Newsom Extends Tax Deadlines and Legislature Proposes New Tax Increase

Newsom extended tax deadlines and the legislative session began with a proposed tax increase and relief for small businesses.

Governor Gavin Newsom extended tax filing and payment deadlines, and the legislators began the 2021-2022 legislative session with proposals that include a significant tax increase to fund programs for the homeless and bills to provide small businesses with limited tax relief.

Executive order for tax extensions

Sales tax extension: On November 30, 2020, California Governor Gavin Newsom announced an automatic three-month income tax extension for taxpayers filing less than $1 million in sales tax. The order also includes an extension of existing interest and penalty-free payment agreements to companies with up to $5 million in taxable sales, and an expansion of interest free payment options for larger businesses particularly affected by significant restrictions on operations based on COVID-19 transmissions.

First quarter tax extension: Newsom signed an executive order on December 14, 2020 that gives small businesses until July 31, 2021 to file and make payments on their first-quarter tax returns. The automatic extension applies to businesses filing a return for less than $1 million.

Proposed constitutional amendment to Article XIII

Lawmakers introduced Constitutional Amendment ACA 1, which would repeal several Proposition 13 protections. It would:

• Amend Section 1 of Article XIII A by creating a new exception to the 1% property tax limit that would authorize a city, county, city and county, or special district to levy an ad valorem tax to pay the interest and redemption charges on bonded indebtedness incurred to fund public housing if the proposition proposing that tax is approved by 55% of the voters.

• Amend Section 4 of Article XIII A to allow “a city, county, or special district” to approve a special tax by a two-thirds vote of “its voters voting on the proposition” rather than the current two-thirds vote of the qualified electors of the district.

• Amend Section 3 of Article XIII D to reduce the voter threshold from incurring indebtedness from two thirds to just 55 percent to pass tax increases for various purposes.

Proposed tax legislation

Funding for programs for the homeless: AB 71 would increase both personal and corporate taxes for tax years after January 1, 2022 to establish funding for programs for the homeless. The bill, introduced by Luz Rivas, stated that it would raise revenues of at least $2.4 billion per year.

For personal taxes, it would:

• increase personal income tax on incomes of more than $1 million;

• require unrealized capital gains to be marked to market; and

• repeal the stepped-up basis of inherited assets.

For corporate taxes, it would :

• increase corporate income tax rates;

• include taxpayer’s global intangible low-taxed income (GILTI) in their gross income in modified conformity with the federal Tax Cuts and Jobs Act;

• require that a taxpayer that makes a water’s-edge election under these provisions take into account 50% of GILTI and 40% of the repatriation income of its affiliated corporations;

• allow a taxpayer to revoke a water’s-edge election for calendar year 2022 only.

Small business tax credit for safety expenses: AB 62 would provide an income tax credit for small businesses and essential employers for the cost of adhering to COVID-19 safety compliance. The bill would allow a credit against taxes for each taxable year beginning on or after January 1, 2021 equal to the amount paid or incurred to comply with the COVID-19 regulations adopted by the Occupational Safety and Health Standards Board on November 19, 2020.

Franchise Tax: AB 91 would lower franchise tax from $800 to $400 for small businesses and to $200 for microbusinesses for taxable years beginning on or after January 1, 2021. The bill would also reduce the annual tax for small businesses to $400 and for microbusinesses to $200.

Other legislation

Housing and homelessness: AB 68 would state the intent of the legislature to implement recommendations made in the California State Auditor’s Report 2020-108, issued on November 17, 2020, on the performance of the state’s housing agencies and local impediments to housing production. The report found that the state’s four key financing agencies lack coordination and alignment and that “State law and oversight are not strong enough to ensure that cities and counties are doing their part to facilitate the construction of affordable housing.”

California Debt Limit Allocation Committee: AB 49 would state the intent of the legislature to eliminate the California Debt Limit Allocation Committee and transfer the duties and authority of that committee to the California Tax Credit Allocation Committee. The California Debt Limit Allocation Committee apportions debt among agencies in connection with specified federal law that established a volume ceiling on the aggregate amount of private activity bonds that a state is permitted to issue.