SB 401: Tax Conformity Bill
No. of Jobs
7,600
Category
Expanding jobs in the new economy
Proposal
Create state tax conformity for renewable energy development and homeowners in short sales.
Summary
This bill seeks state tax conformity with recent changes to the federal tax code regarding a variety of issues – mortgage debt relief, renewable energy grants, depreciation schedules for natural gas distribution lines, tax write-offs for the costs of decommissioning nuclear power plants, and indexes the gross income limits for Individual Retirement Accounts to inflation.
Background
Renewable energy producers that operate solar energy fields and wind farms are eligible for federal renewable energy production tax credits. To accelerate these projects, Congress not only converted these tax credits to cash grants as part of the American Recovery and Reinvestment Act in February, 2009, but also excluded the grants from income for federal purposes. Congress did so because tax credits are never considered income, so taxing the grants would be unfair and could add additional costs onto these needed projects. However, because California law considers these grants income, the Legislature must approve a bill conforming to the federal tax change. California must exclude these grants for income because if the grants would be unexpectedly taxed, possibly resulting in terminating the projects, causing job losses and less renewable power for the state.
SB 401 also conforms California tax law to the federal Mortgage Forgiveness Debt Relief Act, an important provision that ensures that the state does not tax individuals on their debt cancellation income resulting from mortgage forgiveness. For example, a taxpayer with a recourse mortgage with a $500,000 loan enters into a short sale to sell the home for $300,000, resulting in $200,000 in debt forgiveness. Under current California law, the taxpayer must report $200,000 in income, and pay taxes on that amount. SB 401 conforms to the federal law, forgiving the income up to specified amounts. The measure retroactively applies to the previous taxable year, ensuring that individuals with cancellation of indebtedness income from short sales in 2009 are not hit with a big tax bill.
SB 401 also conforms California law to many of the federal income tax law enacted by Congress in past years by changing the specified conformity date in statute from January 1, 2005 (the last time California enacted a conformity bill), to January 1, 2010. In addition, the bill makes numerous changes to specifically not conform to or modify certain items in federal tax law, such as conformity to a previously enacted federal law which waives the 10% penalty to early withdrawals on certain distributions of pension plans. Tax conformity makes state and federal law more consistent, making tax preparation simpler for taxpayers and tax preparers alike.
How the Bill Differs from SBX8 32
The bill is nearly identical to SBX8 32 (Wolk) which the Legislature passed on March 16, 2010. However, there is one important distinction between the bills. SBX8 32 contained a penalty provision applicable to taxpayers earning in excess of $20 million per year and who filed for a tax refund without a reasonable basis in law. SB 401 does not contain such a provision. Governor Schwarzenegger vetoed SBX8 32 due to the penalty provision. That veto denied important benefits for other taxpayers in California. Therefore, in order to ensure that federal ARRA funds are not taxable, to limit tax liability for homeowners caught in a short sale of their home, and to conform various elements of state tax law to federal law, the Legislature is sending SB 401 to the Governor for his signature.
How SBX8 32 Helped Taxpayers
The first conformity bill, SBX8 32, was sent to the Governor in the Eighth Extraordinary Session so the provisions relating to the treatment of ARRA grants for renewable projects and the tax relief provided to homeowners caught in a “short sale” could become effective immediately. While SB 401 (Wolk) is a regular session bill, the state Franchise Tax Board (FTB) has sent a letter to the Pro Tem indicating that, should the bill be signed into law, the FTB will “immediately inform taxpayers that any cancellation-of-indebtedness income excludable under the mortgage forgiveness debt relief provision and any federal energy grant received in 2009 would be excludable on 2009 tax returns.”
Author
Senator Wolk
(916) 651-4005