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California 2002 State and Local Tax: Important Developments

Legislation: Income and Franchise Taxation
2002 Cal Stat. ch. 488 is the major tax bill for the 2002 Legislative Session that responds to California’s $23.6 billion budget gap: (1) it conforms California law to federal law relative to the bad debt reserve of large banks (California had permitted charge-offs to establish bad debt reserves, but federal law had changed to only permit the charge-off of actual bad debt); (2) it requires withholding on stock options and bonus payments at a 9.3 percent rate (California had some optional withholding at 6 percent); (3) it permits the California Franchise Tax Board (FTB) and California State Board of Equalization (SBE), through June 30, 2003, to negotiate waivers of underpayment fees and penalties for certain high-risk accounts where the agency determines the amount would otherwise not be paid or it would be uneconomical to collect; and (4) it suspends the net operating loss (NOL) deduction for taxable years 2002 and 2003, but the carryover period is extended by one year for losses incurred during 2002 and by two years for losses incurred during 2003, and 100 percent of the NOLs incurred in taxable years beginning after 2003 are allowed as a carry forward deduction.

(The remainder of this article can be accessed in the 2003 edition of the ABA’s State and Local Tax Lawyer.)

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