Allegedly there are two things certain in
life: death and taxes. Death is irrevocable. Taxes are subject to change, especially in California, where significant new tax
provisions have been enacted into law
recently. They range from new net operating
loss (NOL) suspension and credit utilization
limitations to increased penalties for under-payments of estimated quarterly tax payments. The provisions will not affect all companies, but sorting out which ones they do
can be confusing. In some cases, enlisting the
help of professional financial advisers might
be advisable.
“If a company has the capability to analyze
its tax situation, it can do that,” says Gary Hui
of Burr, Pilger & Mayer. “But, if it needs outside help, working with professional advisers
might save it time, money and aggravation.”
Smart Business spoke with Hui about how
and when companies should start preparing
for the changes.
Are all California companies affected by the
new tax provisions?
No. Corporations with taxable income less
than $500,000 in 2008 and 2009 tax years are
not affected by the new NOL deduction suspension or credit utilization limitation provisions. The revised California NOL carryover
provision will impact all ‘loss’ companies,
though. In short, any state NOL generated by
a corporation in a tax year beginning on or
after Jan. 1, 2008, will have a carryover period of 20 years as compared to 10 years in the
prior law. It is especially useful for life science
companies due to their long development
cycle and regulatory approval process.
Finally, aside from the fiscal impact to a
company, the new law will also have impact
on a company’s accounting for income taxes
for SEC reporting purposes, if the company
is publicly traded.
Are all life science companies exempt from
the underpayment penalty?
The new 20 percent underpayment penalty,
which is in addition to any other existing
penalties, specifically targets corporations
with unpaid taxes in excess of $1 million in
tax years beginning on or after Jan. 1, 2003.
With a California corporate tax rate of 8.84
percent, that translates to taxable income of
at least $11.3 million. Life science corporations in the development stage are unlikely to
have that level of taxable income.
How will these tax provisions affect
California companies?
Corporations with taxable income of
$500,000 or more in 2008 and 2009 will not be
able to use their net operating losses generated in prior years to reduce their taxable
income in those years. However, if the corporation has California research tax credits,
which is most likely in a life science corporation, it may use the available credit to reduce
up to 50 percent of its state tax liability.
Consequently, a California corporation with
taxable income not less than $500,000 in 2008
and 2009 will have to pay at least 50 percent
of the tax liability in those years, even if it
may have net operating loss and/or research
tax credit carryforwards that would otherwise reduce the CA tax substantially.
When should California companies begin
preparing for these tax provisions?
They should start immediately to assess
whether the NOL suspension and credit utilization limitation provisions would affect
them, since these provisions have direct cash
flow impact. Also, if the new 20 percent
penalty applies to any of the prior year tax filings, the corporation is allowed up to May 31,
2009, to amend the affected tax return and
pay the additional tax to mitigate or eliminate
the penalty.
Will these tax provisions have a detrimental effect on California companies if they
do not prepare properly for their implementation?
Yes, any underpayment of tax will trigger
penalty and interest. Any potential underpayment of tax and the related penalty and interest will have to be included and disclosed in
the audited financial statements of a publicly
traded company.
Are there any other new tax provisions of
which companies should be aware?
Several. The first two quarterly estimated
tax installments will carry higher percentages for tax years beginning on or after Jan.
1, 2009. Tax credit may be assigned to other
combined group members for them to
reduce their tax liabilities in tax years beginning on or after Jan. 1, 2010. In the old law, the
tax credit was attached with the combined
group member that earned the credit and
could not be utilized by other members of the
combined group.
Other NOL related provisions do not have
immediate cash flow impact on a corporation in 2008. For example, the carryover periods for NOLs generated prior to 2008 are
extended by two additional tax years and by
one additional tax year for the NOL generated in 2008. A new NOL carryback provision
will allow a limited carryback of NOLs generated in a tax year beginning in or after 2011
up to two preceding tax years.
Incidentally, for California LLCs, the payment date of the LLC fee has been accelerated to the 15th day of the sixth month of the
taxable year, instead of the 15th of the fourth
month of the following tax year.
GARY L. HUI, CPA, is tax senior manager with Burr, Pilger & Mayer. Reach him at (415) 677-3324 or [email protected].
