January 2009 - New California Tax Legislation

NEW CALIFORNIA TAX LEGISLATION

January 23, 2009

The California Governor has recently signed legislation (Senate Bill 1389) that may affect the way you pay your estimated tax and extension payments:

High Income Taxpayers Required to Pay Electronically

Beginning January 1, 2009, high income taxpayers are required to make all estimated and extension payments using an electronic method. An individual is considered “high-income” after he/she:

1. Makes a single estimated tax or extension payment greater than $20,000 for a taxable year beginning on or after January 1, 2009; or

2. Files an original return with a tax liability greater than $80,000 for a taxable year beginning on or after January 1, 2009.

Electronic payment methods (EPM) include Electronic Funds Withdrawal (EFW), Web Pay or credit card. Failure to utilize an EPM method will result in a one percent penalty of the amount paid, unless the failure to pay electronically was for reasonable cause and not willful neglect.

Taxpayers Required to Accelerate Estimated Tax Payments

The legislation also includes provisions to accelerate the estimated tax payments for both corporations and individuals. For taxable years beginning on or after January 1, 2009, taxpayers are required to pay 30% of the required annual payment in each of the first two quarters and 20% in the last two quarters. The previous requirement was 25% per quarter.

Safe Harbor for Estimated Tax Eliminated

Also for taxable years beginning on or after January 1, 2009, individual taxpayers with Adjusted Gross Income (AGI) equal to or greater than $1 million must pay at least 90% of their current year tax to avoid an underpayment penalty. Previously, there was a safe harbor exception if 110% of the prior year tax was paid ratably during the current year. In 2009, however, a taxpayer with AGI of $1 million or more may not use the prior-year safe harbor amounts.

More (not so) Good News

As added good news, State Controller John Chiang announced on January 16, 2009, that the State will delay paying tax refunds for at least 30 (thirty) days beginning February 1, 2009, due to lack of money in the State’s General Fund. If no corrective action is taken by the Governor or legislature, Mr. Chiang may have to extend the payment delays, or issue IOU’s.

WHAT THIS MEANS TO YOU

If you are required to make estimated tax and/or extension payments meeting the above criteria, we are here to assist you regardless of the method with which you choose to pay. These new laws may affect your payments due by April 15, 2009. If so, we will contact you to discuss your options and how best to proceed.

We are as (or more) unhappy with this new legislation as are you. The above measures are attempts by the California legislature to solve the current budget crisis. These actions will likely result in larger budget deficits in the future, as the State is borrowing from the future to cover the current deficit.

A copy of this letter may be obtained directly from our website at www.friedmanbrannen.com. We have also posted on our website information regarding the acceleration of 2009 LLC (limited liability company) payments that may be of interest to you and your business.

Thank you for this opportunity to be of service. As always, please call should you have any questions regarding this correspondence.