California adopts partnership audit rules; updates estimated payments

Nov 15, 2018

On Sept. 23, 2018, California Gov. Jerry Brown signed Senate Bill 274 into law amending the California assessment and reporting requirements for federal audit determination adjustments, and conforms California to the new federal partnership audit rules, effective as of Jan. 1, 2018.

The bill also requires partnerships to report federal changes or corrections to the Franchise Tax Board (FTB) within six months after the final federal audit determination. Partnerships can elect at the federal level to report and pay additional tax resulting from the federal audit at either the partnership level or push the adjustments to its partners. The bill conforms California to the same reporting and payment method as the federal; however, taxpayers have the option to elect a separate method in California with approval from the FTB.

Additional important changes

  • Clarifies that a partnership’s federal election regarding audit rules is binding for state purposes, and outlines the requirements for how both partnerships and partners report federal adjustments to the state.
  • Provisions to assist with implementation and compliance of reporting changes or corrections, such as how to calculate penalties and interest, how to calculate the new partnership tax in lieu of pushing adjustments to its partners, and the FTB’s treatment of direct and indirect partners.
  • Outlines treatment of federal audit determination changes or corrections for publicly traded partnerships.
  • Other technical changes such as an urgency clause and other regulations are necessary to implement the bill.

The amended laws and new conformity rules require partnerships with California activity to consider the effect federal elections will have on state reporting and payment requirements. Partnerships currently under federal audit will need to determine if a separate method for California is favorable and take the necessary steps to request the FTB’s approval. The legislation had received broad-based support from taxpayers and tax advocacy groups. Taxpayers should contact their state and local adviser to discuss and determine how to benefit from the new rules.

New estimated payment notification system

The California FTB made an announcement that beginning in early 2019, business entities who have made an LLC fee payment or estimated tax payment will receive the FTB Form 3713, Summary of Account Payments, Transfers, and Credits. The form provides a summary for estimated tax payments, transfer and credit information, and effective dates. The form is expected to be mailed for the 2018 tax year by the beginning of Feb. 2019.

The FTB’s new payment notification system is a pilot program intended to proactively address the most common reason tax professionals contact the FTB, to verify payments. Business entities and tax professionals may also obtain payment information through their respective MyFTB accounts.