CHICAGO, Oct. 20, 2010 – On Oct. 8, 2010, California Governor Arnold Schwarzenegger signed into law the California budget — more than 100 days late. As part of the budget package, the California Legislature sent Senate Bill 858, a trailer bill to the budget containing significant tax legislation, to enrollment. Under the legislation, which will be effective immediately upon enactment, the 2008 net operating loss (NOL) suspension will be extended an additional two years, cost of performance rules impacting the calculation of the sales factor will be applied in certain circumstances, and other tax-related provisions are expected to be implemented.
These changes must be considered in conjunction with the potential passage of Proposition 24 on Nov. 2, a voter initiative, which would make significant changes to the California NOL and sales factor rules. Grant Thornton LLP issued a State & Local Tax Alert on this topic to help companies that do business in California understand the tax ramifications of this new legislation.
“Although California passed its budget relying on the enactment of the proposed changes to tax legislation in the trailer bill, the trailer bill has not been enacted to date,” said Scot Grierson, Grant Thornton principal and West Region State and Local Tax practice leader. “Until the trailer bill is approved by the legislature and signed by the governor, the trailer bill is subject to modification. It will be interesting to see whether the trailer bill is signed before the results of Proposition 24 are announced. If Proposition 24 passes, the cost of performance methodology that all taxpayers thought was going to go away will continue to be important for taxpayers that sell services and intangible items.”
“With the abundance of corporate income tax changes that will occur as a result of the budget process, and potentially with the passage of Proposition 24, taxpayers are going to have many questions with respect to estimated payments and the treatment of financial statement adjustments,” said David Griffiths, Grant Thornton State and Local Tax executive director and the California technical team leader.
“Taxpayers that have made estimated tax payments based on the utilization of NOLs may owe additional tax for the 2010 tax year,” said Eddie Delgado, Grant Thornton State and Local Tax senior manager. “However, penalties for underpayment of estimated taxes should not be imposed in this instance, to the extent the underpayment was created by the enactment of the trailer bill. As for financial statement considerations, companies that planned to utilize the single sales factor election and source services based on where their customers received the benefit of the service may need to reevaluate these conclusions.”
To read the entire Grant Thornton State & Local Tax Alert: California Budget Finally Passed – Trailer Bill Includes Two Year NOL Suspension, Return of Costs of Performance Rules, and Other Tax Related Provisions, please go to www.GrantThornton.com/SALTalerts.
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