The Personal Income Tax Law and the Corporation Tax Law provide for a deduction of specified losses sustained as a result of disasters occurring in California in an area determined by the President of the United States to warrant specified federal assistance or, for other disasters for which a specific law has been enacted, proclaimed by the Governor to be in a state of emergency. Those laws allow a taxpayer to elect to deduct those disaster losses on the return for the taxable year preceding the taxable year in which the disaster occurred, filed by a specified date. Existing law also allows individual and corporate taxpayers to utilize net operating losses and carryovers and carrybacks of those losses for purposes of offsetting their individual and corporate tax liabilities. Existing law, for net operating losses incurred in taxable years beginning on or after January 1, 2013, allows net operating losses to be carrybacks to each of the preceding 2 taxable years, as provided, but varies the amount of carryback allowed for net operating losses attributed to specified taxable years.

This bill would, for taxable years beginning on or after January 1, 2014, and before January 1, 2024, extend the provisions relating to disaster losses to losses in any city, county, or city and county that is proclaimed by the Governor to be in a state of emergency and would extend the time during which a taxpayer may claim the deduction. This bill would additionally provide that any law that suspends, defers, reduces, or otherwise diminishes the deduction of a net operating loss, other than those variations already imposed in existing law, shall not apply to a net operating loss attributable to these specified disaster losses.

This bill would make a legislative finding and declaration relating to the statewide public purpose served by the bill.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law provide for a deduction of specified losses sustained as a result of disasters occurring in California in an area determined by the President of the United States to warrant specified federal assistance or, for other disasters for which a specific law has been enacted, proclaimed by the Governor to be in a state of emergency. Those laws allow a taxpayer to elect to deduct those disaster losses on the return for the taxable year preceding the taxable year in which the disaster occurred, filed by a specified date. Existing law also allows individual and corporate taxpayers to utilize net operating losses and carryovers and carrybacks of those losses for purposes of offsetting their individual and corporate tax liabilities. Existing law, for net operating losses incurred in taxable years beginning on or after January 1, 2013, allows net operating losses to be carrybacks to each of the preceding 2 taxable years, as provided, but varies the amount of carryback allowed for net operating losses attributed to specified taxable years.

This bill would, for taxable years beginning on or after January 1, 2014, and before January 1, 2024, extend the provisions relating to disaster losses to losses in any city, county, or city and county that is proclaimed by the Governor to be in a state of emergency and would extend the time during which a taxpayer may claim the deduction. This bill would additionally provide that any law that suspends, defers, reduces, or otherwise diminishes the deduction of a net operating loss, other than those variations already imposed in existing law, shall not apply to a net operating loss attributable to these specified disaster losses.

This bill would make a legislative finding and declaration relating to the statewide public purpose served by the bill.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law provide for a deduction of specified losses sustained as a result of disasters occurring in California in an area determined by the President of the United States to warrant specified federal assistance or, for other disasters for which a specific law has been enacted, proclaimed by the Governor to be in a state of emergency. Those laws allow a taxpayer to elect to deduct those disaster losses on the return for the taxable year preceding the taxable year in which the disaster occurred, filed by a specified date. Existing law also allows individual and corporate taxpayers to utilize net operating losses and carryovers and carrybacks of those losses for purposes of offsetting their individual and corporate tax liabilities. Existing law, for net operating losses incurred in taxable years beginning on or after January 1, 2013, allows net operating losses to be carrybacks to each of the preceding 2 taxable years, as provided, but varies the amount of carryback allowed for net operating losses attributed to specified taxable years.

This bill would, for taxable years beginning on or after January 1, 2014, and before January 1, 2024, extend the provisions relating to disaster losses to losses in any city, county, or city and county that is proclaimed by the Governor to be in a state of emergency and would extend the time during which a taxpayer may claim the deduction. This bill would additionally provide that any law that suspends, defers, reduces, or otherwise diminishes the deduction of a net operating loss, other than those variations already imposed in existing law, shall not apply to a net operating loss attributable to these specified disaster losses.

This bill would make a legislative finding and declaration relating to the statewide public purpose served by the bill.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law provide for a deduction and the carryover to specified taxable years of specified losses sustained as a result of certain disasters occurring in California in an area determined by the President of the United States to warrant specified federal assistance or, for other disasters for which a specific law has been enacted, proclaimed by the Governor to be in a state of emergency. Those laws further allow a taxpayer to elect to deduct those disaster losses on the return for the taxable year preceding the taxable year in which the disaster occurred, filed by a specified date. Existing law also allows individual and corporate taxpayers to utilize net operating losses and carryovers and carrybacks of those losses for purposes of offsetting their individual and corporate tax liabilities. Existing law, for net operating losses incurred in taxable years beginning on or after January 1, 2013, allows net operating losses to be carrybacks to each of the preceding 2 taxable years, as provided, but varies the amount of carryback allowed for net operating losses attributed to specified taxable years.

This bill would, for taxable years beginning on or after January 1, 2014, extend these the provisions relating to disaster losses sustained in the Counties of Napa, Solano, and Sonoma as a result of the earthquake that occurred in August 2014 for which the Governor proclaimed a state of emergency to losses in any city, county, or city and county that is proclaimed by the Governor to be in a state of emergency and would extend the time during which a taxpayer may claim the deduction. This bill would additionally provide that any law that suspends, defers, reduces, or otherwise diminishes the deduction of a net operating loss, other than those variations already imposed in existing law, shall not apply to a net operating loss attributable to these specified disaster losses.

This bill would make a legislative finding and declaration relating to the statewide public purpose served by the bill.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law provide for a deduction and the carryover to specified taxable years of specified losses sustained as a result of certain disasters occurring in California in an area determined by the President of the United States to warrant specified federal assistance or proclaimed by the Governor to be in a state of emergency. Those laws further allow a taxpayer to elect to deduct those disaster losses on the return for the taxable year preceding the taxable year in which the disaster occurred.

This bill would extend these provisions to losses sustained in the Counties of Napa, Solano, and Sonoma as a result of the earthquake that occurred in August 2014 for which the Governor proclaimed a state of emergency.

This bill would make a legislative finding and declaration relating to the statewide public purpose served by the bill.

This bill would take effect immediately as a tax levy.

 UNFINISHED BUSINESS  

Bill No: SB 35

Author: Wolk (D), et al.

Amended: 6/16/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 2/25/15

AYES: Hertzberg, Nguyen, Bates, Beall, Hernandez, Pavley

NO VOTE RECORDED: Lara

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SENATE FLOOR: 38-0, 4/9/15

AYES: Allen, Anderson, Bates, Beall, Block, Cannella, De León, Fuller, Gaines, Galgiani, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk

NO VOTE RECORDED: Berryhill

ASSEMBLY FLOOR: 79-0, 7/16/15 (Consent) - See last page for vote

SUBJECT: Income and corporation taxes: deductions: disaster relief

SOURCE: Author

DIGEST: This bill enacts disaster loss treatment, and extends the deadline for taxpayers affected by recent earthquakes to carry back disaster losses to the 2013 tax year.

Assembly Amendments insert a ten-year sunset provision, thereby repealing the measure on December 1, 2024, and add legislative findings and declarations.

ANALYSIS:

Existing federal and state law:

1. Allows taxpayers to apply losses, including disaster losses, to reduce taxable income from other sources. Disaster losses are the amounts not compensated by insurance or other means that result from fires, storms, floods or other natural events. Disaster losses must exceed $100 per taxpayer and 10% of their adjusted gross income for the year. These limits don’t apply to business or income-producing property.

2. Provides that when the President declares a disaster, as he did for the earthquake that affected Napa and Solano Counties in August, 2014, the declaration triggers disaster loss treatment automatically for federal and state purposes for taxpayers in areas subject to the declarations. When the Governor declares, but the President does not, the Legislature must affirmatively enact disaster loss treatment, as it did most recently for fires in San Diego County in May, 2014 (AB 922, Maienschein, Chapter 352, Statutes of 2014).

3. Allows taxpayers to apply losses to income gained in the future, called a “carry forward,” or against past income, called a “carry back.” To apply the loss in the previous taxable year, state and federal law require the taxpayer to amend their return by the next year’s filing deadline, which is generally April 15th.

This bill:

1. Amends California’s Personal Income Tax Law and Corporation Tax Law to enact disaster loss treatment whenever taxpayers incur losses in a city, county, or city and county, subject to the Governor’s declaration of emergency, commencing in the 2014 taxable year.

2. Extends the deadline for taxpayers affected by such disasters to apply disaster losses to the taxable year immediately preceding the taxable year in which the disaster occurred from April 15th of the immediately following taxable year to the extended due date for the immediately following taxable year, again commencing in the 2014 taxable year.

3. Provides that any other suspension, deferral, reduction, or other diminishment of net operating losses generally shall not affect SB 35’s treatment of disaster losses.

4. Sunsets its provisions on December 1, 2024.

5. States legislative intent that the measure fulfills a statewide public purpose, which is necessary to apply SB 35’s changes to the 2014 taxable year, which has already ended for most taxpayers.

6. Makes legislative findings and declarations relating to relating to the South Napa Earthquake in August, 2014, and the measure’s consistency with previous tax relief for taxpayers affected by disasters.

Background

In August, 2014, a significant earthquake occurred southwest of the City of Napa, causing significant damage to taxpayers in Napa, Solano, and Sonoma Counties. Because many taxpayers have not yet determined the amount of uninsured losses the earthquake created, the Legislature must extend the state deadline to allow taxpayers more time to claim disaster losses on their 2013 tax returns. As introduced, the measure only applied to those counties; however, when the measure was heard in the Committee on Governance and Finance, the measure was amended to enact disaster loss treatment and the extended deadline both for the Napa earthquake and any future disaster declared by the Governor. Doing so negates the need for future disaster-specific legislation.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 8/11/15)

California Professional Firefighters

California Taxpayers Association

City of Napa

Counties of Napa, Solano, and Sonoma

Family Winemakers of California

Napa Valley Vintners

OPPOSITION: (Verified 8/11/15)

None received

ARGUMENTS IN SUPPORT: According to the author, “Many taxpayers that recently suffered from the August, 2014 Napa earthquake would like to apply losses to their tax returns filed the previous year, resulting in a tax refund which can immediately be used to rebuild and recover from the earthquake. The Legislature has enacted identical treatment for almost every significant disaster that has occurred in California for the last 25 years. Additionally, the measure now applies these provisions to future disasters, so affected taxpayers don’t have to wait for the Legislature to enact a bill to ensure they’ll be afforded the same disaster loss treatment and extended deadline.”

ASSEMBLY FLOOR: 79-0, 7/16/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Gordon

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

8/13/15 13:04:16

**** END ****

Date of Hearing: July 8, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

SBPCA Bill Id:SB 35

Author:(Wolk) – As Amended Ver:June 16, 2015

Urgency: Yes State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill allows, for taxable years beginning on or after January 1, 2014 and before January 1, 2024, a deduction under the Personal Income and Corporation Tax Laws for certain losses sustained from a disaster occurring in California that is proclaimed by the Governor to have resulted in a state of emergency.

FISCAL EFFECT:

1) Minor and absorbable administrative costs to the Franchise Tax Board.

2) Minimal expected GF revenue decrease.

COMMENTS:

1) Purpose. According to the author, this bill allows taxpayers that suffered from the 2014 Napa earthquake to apply losses to their tax returns filed the previous year, and expands state disaster loss treatment for state tax purposes to taxpayers in Sonoma County. The author contends the Legislature has enacted identical treatment for almost every significant disaster that has occurred in California for the past 25 years.

2) Sonoma County Relief. Currently, a taxpayer may elect to file an amended return to deduct a disaster loss in the year the loss occurred, resulting in an expedited refund, if the President has declared a disaster. The election is not available for disasters declared only by the Governor unless the Legislature has enacted specific legislation with respect to that disaster. On August 24, 2014, the Governor declared a state of emergency for Napa, Solano, and Sonoma Counties; however, the President's declaration on September 11, 2014 included only Napa and Solano Counties. This bill extends state tax relief, but not federal relief, for disaster losses to taxpayers in Sonoma County.

3) Lasting Solution. While this bill effectively provides disaster loss relief to Sonoma County, it also provides a broader, automatic disaster loss relief to any area proclaimed by the Governor to be in a state of emergency. As a result, special legislation for Governor-declared disasters would no longer be necessary to enable taxpayers to claim disaster losses, expediting economic assistance to affected areas and, hopefully, hastening recovery.

Analysis Prepared by: Joel Tashjian / APPR. / (916) 319-2081

Date of Hearing: June 22, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

SBPCA Bill Id:SB 35

Author:(Wolk) – As Amended Ver:June 16, 2015

Majority vote. Fiscal committee. Tax levy.

SENATE VOTE: 38-0

SUBJECT: Income and corporation taxes: deductions: disaster relief.

SUMMARY: Provides, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, automatic disaster loss relief for any disaster occurring in any city or county in California that is proclaimed by the Governor to be in a state of emergency. Specifically, this bill:

1. Applies, for taxable years beginning on or after January 1, 2014 and before January 1, 2024, Internal Revenue Code (IRC) Section 165(i) to any loss sustained as a result of any disaster occurring in any city, county, or city and county in California that is proclaimed by the Governor to be in a state of emergency.

2. Provides that the election under IRC Section 165(i) may be made on a return or amended return filed on or before the due date of the return, determined with regard to any extension of time for filing the return, for the taxable year in which the disaster occurred.

3. Provides that the provisions of this bill apply notwithstanding Revenue and Taxation Code (R&TC) Section 18572.

4. Precludes, other than those specific to net operating loss (NOL) treatment under the R&TC, any law that suspends, defers, reduces, or otherwise diminishes the deduction of an NOL from applying to an NOL attributable to disaster losses proclaimed by the Governor.

5. Provides that the automatic disaster loss relief shall remain in effect only until December 1, 2024, and as of that date is repealed.

6. Provides that this act fulfills a statewide public purpose because it is consistent with, and supplements, the proclaimed disaster assistance relief by providing necessary tax relief to persons affected jurisdictions by allowing them to maintain essential basic services and repair damage to, and restore, their homes and businesses.

7. Makes findings and declarations.

8. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Allows a taxpayer that suffers a disaster loss to elect to deduct the loss in the year immediately preceding the year the disaster occurred if it is a Presidentially-declared disaster loss. (IRC Section 165(i).) The election is not available for a Governor-declared disaster area until enabling state legislation has been enacted.

2. Allows an individual taxpayer with a disaster loss that is not reimbursed by insurance or otherwise, to deduct disaster losses to the extent that each loss exceeds $100 and aggregate net losses for the taxable year exceed 10 percent of adjusted gross income. Business and income-producing property are not subject to these limitations.

3. Provides that if a disaster loss deduction creates a NOL, carry forward and carry back treatment apply.

4. Allows individual and corporate taxpayers to utilize NOLs to offset their tax liabilities. For NOLs incurred in taxable years beginning on or after January 1, 2008, existing law provides a carryover period of 20 years.
   
   

5. Allows NOLs attributable to taxable years beginning on or after January 1, 2013, to be carried back to each of the preceding two taxable years, as provided. The allowable NOL carryback percentage increases during the phase-in period as follows: 50% for the 2013 taxable year, 75% for the 2014 taxable year, and 100% for the 2015 taxable year and any subsequent taxable year thereafter.
   
   

FISCAL EFFECT: The Franchise Tax Board has historically estimated revenue losses of approximately $1,000.

COMMENTS:

1. Author’s Statement: The author has provided the following statement in support of this bill:

The purpose of the bill is to allow taxpayers that recently suffered from August, 2014 Napa earthquake to apply losses to their tax returns filed the previous year, resulting in a tax refund which can immediately be used to rebuild and recover from the earthquake. The Legislature has enacted identical treatment for almost every significant disaster that has occurred in California for the last 25 years. Additionally, the measure expands state disaster loss treatment for state purposes for taxpayers in Sonoma County.

2. Filing Extension: This bill allows taxpayers who recently suffered from the August 2014 Napa earthquake to apply losses to their tax returns filed the previous year, resulting in a tax refund which can immediately be used to rebuild and recover from the earthquake. To apply the loss in the previous year, state and federal law require the taxpayer to amend his/her return by the next year’s filing deadline, which is generally April 15^th. While a Presidential declaration automatically extends the deadline for carrying back disaster losses for federal tax, the Legislature must affirmatively enact a statute doing so for state purposes. Because many taxpayers have not yet determined the amount of uninsured losses the earthquake created, this bill extends the state deadline to allow taxpayers more time to claim disaster losses on their 2013 tax returns.

3. Sonoma County: In the case of disaster losses, a taxpayer may elect to file an amended return to deduct the loss in the taxable year prior to the taxable year in which the disaster loss actually occurred, resulting in an expedited refund. This election may be made for any Presidentially-declared disaster prior to the passage of any state legislation allowing this treatment as California conforms to federal disaster tax law treatment. The election is not available, however, for a "Governor-only" declared disaster unless special state legislation is enacted.

On August 24, 2014, the Governor, declared a state of emergency in the Counties of Napa, Solano, and Sonoma. On September 11, 2014, President Obama also declared a major disaster for those areas affected by the earthquake. However, Sonoma County was not included in the President’s declaration. As such, disaster loss relief is not available to Sonoma County. This bill extends disaster loss relief for state tax purposes to taxpayers in Sonoma County.

4. Governor Declares State of Emergency: As explained by the author, the Legislature has enacted similar disaster loss relief legislation in every significant disaster that has occurred in California for the last 25 years. As noted above, this bill extends disaster loss relief to Sonoma County; but instead of specifically naming affected counties, this bill provides automatic disaster loss relief to any disaster area proclaimed by the Governor to be in a state of emergency. Not only will this bill provide relief to the counties affected by the earthquake, it will also provide ongoing relief to any future declared disaster by the Governor. Doing so will expedite disaster relief to affected areas and eliminate future disaster-relief related legislation.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

 THIRD READING  

Bill No: SB 35

Author: Wolk (D)

Amended: 3/4/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 2/25/15

AYES: Hertzberg, Nguyen, Bates, Beall, Hernandez, Pavley

NO VOTE RECORDED: Lara

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT: Income and corporation taxes: deductions: disaster relief

SOURCE: Author

DIGEST: This bill enacts disaster loss treatment and extends the deadline for taxpayers affected by recent earthquakes to carry back disaster losses to the 2013 tax year.

ANALYSIS:

Existing federal and state law:

1. Allows taxpayers to apply losses to reduce taxable income from other sources. Disaster losses are the amounts not compensated by insurance or other means that result from fires, storms, floods or other natural events. Disaster losses must exceed $100 per taxpayer and 10% of their adjusted gross income for the year. These limits don’t apply to business or income-producing property.

2. Provides that when the President declares a disaster, as he did for the earthquake that affected Napa and Solano Counties in August, 2014, the declaration triggers disaster loss treatment automatically for federal and state purposes for taxpayers in areas subject to the declarations. When the Governor declares, but the President does not, the Legislature must affirmatively enact disaster loss treatment, as it did most recently for fires in San Diego County in May, 2014 (AB 922, Maienschein, Chapter 352, Statutes of 2014).

3. Allows taxpayers to apply losses to income gained in the future, called a “carry forward,” or against past income, called a “carry back.” To apply the loss in the previous taxable year, state and federal law require the taxpayer to amend their return by the next year’s filing deadline, which is generally April 15th.

This bill:

1. Amends California’s Personal Income Tax Law and Corporation Tax Law to enact disaster loss treatment whenever taxpayers incur losses in a city, county, or city and county, subject to the Governor’s declaration of emergency.

2. Extends the deadline for taxpayers affected by such disasters to apply disaster losses for the taxable year immediately preceding the taxable year in which the disaster occurred from April 15^th of the immediately following taxable year to the extended due date for the immediately following taxable year.

3. Provides that any other suspension, deferral, reduction, or other diminishment of net operating losses generally shall not affect SB 35’s treatment of disaster losses.

4. States legislative intent that the measure fulfills a statewide public purpose, which is necessary to apply SB 35’s changes to the 2014 taxable year, which has already ended for most taxpayers.

Background

In August, 2014, a significant earthquake occurred southwest of the City of Napa, causing significant damage to taxpayers in Napa, Solano, and Sonoma Counties. Because many taxpayers have not yet determined the amount of uninsured losses the earthquake created, the Legislature must extend the state deadline to allow taxpayers more time to claim disaster losses on their 2013 tax returns. As introduced, the measure only applied to those counties; however, when the measure was heard in the Committee on Governance and Finance, the measure was amended to enact disaster loss treatment and the extended deadline both for the Napa earthquake and any future disaster declared by the Governor. Doing so negates the need for future disaster-specific legislation.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 4/8/15)

California Professional Firefighters

California Taxpayers Association

City of Napa

Counties of Napa, Solano, and Sonoma

Family Winemakers of California

Napa Valley Vintners

OPPOSITION: (Verified 4/8/15)

None received

ARGUMENTS IN SUPPORT: Supporters note many taxpayers that recently suffered from the August, 2014 Napa earthquake would like to apply losses to their tax returns filed the previous year, resulting in a tax refund which can immediately be used to rebuild and recover from the earthquake. The Legislature has enacted identical treatment for almost every significant disaster that has occurred in California for the last 25 years. Additionally, the measure now applies these provisions to future disasters, so affected taxpayers don’t have to wait for the Legislature to enact a bill to ensure they’ll be afforded the same disaster loss treatment and extended deadline.

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

4/8/15 15:13:13

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Bill No: SB 35 Hearing Date: 2/25/15

Subject: Disaster relief: Counties of Napa, Solano, and Sonoma.

Enacts disaster loss treatment and extends the deadline for taxpayers affected by recent earthquakes to carry back disaster losses to the 2013 tax year.

Background and Existing Law

Federal and state law allows taxpayers to apply losses to reduce taxable income from other sources. Disaster losses are the amounts not compensated by insurance or other means that result from fires, storms, floods or other natural events. Disaster losses must exceed $100 per taxpayer and 10% of their adjusted gross income for the year, but these limits don’t apply to business or income-producing property. When the President declares a disaster, as he did for the earthquake that affected Napa and Solano Counties in August, 2014, the declaration triggers disaster loss treatment automatically for federal and state purposes for taxpayers in areas subject to the declarations. When the Governor declares, but the President does not, the Legislature must affirmatively enact disaster loss treatment, as it did most recently for fires in San Diego County in May, 2014 (AB 922, Maienschein, 2014).

Federal and state law also allows taxpayers to apply losses to income gained in the future, called a “carry forward,” or against past income, called a “carry back.” Taxpayers can apply disaster losses in the current tax year or carry them forward, but because disasters often incur costs that cause immediate cash needs for taxpayers, state and federal law generally allow taxpayers to amend tax returns from the immediately preceding tax year to carry back a disaster loss, generating a cash refund on taxes paid the immediately preceding year. To apply the loss in the previous year, state and federal law require the taxpayer to amend their return by the next year’s filing deadline, which is generally April 15^th. However, while a Presidential declaration automatically extends the deadline for carrying back disaster losses for federal tax, the Legislature must affirmatively enact a statute doing so for state purposes. Because many taxpayers have not yet determined the amount of uninsured losses the earthquake created, the Author wants to extend the state deadline to allow taxpayers more time to claim disaster losses on their 2013 tax returns, and extend disaster loss treatment for state purposes to taxpayers in Sonoma County, who were not included in the President’s declaration.

Proposed Law

Senate Bill 35 extends the deadline for taxpayers in Napa, and Solano Counties affected by the August, 2014, earthquake to claim disaster losses for the 2013 tax year from April 15, 2015 to the extended due date, conforming to federal law. The measure also allows disaster loss treatment for taxpayers in Sonoma County, who were not included in the President’s disaster declaration. The measure also provides that any subsequent legislation that suspends, defers, reduces, or otherwise diminishes net operating loss deductions shall not apply to disaster losses claimed by affected taxpayers due to the earthquake. The bill also makes legislative findings and declarations justifying the measure’s statewide public purpose.

State Revenue Impact

According to the Franchise Tax Board (FTB), SB 35 results in revenue losses of $1,000 in 2013-14, and gains of $500 in 2014-15 and 2015-16.

Comments

1. Purpose of the bill. The purpose of the bill is to allow taxpayers that recently suffered from the August, 2014 Napa earthquake to apply losses to their tax returns filed the previous year, resulting in a tax refund which can immediately be used to rebuild and recover from the earthquake. The Legislature has enacted identical treatment for almost every significant disaster that has occurred in California for the last 25 years. Additionally, the measure expands state disaster loss treatment for state purposes for taxpayers in Sonoma County.

2. When disaster strikes. Starting with the forest fires in 1985, and approximately 51 times thereafter for various other disasters, the Legislature enacted disaster tax relief legislation. Previous disaster tax relief bills were much longer than SB 35 because they enacted three distinct provisions: homeowners’ exemption, fiscal relief to disaster-affected counties, and disaster losses:

• Homeowners’ Exemption. The California Constitution grants taxpayers an exemption on the first $7,000 of taxable value for their personal place of residence; however, state law provides that when a property is vacant, under construction, or no longer occupied by the owner on the lien date of January 1, the property is no longer eligible for the exemption. Previous disaster relief bills prohibit the assessor from revoking the exemption for property affected by each individual disaster, but the Legislature enacted a general protection for all taxpayers, negating the need for subsequent bills to prohibit the revocation (SB 1494, Committee on Revenue and Taxation, 2010).

• County fiscal relief. The California Constitution allows taxpayers to request the assessor to revalue property to its disaster-affected value until it’s restored, reconstructed, or repaired. Disaster tax relief bills enacted a process for the state to reimburse counties for property tax revenue losses resulting from reassessments in the first fiscal year following the disaster; however, the Legislature has not enacted these provisions since 2010, choosing not to for the last three most recent disasters: tsunamis in Humboldt County in 2011, severe storms in Santa Cruz County in 2012, and fires in San Diego County in 2014.

• Disaster losses. While the Legislature consistently enacts disaster loss treatment for individual disasters, it will soon be rendered moot by the state’s general loss treatment. In 2008, the Legislature enacted two-year carry backs for all losses, which allow taxpayers to apply losses from the current year to the previous two tax years, but the measure limited the percentage of the loss that taxpayers can claim in its initial two years, originally 50% of the loss for 2011, and 75% for 2012 (AB 1452, Committee on Budget). After the Legislature delayed carry backs for two years (SB 858, Committee on Budget and Fiscal Review, 2010), taxpayers are now allowed two year carry backs of 50% of 2013 losses, 75% this tax year, and 100% next year. Taxpayers will be able to carry back 100% of losses incurred in 2015 regardless of whether they were caused by a disaster, meaning that a bill that solely enacts one-year disaster loss carrybacks would provide inferior treatment.

3. Me too. SB 35 enacts disaster loss treatment for state purposes for Sonoma County. However, Sonoma County taxpayers can’t apply disaster losses for federal purpose, as they were not included in the President’s declaration, which applied only to Napa and Solano Counties.

4. Make it easy. Just as the Legislature has enacted general law to replace disaster-specific provisions described above, the California Taxpayers’ Association and the California Society of Enrolled Agents are requesting that SB 35 be amended to provide that its amended return deadline extension for any President or Governor declared disaster. Doing so would negate the need for future disaster-specific legislation.

5. Amendment needed. FTB and committee staff recommends the following amendment:

• On page 3, line 5, strike out “allow”

• On Page 3, line 6, strike out “them to”

Support and Opposition

(2/19/15)

Support: Counties of Napa, Solano, and Sonoma; California Professional Firefighters, Family Winemakers of California; City of Napa.

Opposition: Unknown.

-- END --