Tax filing season is here. The California Franchise Tax Board (FTB) and the federal Internal Revenue Service (IRS) are now accepting and processing returns for 2020 income. The IRS has made programming updates following December 2020 tax law changes that provided a second round of economic impact payments. Under these changes, eligible individuals will receive any stimulus funds not yet received as a Recovery Rebate Credit when they file a federal tax return on their 2020 income.
For faster refunds and increased accuracy, taxpayers are urged to file electronically and provide their direct deposit information. The deadline to file and pay any tax owed is Thursday, April 15, 2021. For this filing season, FTB expects to process 20 million personal income tax (PIT) returns; the IRS expects more than 150 million PIT returns.
Earned Income Tax Credit and Young Child Tax Credit
The federal Earned Income Tax Credit (EITC) and the California Earned Income Tax Credit (CalEITC) help low- to moderate-income workers and families receive a tax break. The credit is refundable, meaning it not only reduces taxes owed but will be refunded to a filer who does not have a tax liability. This year, eligibility for CalEITC was expanded to taxpayers with an Individual Taxpayer Identification Number.
For tax year 2020, unemployment payments and other unearned income received could affect the amount of earned income a worker can claim. However, under the federal Taxpayer Certainty and Disaster Tax Relief Act of 2020, people may elect to use their 2019 earned income to calculate the federal EITC if their 2019 earned income is more than their 2020 earned income but still within EITC eligibility limits, thereby maximizing their credit.
People who earned less than $30,000 in 2020 may qualify for CalEITC. Those who qualify for CalEITC and have a child under age six also may be eligible to claim the Young Child Tax Credit (YCTC), which is worth up to $1,000. Those earning less than $56,844 also may qualify for the federal EITC. Taxpayers may estimate their credit by using FTB’s credit calculator.
Golden State Stimulus
Governor Gavin Newsom’s proposed FY 2021-22 budget calls for a one-time $600 payment to individuals who claimed the CalEITC based on their 2020 tax filing. On February 17, the Legislature reached agreement on the proposal, providing another way to help low-income Californians who have faced income losses during the COVID-19 pandemic.
CalFile and Volunteer Income Tax Assistance
FTB offers free electronic filing for many state tax returns through CalFile, an easy-to-use tool available to more than 6.5 million taxpayers. CalFile allows taxpayers to e-file directly with FTB and provides instant confirmation when the return is received. CalFile is available for those claiming the CalEITC and YCTC, those who are claiming the standard or itemized deduction, and those with income as high as $400,000.
Income-eligible Californians who need help filing a PIT return can also find help through Volunteer Income Tax Assistance (VITA) program locations throughout California. Due to public health considerations during COVID-19, a number of VITA locations will operate virtually, while others will be held in person with an appointment. In addition, taxpayers can file a federal tax return online using the IRS Free File program.
FTB Customer Service
FTB communication channels provide services and information to help taxpayers file accurate and timely tax returns and pay the proper amount owed. FTB communication channels include a customer service line at (800) 852-5711, a tax practitioner hotline, authenticated chats, and assistance at field offices. During the last tax season, FTB communication channels were accessed more than 2.1 million times.
FTB offers many online tools including MyFTB and the Where’s My Refund tool. The MyFTB service allows taxpayers to view their tax documents, check balances due, access tax calculators, and send secure messages to FTB staff. It normally takes up to two weeks to receive a refund for e-file return and up to four weeks for a paper return. The Where’s My Refund tool allows taxpayers to check the status of a refund.
Main Street Small Business Tax Credit
For the 2020 tax year, a Main Street Small Business Tax Credit was available to qualified small businesses. The credit sought to provide financial relief to those small businesses that experienced economic disruption in 2020, resulting in unprecedented job losses. The credit only applied to California small businesses that met the following qualifications:
Employed 100 or fewer employees as of December 31, 2019; and
Suffered a 50-percent or higher decrease in income tax gross receipts when comparing the second quarter of 2020 to the second quarter of 2019.
Taxpayers had the option of using the credit against income taxes or making an irrevocable election to apply the credit against sales and use taxes. The California Department of Tax and Fee Administration (CDTFA) is responsible for allocating the credit on a first-come, first-served basis, and the reservation process is now closed. Seventy percent of the credit was allocated for income taxes, and the balance was for sales and use taxes. The credit was capped at $100 million; the governor’s FY 2021-22 budget proposes an additional $100 million for this program.
Net Operating Loss Suspension
For tax years 2020 through 2022, California has suspended the net operating loss (NOL) carryover deduction. However, taxpayers with net business income, modified adjusted gross income (PIT taxpayers), or taxable income (corporate taxpayers) of less than $1 million – or with disaster loss carryovers – are not affected by the NOL suspension.
Taxpayers may continue to compute and carry over a NOL during the suspension period. The carryover period for suspended losses is extended by:
- Three years for losses incurred in taxable years beginning before January 1, 2020;
- Two years for losses incurred in 2020; and
- One year for losses incurred in 2021.
For tax years 2020 through 2022, there is a limitation on the application of all credits. For PIT filers, the total of all business credits including the carryover of any business credit for the taxable year may not reduce the “net tax” by more than $5 million.
For corporate taxpayers, the total of all credits including the carryover of any credit for the taxable year may not reduce the “tax” by more than $5 million.
For taxpayers included in a combined report, the limitation is applied at the group level. Credits disallowed due to the limitation may be carried over. The carryover period for disallowed credits is extended by the number of taxable years the credit was not allowed. The limitation does not apply to the Low-Income Housing Tax Credit.
Beginning in tax year 2020, California allows individuals and other PIT filers to claim credits and deductions for business expenses paid or incurred during the taxable year in conducting commercial cannabis activity. Prior to this change, PIT law conformed to federal law, which did not allow deductions or credits for commercial cannabis activity. Under corporate tax law, a licensee engaged in commercial cannabis activity is allowed otherwise allowable deductions or credits, assuming the entity has adequate records to substantiate these items.
COVID-19 Economic Impact Payments
Stimulus payments individuals received from the federal government in 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as payments received under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSA), are not subject to California income tax.
Unemployment compensation, including the emergency $600 per week increase in unemployment compensation benefits individuals legally received under the CARES Act and the $300 per week increase individuals legally received under the CRRSA, are not subject to California income tax.
Paycheck Protection Program Loan Forgiveness
For taxable years beginning on or after January 1, 2020, California provides an exclusion from gross income for covered loan amounts forgiven under the CARES Act, Paycheck Protection Program (PPP) and Health Care Enhancement Act, or the Paycheck Protection Program Flexibility Act of 2020.
The Consolidated Appropriations Act signed in December 2020 allows deductions for eligible expenses paid for with covered loan amounts that would be, or would reasonably be expected to be, forgiven under the PPP. As of February 17, California is considering partial conformity by allowing companies to deduct up to $150,000 in expenses covered by the PPP loan.
Gig Economy and Worker Classification
The gig economy, which also is called the sharing economy or access economy, involves activity where people earn income providing on-demand work, services, or goods. Often, it is through a digital platform like an app or website. The income from this activity is taxable and must be reported on a tax return, even if the income is:
- From part-time, temporary or side work;
- Not reported on an information return form such as a form 1099-K, 1099-MISC, W-2, or other income statement; or
- Paid in any form, including cash, property, goods, or virtual currency.
Due to recent changes to California law, the California Labor and Workforce Agency has developed some frequently asked questions to help the public understand current worker classification guidelines.
Health Care Coverage Penalties for Tax Returns in 2021
Last year, a new state law required Californians to have qualifying health insurance coverage throughout the year. Those who do not maintain qualifying medical coverage are subject to a penalty of $750 or more when they file their tax returns. The penalty for a dependent child is half of what it would be for an adult. A married couple without coverage could see a penalty of $1,500 or more. For a family of four with two dependent children, it could be $2,250 or more. Health coverage and financial help is available through Covered California.
This article was released by the California State Controller’s Office.