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Analysis

California FTB issues Preliminary Report on California’s conformity to various provisions of the Federal Tax Reform Act

Multistate Tax alert | February 20, 2018

This tax alert summarizes the Preliminary Report, released on February, 12, 2018.

Overview

On December 22, 2017, President Trump signed into law P.L. 115-97 “The 2017 Tax Reform Act” (the Act). On February 12, 2018, the California Franchise Tax Board (FTB) issued a Preliminary Report on Specific Provisions of the Act, Part 1 (Preliminary Report) that addresses, among others, California Corporation Tax Law (CTL) conformity or lack thereof to certain provisions in the Act.

In the Preliminary Report, the FTB notes that the CTL conforms generally to the IRC as of January 1, 2015, with one notable exception. In instances where California’s water’s-edge provisions refer to an IRC provision, “it is the IRC provision in effect for the same taxable period.” However, neither existing CTL nor the water’s-edge provisions within the CTL incorporate by reference (or specifically refer to) the new federal repatriation provisions found under IRC Sections 245A, 951A, and 965. Therefore, the FTB states that neither existing CTL nor California water’s edge provisions conform to the federal repatriation provisions added by the federal Tax Act.

In light of this nonconformity, the Preliminary Report concludes with an estimate of the potential impact upon California corporate tax revenues given the expectation that “many taxpayers may have an extraordinary repatriation dividend.” Acknowledging the many variables and uncertainties which impact such a projection, the FTB estimates that the tax revenue increase by fiscal year would be $50 million in 2017-2018, $150 million in 2018-2019, $110 million in 2018-2019, and $40 million in 2019-2020.

The FTB also indicates that it plans to issue additional reports addressing California’s conformity to other provisions in the Tax Act on or before March 2, 2018, March 26, 2018, and April 20, 2018.

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Contacts

If you have any questions regarding the FTB’s Preliminary Report or other California tax matters, please contact any of the following Deloitte Tax professionals:

Valerie C. Dickerson, partner, Deloitte Tax LLP, Washington, DC, +1 202 220 2693

Christopher Campbell, principal, Deloitte Tax LLP, Los Angeles, CA , +1 213 553 3072

Steve West, managing director, Deloitte Tax LLP, Los Angeles, CA, +1 213 688 5339

Shirley J. Wei, senior manager, Deloitte Tax LLP, Los Angeles, CA, +1 213 553 1715

Brian Toman, tax specialist leader, Deloitte Tax LLP, San Francisco, +1 415 783 6137

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The Multistate Tax alert archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.

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