CA FTB Issues Formal Notices on Elections for Small Business Methods of Accounting and for Technical Termination of Partnerships

On July 1, 2019, California enacted Assembly Bill No. 91 (A.B. 91) as part of the budget package for the fiscal year 2020. Click here to read BDO’s August 2019 alert on California’s selective conformity provisions to the TCJA, which touches on all of the major SALT provisions under A.B.91. The bill requires the Franchise Tax Board (FTB) to determine how elections are to be made for two of those provisions: (1) Small Business Method of Accounting, and (2) Technical Termination of Partnerships.
 
Previously, the California FTB had issued informal guidance for purposes of making these elections.  On September 6, 2019, the FTB issued Notice 2019-03 for formal procedures to make an election related to the Small Business Method of Accounting provisions.  On the same day, the FTB also issued Notice 2019-04 for formal procedures to make an election to avoid a technical termination of a partnership.  The two notices now formalize the intent of the provisions under A.B. 91.  Read on for more information regarding these provisions.

 

Election of Small Business Method of Accounting - FTB Notice 2019-03

After A.B. 91, California conforms to the TCJA’s simplification of small business income tax accounting that increases the thresholds for small businesses that may use certain accounting methods.  However, California’s conformity starts for tax years beginning on or after January 1, 2019, and allows taxpayers to elect to have these changes apply to tax years beginning on or after January 1, 2018, and before January 1, 2019.
 
To make one or more of the elections to apply a California Small Business Method of Accounting provision for taxable years beginning on or after January 1, 2018, and before January 1, 2019, a taxpayer must complete all of the following:

1. Include a statement on an original or amended California tax return stating the taxpayer’s intent to make one or more of the elections along with the specific election(s) being made.
2. On the top of the first page of the original or amended tax return, write or print “AB 91 – Small Business Accounting Election” in blue or black ink.
3. Mail all “AB 91 – Small Business Method of Accounting Election” returns to:

 

If a taxpayer has an electronic filing requirement, the taxpayer may file a paper return for the purposes of making the election pursuant to Notice 2019-03.  In that case, the taxpayer is also required to include a statement with the return stating that the taxpayer is filing a paper return in lieu of an electronic return pursuant to FTB Notice 2019-03.

 

Election to Avoid a Technical Termination of a Partnership - FTB Notice 2019-04

California adopts the TCJA amendments to IRC Section 708, which provide that a sale or exchange of 50 percent or more of the interests in a partnership in a 12-month period no longer is a termination of the partnership.  This adoption by A.B. 91 is important for California partnerships.  However, because A.B. 91 became effective on January 1, 2019, California partnerships were still exposed to termination treatment with respect to transactions occurring after December 31, 2017, the effective date of the TCJA’s amendment of IRC Section 708, and prior to January 1, 2019.  A.B. 91 also provides an election to apply the IRC Section 708 amendment for California tax purposes prior to January 1, 2019. 
 
To make the California election, a taxpayer must complete all of the following:

1. Include a statement on an original or amended California tax return, for the appropriate tax year, stating the taxpayer’s intent to make an election under RTC Section 17859(d)(1).
2. On the top of the first page of the original or amended tax return, write or print “AB 91 – Section 16 Election” in blue or black ink.
3. Mail all “AB 91 – Section 17859(d)(1) Election” returns to:

 

If a taxpayer has an electronic filing requirement, the taxpayer may file a paper return for the purposes of making the election pursuant to Notice 2019-04.  In that case, the taxpayer is also required to include a statement with the return stating that the taxpayer is filing a paper return in lieu of an electronic return pursuant to FTB Notice 2019-04.
 

BDO Insight

California taxpayers who could make either of these elections should consider the election and mechanics with respect to their 2018 original or amended returns.

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