Mar 13, 2017
From KPMG TaxWatch
Senate Bill 567, entitled “The Millionaire Tax Accountability Act,” has recently been introduced in California. If enacted, Senate Bill 567, per the legislative factsheet, would close four “popular loopholes.” Two of these “loopholes” would affect corporate taxpayers and two generally apply to individuals. One big change for corporate taxpayers would be the elimination of the water’s-edge election, which has been in place since 1987. Currently, the water’s-edge election, once made, applies for 84 months. Senate Bill 567 would eliminate the ability to make the election for tax years beginning on or after January 1, 2017. Furthermore, any currently electing taxpayers would be unable to file on a water’s-edge basis for tax years beginning on or after January 1, 2023. Thus, it appears that current water’s-edge filers would be able to file under that method until their current election expires at which point they would be required to file on a worldwide basis. The other provision in Senate Bill 567 specific to corporations is that for tax years on or after January 1, 2017, corporations would be required to add back compensation deducted for federal tax purposes that is payable to the chief executive officer based on commission or on meeting certain performance goals. This would essentially prohibit corporations from deducting compensation paid to an executive exceeding $1 million.
For individuals, the bill would eliminate the “basis step-up” option on inherited property for taxpayers with income over a certain amount and would require that the value of a charitable remainder annuity trust (as defined under the IRC) be at least 40 percent of the initial fair market value of the property placed in the trust. Currently, California conforms to the federal rule, which requires that the value of the remainder interest be at least 10 percent of the initial net fair market value of the property placed in trust. As a bill that would raise taxes, Senate Bill 567 would need to be approved by a ⅔ majority in both the Assembly and Senate. Interestingly, legislation is currently pending in Massachusetts (Senate Bill 1548) and Montana (Senate Bill 105) that would also eliminate the ability to file combined reports on a water’s edge basis. Please stay tuned to TWIST for legislative updates on these and other bills.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.