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Tax Resolution

California Tax Changes During the Pandemic

The world is still in the midst of the coronavirus pandemic. It has been a few months now and some countries are still grappling with the effects of COVID-19. What makes the COVID-19 worse than any other illness is that there is no vaccine yet and there is no cure. 

However, the effects of COVID-19 are not limited to health. There are also economical, emotional and psychological effects. But let’s focus on the economic effects. Many people lost their jobs. So, how can these people buy food and pay their rent?

The role of the government is to ensure that disadvantaged people will have help. In this case, everybody is disadvantaged. The 116th Congress then passed the aptly named CARES Act (Coronavirus Aid, Relief, and Economic Security Act), which gave Americans some sort-of allowance to help them out during this trying time. 

Another legislation, the Families First Coronavirus Response Act, complemented the CARES Act. This was mainly for paid sick leave for people who may be affected by the coronavirus. 

Now, some states passed their own complementary legislations. But what about California? The state imposed some new tax changes of their own, but didn’t pass anything new. Still, these changes allowed families to cope with the pandemic better. 

Tax changes

In California, the Net Operating Losses (NOLs) are suspended for three years—from January 1, 2000 to December 31, 2022. 

There were some exemptions to the suspension though. For one, taxpayers whose personal income tax if net business income or modified gross income comes out less than $1 million. The same could be said for those with corporate income tax if business income subject to California taxation is also less than $1 million. 

Now, there may be NOL or NOL carryover that will be disallowed because of the suspension. What happens then? A maximum of 20-year carryover period will be extended by three years for NOL that occurred before 2020. An extension of two years will be imposed on NOLs that happened in 2020. Meanwhile, a one-year extension will be given to NOLs that incurred next year. 

There are also some changes to the business credit limit.

For the same taxable years mentioned in the NOL, business credits in California may not reduce tax by more than $5 million. This limitation may cause some credits not be used. In this case, the carryforward period will be increased. By how much? It will depend on the number of taxable years the credit, or a portion of it, was not allowed. 

Changes were also made for first-year LLC and LP tax exemption. Using the same time period of taxable years, there will be a new first-year exemption starting from the $800 tax on LLPs and LPs that filed a certificate of limited partners or at least have registered with the Secretary of State. The same could be imposed on LLCs that registered with the Secretary of State. 

An exemption of such nature was previously only applied to corporations. 

You know what this implies? If at all possible, taxpayers who want to form a new LLC or LP should wait until 2021 to start their business. 

Are You Eligible for Interest Check This Year?

Taxes should be filed on April 15 of every year. However, because of the COVID-19 pandemic, it was understandable that a lot of people failed to file their taxes on time.

The Internal Revenue Service (IRS) moved the due date this year to July 15 to give way to those affected by the pandemic. Those who filed their taxes after April 15 are in luck because they would be getting extra money from the government. It is referred to as an interest check.

Let’s discuss this unusual extra money this year: Every year, the IRS has to pay interest on refunds because the federal government takes some time to actually process them. The IRS admitted that as of June, it has a backlog of 4.7 million returns.

According to the IRS, the accrual period for this interest check will start on April 15. This means that if you filed your tax return later, then you are going to get an interest check. The interest payments will or might be sent as a separate check from the actual refund. Of course, with the backlog, you might receive your refund later. This means additional interest.

Stimulus payment

Note that this is different from the stimulus payment from the government. The Coronavirus Aid, Relief and Security Act, which is wittily referred to as the CARES Act, is a law signed by President Donald Trump to give financial assistance to the millions of Americans affected by COVID-19.

Don’t be confused considering that the stimulus check is also issued by the IRS and is based on a person’s adjusted gross income. If you already received a stimulus check, then expect another check coming. Of course, that is granting that you are eligible for it.

If you are a taxpayer who didn’t receive a refund by April 15, then the months that you didn’t get it will incur an interest. The total amount of the interest will be sent to you as a second check.

Wondering how much you will get?

The IRS will pay an annual interest of 5% that will be compounded each day until June 30. By July 1, the interest rate would have decreased to just 3%. What would this entail? This means that for every $1,000 that should have been refunded to you, you will get 14 cents as interest every day from April 15 to June 30. This would decrease to just 8 cents every day starting on July 1.

The IRS, though, is yet to announce the date of the release of the interest checks. It is hoping that it will be out later in the summer.

Of course, the interest is taxable. It will be part of your taxable income in your 2020 tax return. At least, it will be available at a time when a lot of people really need the money. COVID-19 affected a lot of people and not just in terms of health. A lot of people also lost their jobs while some experienced shorter work hours.

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