The Corporation Tax Law provides that, for taxable years beginning on or after January 1, 2002, corporations that have elected to be taxed as “S” corporations for federal tax purposes are deemed to be “S” corporations for California income tax purposes, unless the entity is prohibited from being a California “S” corporation. The Corporation Tax Law, in modified conformity to federal income tax laws, provides for the specified tax treatment of “S” corporations and their shareholders. Among other things, that law imposes a tax on built-in gains, attributable to California sources, derived by an “S” corporation from the disposition of its assets that appreciated in value during the years when the “S” corporation was a “C” corporation, as provided.
This bill, for taxable years beginning on or after January 1, 2002, would specify that the built-in gain provisions in the case of a “C” corporation, that became an “S” corporation for state tax purposes as a result of the enactment of Chapter 35 of the Statutes of 2002, as amended by Chapter 807 of the Statutes of 2002, would apply based on the effective date of the election by that corporation to be treated as an “S” corporation for federal tax purposes, regardless of the effective date for state tax purposes. This bill would declare that the retroactive application of the provisions of the bill serves a public purpose by ensuring the fair and consistent application of California tax law, and by avoiding possible legal challenges to that law or its application.
Existing law, in modified conformity to federal income tax laws, limits the use of a cash method of accounting in the case of a “C” corporation, a partnership that has a “C” corporation as a partner, and a tax shelter, but provides an exemption, among others, for the amounts received by a person using an accrual method of accounting for the performance of services.
This bill would provide additional state income and corporation tax law conformity with federal income tax laws by adopting specified provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 with respect to the accounting of amounts to be received by a person for the performance of services by that person.
This bill would take effect immediately as a tax levy.