Instructions for Form 100W - FormSend

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Instructions for Form 100WCalifornia Corporation Franchise or Income Tax Return — Water’s-Edge FilersReferences in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2001, and to the California Revenue and Taxation Code (R&TC).IntroductionCorporations may elect to compute incomeattributable to California sources on the basisof a water’s-edge combined report. In general,under a water’s-edge election, affiliated foreigncorporations are excluded from the combinedreport.Note: For purposes of these instructions, theword “taxpayer” means a corporation in thecombined group that has a California filingrequirement.The statute allowing the corporation to file on awater’s-edge basis does not supersede theconcept of unity; it merely limits the unitaryentities included in the combined report. For adiscussion of the concepts of the unitarymethod of taxation and its application by thestate of California, get FTB Pub. 1061,Guidelines for Corporations Filing a CombinedReport. Once the corporation has computed itsincome attributable to California sources onthe water’s-edge combined report basis, thecorporation may either file a separate return ormay elect to file a single return with the othercorporations in the water’s-edge group. SeeSchedule R-7, Election to File a UnitaryTaxpayers’ Group Return and List of AffiliatedCorporations, which is included in Schedule R,Apportionment and Allocation of Income.Note: S corporations normally may not beincluded in a combined report. ForS corporations filing on a water’s-edge basis,this booklet should be used in conjunctionwith Form 100S, California S CorporationFranchise or Income Tax Return.For more information, see General InformationR, Apportionment of Income; S, CombinedReport; and T, Water's-Edge Reporting.What’s NewIn general, California law conforms to theInternal Revenue Code (IRC) as of January2001. However, there are continuing differencesbetween California and federal law.When California conforms to federal tax lawchanges, we do not always adopt all of thechanges made at the federal level. For moreinformation regarding California and federallaw, please visit our Website atwww.ftb.ca.gov and select “Law and Legislation.”Additional information can be found inFTB Pub. 1001, Supplemental Guidelines toCalifornia Adjustments, the instructions forCalifornia Schedule CA (540 or 540NR), andthe Business Entity tax booklets.Note, the instructions provided with Californiatax forms are a summary of California tax lawand are only intended to aid taxpayers inpreparing their state income tax returns. Weinclude information that is most useful to thegreatest number of taxpayers in the limitedspace available. It is not possible to include allrequirements of the California Revenue andTaxation Code (R&TC) in the tax booklets.Taxpayers should not consider the tax bookletsas authoritative law.Tax Amnesty – Recent legislation authorizesthe Franchise Tax Board (FTB) and theBoard of Equalization to administer a TaxAmnesty Program. Tax amnesty is alimited-time chance for individuals andbusinesses to pay past-due income,franchise, sales, or use taxes and therelated interest penalty-free and without thefear of criminal prosecution. Amnesty runsfrom February 1, 2005, through March 31,2005. Taxpayers eligible to participate inamnesty, but choose not to do so, will besubject to additional penalties. For moredetails, visit our Website at www.ftb.ca.govor call (800) 852-5711.Abusive Tax Shelter – If the corporation wasinvolved in a potentially abusive tax shelter, thecorporation may have a disclosure, registrationand list maintenance requirement. FTB mayimpose several new and enhanced penalties ifthe corporation fails to file federal Forms 8886,8264, 8271 or any required information. Formore information, see Registration andReporting Requirements under Abusive TaxShelters on our Website at www.ftb.ca.gov.Federal Schedule M-3 (Form 1120) – Fortaxable years beginning on or after January 1,2004, the Internal Revenue Service (IRS)requires any domestic corporation or U.S.consolidated tax group with total assets of $10million or more on the last day of the tax yearto complete Schedule M-3 (Form 1120), NetIncome (Loss) Reconciliation for CorporationsWith Total Assets of $10 Million or More,instead of Schedule M-1, Reconciliation ofIncome (Loss) per Books With Income perReturn.For California purposes, the corporation muststill complete the California Schedule M-1,and:• Attach a copy of the Schedule M-3(Form 1120) to the California Franchise orIncome Tax Return; or• Attach a complete copy of the federalreturn; or• FTB will accept the Schedule M-3(Form 1120) in a spreadsheet format ifmore convenient.Net Operating Loss (NOL) – For taxable yearsbeginning on or after January 1, 2004,California has reinstated the NOL carryoverdeductions. The carryover periods for an NOLincurred in years:• beginning before January 1, 2002, havebeen extended for two years.• beginning on or after January 1, 2002, andbefore January 1, 2003, have beenextended for one year.For taxable years beginning on or after January1, 2004, 100% of the NOL may be carriedforward. For more information, see form FTB3805Q, Net Operating Loss (NOL) Computationand NOL and Disaster Loss Limitations –Corporations.Dividends Received Deduction – R&TCSection 24410 was repealed and re-enacted toallow a “Dividends Received Deduction"”ofqualified dividends received from an insurersubsidiary. The deduction is allowed whetheror not the insurer is engaged in business inCalifornia, if at the time of each payment atleast 80% of each class of stock of the insurerwas owned by the corporation receiving thedividend. For taxable years beginning on orafter January 1, 2004, and ending on or beforeJanuary 1, 2008, an 80% deduction is allowedfor qualified dividends. For taxable yearsbeginning on or after January 1, 2008, thededuction is increased to 85%. A portion ofthe dividends may not qualify if the insurersubsidiary paying the dividend is overcapitalizedfor the purpose of the dividend receiveddeduction. See the Schedule H (100W)instructions for additional information.Natural Heritage Preservation Credit –Currently there is no funding to award NaturalHeritage Preservation Credits; therefore nonew credits may be claimed for 2004.However, carryover is not affected forpreviously awarded credits. Contact theWildlife Conservation Board (WCB) todetermine if funding has been restored, if theyare accepting qualified contributions ofproperty, and to see if they are awarding newNatural Heritage Preservation Credits.Complete FTB 3503 to claim the credit only ifthe WCB has resumed awarding the credits.To get updated information regarding currentfunding, qualified contributions of property, orthe awarding of credits, contact the WildlifeConservation Board at (916) 445-8448. Or goto their Website at www.wcb.ca.gov.Contribution for Computer Technology – Fortaxable years beginning on or after January I,2004, California no longer allows a deductionfor an enhanced charitable contribution forcomputer technology or equipment.Punitive Damage Awards – For court actionsfiled after August 16, 2004, and finallyadjudicated by June 30, 2006, 75% of punitivedamage awards must be paid to the Director ofthe Department of Finance. The corporationmay exclude from income the portion of apunitive damage award that is paid to theDepartment of Finance. In addition, during thisperiod, the corporation may claim a deductionfor attorney's fees incurred in connection witha punitive damage award.Important Information• In Farmer Bros. Co. v. Franchise Tax Board(2003) 108 Cal App 4th, 134 Cal Rptr. 2nd390, the California Court of Appeal foundthat the R&TC Section 24402 deductibledividend provision discriminated againstinterstate commerce in violation of theCommerce Clause of the United StatesConstitution. R&TC Section 24402provided for a deduction to the extent thatthe dividend payer was taxable in California.A statute that is held to be unconstitutionalis invalid and unenforceable. Therefore, thededuction is not available.• For taxable years beginning on or afterJanuary 1, 2003, the provisions for makinga water's-edge election have substantiallychanged. The new procedures replace thecontract with a statutory election, whichcontinues in effect for a minimum of sevenyears; see R&TC Section 25113.Form 100W Booklet 2004 Page 3
As a result of the new procedures:• Form FTB 1115, Request for Consent for aWater's-Edge Re-Election, is a new form.• Form FTB 1116, Notice of Nonrenewal ofWater's-Edge Contract, is obsolete.• Form FTB 1117, Request to TerminateWater's-Edge Contract, is renamed Requestto Terminate Water's-Edge Election. It is nolonger available within the Water's-EdgeBooklet.To make a water's-edge election under the newrules, a corporation must:• Compute the corporation's income on awater's-edge basis,• Use Form 100W, California CorporationFranchise or Income Tax Return —Water's-Edge Filers, and• Attach the Form 100-WE, Water's-EdgeElection, to the timely filed original returnfor the year of the election.Corporations that have a valid election fortaxable years beginning before January 1,2003 will continue to file on a water's-edgebasis and will be deemed to have elected underthe new rules (R&TC Section 25113) fortaxable years beginning on or after January 1,2003. However, the election start date underthe new rules (R&TC Section 25113) willcontinue to be the start date, as originallyelected under the old rules (R&TCSection 25111.)• For taxable years beginning on or afterJanuary 1, 2003, corporate shareholders ofa Regulated Investment Company (RIC) areexplicitly denied a dividend deduction forearnings from the RIC that are not fromstock dividends.R&TC Sections 17024.5 and 23051.5 havebeen amended to clarify that, unlessotherwise expressly allowed, federalelections made before a taxpayer becomesa California taxpayer are binding forCalifornia tax purposes.• R&TC Section 18662 requires buyers towithhold income taxes when purchasingCalifornia real property from corporatesellers with no permanent place of businessin California immediately after the transfer.For more information, get FTB Pub. 1016.Sellers of California real estate must attachcopy B of Form 593-B, Real EstateWithholding Tax Statement, to their taxreturn as proof of withholding.If the corporation needs to verify withholdingpayments, the corporation may call theWithholding Services and ComplianceSection at (888) 792-4900 (toll-free) or(916) 845-4900.• For the purposes of determining the correctamount of tax for water’s-edge electors, apresumption of correctness attaches to allfederal determinations, including determinationsmade at the audit, appeals, and/orcompetent authority levels.California conforms to federal law for:• Large banks' bad-debt losses deduction,which is limited to the actual losses ratherthan contributions to a reserve for baddebts.• Alternative Minimum Tax (AMT) treatmentof contributions of appreciated property.• Disallowing the deduction for clubmembership fees and lobbying expenses.Page 4 Form 100W Booklet 2004• Disallowing the deduction for employeeremuneration in excess of $1 million.• Expensing of Environmental RemediationCosts. Certain environmental remediationexpenditures that would otherwise bechargeable to capital accounts may beexpensed and taken as a deduction in theyear the expense was paid or incurred. Anelection to expense environmentalremediation costs for federal purposes isconsidered an election for state purposesand a separate election is not allowed.• Shrinkage Estimates for InventoryAccounting. For purposes of inventoryaccounting, an adjustment for shrinkage,based on an estimate, may be made.Taxpayers can voluntarily change theirmethod of accounting if the methodcurrently being used does not utilizeestimates of inventory shrinkage and thetaxpayer now wishes to use that method.• Required recognition of gain on certainappreciated financial positions in personalproperty.• Election of mark-to-market for securitiesand commodities traders. Allows securitiestraders and commodities traders anddealers to elect to use mark-to-marketaccounting similar to what is currentlyrequired for securities dealers. Commoditieswould include only commodities of akind that are dealt with in the organizedcommodities exchange. An election to usethe mark-to-market method for federalpurposes is considered an election for statepurposes and a separate election is notallowed.• Limitation on exception for investmentcompanies under IRC Section 351.• Expansion of deduction for certain interestand premiums paid for company-owned lifeinsurance.• Modification of holding period applicable todividends received deduction.• Repeal of special installment sales rule formanufacturers of tangible personalproperty.• Required registration for abusive taxshelters.• Payment of estimated tax for closely heldreal estate investment trusts (REIT) andincome and services provided by REITsubsidiaries.California law does not conform to federallaw for:• The additional 30% or 50% first-yeardepreciation allowance for qualifiedproperty.• The election to deduct up to $102,000under IRC Section 179.• The first-year depreciation deductionallowed for luxury autos or certainpassenger automobiles.• Decreased capital gains tax rate.• Exemption from AMT for small corporations.• Accelerated depreciation for property onIndian Reservations.• The treatment of Subpart F and Section 936income.• The IRC passive activity loss rules for realestate activities.• The temporary suspension of incomelimitations on percentage depletion forproduction from marginal wells. Thepercentage depletion deduction, which maynot exceed 65% of the taxpayer's taxableincome, is restricted to 100% of the netincome derived from the oil and gasproperty.Note: The above lists are not intended to beall-inclusive of the federal and state conformitiesand differences. For additional information,please refer to the California R&TC.California Taxpayers that are 25% Foreign-Owned U.S. Corporations and ForeignCorporationsCorporations that are required to file federalForm(s) 5472, Information Return of a 25%Foreign-Owned U.S. Corporation or a ForeignCorporation Engaged in a U.S. Trade orBusiness, with the federal return must attach acopy(ies) to the California return. The penaltyfor failing to include Form(s) 5472 as requiredis $10,000 per form. See General InformationM, Penalties, for more information.Information Return for U.S. Taxpayers WhoHave Ownership (Directly or Indirectly) in aForeign CorporationFor taxable years beginning on or after January1, 1997, U.S. taxpayers who have an ownershipinterest (directly or indirectly) in a foreigncorporation and are required to file federalForm(s) 5471, Information Return of U.S.Persons With Respect to Certain ForeignCorporations, with the federal return, mustattach a copy(ies) to the California return. Thepenalty for failing to include a copy of federalForm(s) 5471 as required is $1,000 per form.See General Information M, Penalties, for moreinformation.Records Maintenance RequirementsAny taxpayer filing on a water’s-edge basis isrequired to keep and maintain records andmake the following available upon request:• Any records needed to determine thecorrect treatment of items reported on thewater’s-edge combined report for purposesof determining the income attributable toCalifornia;• Any records needed to determine thetreatment of items as nonbusiness orbusiness income;• Any records needed to determine theapportionment factors; and• Documents and information needed todetermine the proper attribution of incometo the U.S. or foreign jurisdictions underIRC Subpart F, IRC Section 882, or othersimilar provisions of the IRC.See R&TC Section 19141.6 and the relatedregulations for more information. A corporationmay be required to authorize an agent,through a Power of Attorney, to act on itsbehalf in response to requests for informationor records pursuant to R&TC Section 19504.Note: For information about the Power ofAttorney, go to our Website atwww.ftb.ca.gov.The penalty for not maintaining the aboverequired records is $10,000 for each taxableyear for which the failure applies. In addition, ifthe failure continues for more than 90 daysafter the FTB notifies the corporation of thefailure, a penalty of $10,000 may be assessedfor each additional 30-day period of continuedfailure. For taxable years beginning on or afterJanuary 1, 1996, there is no maximum amountof penalty that may be assessed. See GeneralInformation M, Penalties, for moreinformation.
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