Douglas M. Sayuk, CPA, and Matthew H. Fricke are partners with Clifton Douglas, LLP of
San Jose, California. Shamen R. Dugger, Esq., CPA is a director with Clifton Douglas. The
authors can be reached at Doug@cliftondouglas.com, Matt@cliftondouglas.com, and
Shamen@cliftondouglas.com. They also can be reached by phone at 408-293-2401. The
information contained herein is general in nature and is not intended, and should not be
construed, as legal, accounting, or tax advice or an opinion provided by Clifton Douglas, LLP to
the reader. The reader also is cautioned that this material may not be applicable to, or suitable
for, the reader’s specific circumstances or needs, and may require consideration of non-tax and
other factors if any action is to be contemplated. The reader should contact his or her tax advisor
prior to taking any action based upon this information. Clifton Douglas, LLP assumes no
obligation to inform the reader of any changes in tax laws or other factors that could affect the
information contained herein.
2
H.R. 1586 (2010).
3
"Largest State GDPs in the United States - California Texas New York Florida, "
EconPost.com, November 11, 2009, retrieved March 9, 2010. "California Economy Ranking
Among World Economies," EconPost.com, November 8, 2009, retrieved March 9, 2010.
4
Fortune Magazine, April 2010.
5
Hilston, James (August 17, 2008). "Enough Said: Guess How Pennsylvania Stacks Up Against
Other States on Size of Local/State Tax Burden,” Pittsburg Post-Gazette.
6
See President Signs Foreign Tax Reforms Into Law; Helps Fund Education/Medicaid Relief,
CCH Tax Briefing, Special Report (August 10, 2010).
See Reform U.S. International Tax System, Tax Policy Center’s 2010 Budget Tax Proposals,
Urban Institute, Brookings Institution (2010).
7
8
See President Signs Foreign Tax Reforms Into Law; Helps Fund Education/Medicaid Relief,
CCH Tax Briefing, Special Report (August 10, 2010).
9
This example was modeled after an example illustrated in Reform U.S. International Tax
System, Tax Policy Center’s 2010 Budget Tax Proposals, Urban Institute, Brookings Institution
(2010).
See Reform U.S. International Tax System, Tax Policy Center’s 2010 Budget Tax Proposals,
Urban Institute, Brookings Institution (2010).
10
11
Id.
12
Id.
13
Id.
14
See KPMG International Tax Provisions Enacted August 10, 2010 (2010).
See Reform U.S. International Tax System, Tax Policy Center’s 2010 Budget Tax Proposals,
Urban Institute, Brookings Institution (2010).
15
16
Id.
17
Id.
18
This example was modeled after an example illustrated in Reform U.S. International Tax
System, Tax Policy Center’s 2010 Budget Tax Proposals, Urban Institute, Brookings Institution
(2010).
19
Id.
20
See The Education Jobs and Medicaid Assistance Act of 2010 Clients & Friends Memo,
Cadwalader, Wickersham & Taft LLP (August 11, 2010).
21
Id.
22
Generally speaking, IRC § 956 provides guidelines relating to when a U.S. shareholder of a
controlled foreign corporation has received deemed dividends from the controlled foreign
corporation and in what amount.
23
See The Education Jobs and Medicaid Assistance Act of 2010 Clients & Friends Memo,
Cadwalader, Wickersham & Taft LLP (August 11, 2010).
24
Id.
25
Id.
26
See U.S. Lags While Competitors Accelerate Corporate Income Tax Reform, The Tax
Foundation (August 5, 2009).
27
Generally speaking, IRC § 304 was enacted to prevent companies from trying to improperly
withdraw earnings and profits from a company through the use of brother/sister corporations.
28
See KPMG International Tax Provisions Enacted August 10, 2010 (2010).
29
Id.
30
Id.
31
Fortune Magazine, April 2010.
32
See President Signs Foreign Tax Reforms Into Law; Helps Fund Education/Medicaid Relief,
CCH Tax Briefing, Special Report (August 10, 2010).
33
34
Id.
The guidelines related to Accounting for Income Taxes previously were found within
Financial Accounting Standard 109 (“FAS 109”). Effective for financial statements issued for
interim and annual periods ending after September 15, 2009, FAS 109 has been codified as
Accounting Standard Codification 740 (“ASC 740”).
35
The guidelines related to Accounting for Uncertainty in Income Taxes previously were found
within Financial Interpretation No. 48 (“FIN 48”). Effective for financial statements issued for
interim and annual periods ending after September 15, 2009, FIN 48 has been codified generally
as Accounting Standard Codification 740-10 (“ASC 740-10”).
36
See President Signs Foreign Tax Reforms Into Law; Helps Fund Education/Medicaid Relief,
CCH Tax Briefing, Special Report (August 10, 2010).
IRS Form 1118 is used to compute a corporation’s foreign tax credit for certain taxes paid or
accrued to foreign countries or U.S. possessions.
37
38
IRS Form 5471 is required by certain U.S. citizens and U.S. residents who are officers,
directors, or shareholders in certain foreign corporations having a certain level of control in the
foreign corporation. Substantial penalties apply if these forms are not properly filed with
requisite federal income tax returns.
39
Corporations that, at any time during the tax year, had assets in or operated a business in a
foreign country or a U.S. possession may have to file Schedule N along with requisite federal
income tax returns.
40
Per Announcement 2010-30, the draft schedule, and draft instructions, the uncertain tax
position reporting requirement will apply to all Federal Form 1120 filers with both uncertain tax
positions and assets equal to or exceeding $10 million. The “Schedule UTP” will be required
beginning with 2010 federal income tax returns. The Schedule UTP is broad requiring specific
information about a company’s uncertain tax positions as well as inclusion of a “maximum tax
adjustment,” which is defined as “an estimate of the maximum amount of potential federal
income tax liability associated with the tax year for which the tax position was taken.” In
addition, proposed Treas. Reg. § 1.6012-2 would permit the IRS to require reporting of uncertain
tax positions.
41
See President Signs Foreign Tax Reforms Into Law; Helps Fund Education/Medicaid Relief,
CCH Tax Briefing, Special Report (August 10, 2010).
42
43
Id.
Orbitax Corporate Tax Rate Table as of August 25, 2010.
44
France and Japan have both enacted large-scale tax reform to improve the overall business
climate.
45
46
IRC § 41, the federal research credit, expired December 31, 2009.
On September 8, 2010, President Obama proposed a permanent extension of the federal
research credit. The proposal will receive Congressional consideration beginning the month of
September 2010, but due to November Congressional elections may not be voted upon until
2011.
47
Many federal credits are nonrefundable and include limitations on the types of income tax they
may offset, the types of entities that may avail themselves of the benefits, and the qualifying
activities eligible for benefits. In addition, many federal incentive programs are administratively
cumbersome to the point where any potential benefits are outweighed by the overwhelming costs
associated with claiming and sustaining the benefit on audit.
48
Orbitax Corporate Tax Rate Table as of August 25, 2010.
49
A.B. 1452 suspended California net operating losses for any taxable year beginning on or after
January 1, 2008, and before January 1, 2010.
50
Thomson Reuters/RIA State Corporate Income Tax Rate Table as of September 12, 2010.
51
Cal. Rev. & Tax. Cd. § 23609(i).
52
A.B. 1452 extended the California net operating loss carryover from ten to twenty years. The
legislation also allowed combined filers to share credits among group members. Per prior
California tax law, credits only could be utilized by the entity that generated the credits not
shared among the combined group.
53
On May 10, 2010, two California Assembly bills (AB 1935 and AB 1936) were approved by
the Revenue & Taxation Committee that, if ultimately enacted, would impact corporate income
tax benefits passed during 2008 and 2009. AB 1935 would make the single sales factor
apportionment election, originally planned to take effect for taxable years beginning on or after
January 1, 2011, mandatory for most California corporate income taxpayers. AB 1936 would
repeal the California net operating loss deduction carryback set to take effect beginning taxable
years on or after January 1, 2011. Additional repeals of California tax benefits are expected in
the near future.