California Form 100S – Fill Out and Use This PDF

CALIFORNIA

FORMS & INSTRUCTIONS

Members of the Franchise Tax Board

Betty T. Yee, Chair

George Runner, Member

Keely Bosler, Member

100S

2018

SCorporation Tax Booklet

This booklet contains:

Form 100S, California S Corporation Franchise or Income Tax Return

Schedule B (100S), S Corporation Depreciation and Amortization

Schedule C (100S), S Corporation Tax Credits

Schedule D (100S), S Corporation Capital Gains and Losses and Built-In Gains

Schedule H (100S), S Corporation Dividend Income Deduction

Schedule QS, Qualified Subchapter S Subsidiary (QSub) Information

Schedule K-1 (100S), Shareholder’s Share of Income, Deductions, Credits, etc.

FTB 3539, Payment for Automatic Extension for Corporations and Exempt Organizations

FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations — Corporations

For more information regarding e-file, go to ftb.ca.gov and search for business eile.

In general, for taxable years beginning on or after January 1, 2015, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2015. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to ftb.ca.gov and search for conformity. Additional information can

be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540 or 540NR), and the Business Entity tax booklets.

The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the instructions. Taxpayers should not consider the instructions as authoritative law.

What’s New/Tax Law Changes

Federal Tax Reform – The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, made changes to the IRC. In general, the California R&TC does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015, with modifications.

Deferred Foreign Income – Under IRC

Section 965, if the S corporation owns (directly or indirectly) certain foreign corporations, it may have to include certain deferred foreign income on its income tax return. California does not conform. If the S corporation reported IRC Section 965 inclusions and deductions on Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K for federal purposes, write “IRC 965” at the top of Form 100S, California S Corporation Franchise or Income Tax Return.

Global Intangible Low-Taxed Income (GILTI) - Under IRC Section 951A, if the S corporation is a U.S. shareholder of a controlled foreign corporation, the S corporation must include GILTI in its income. California does not conform.

Depreciation Limitations - The TCJA amended IRC Section 280F relating to depreciation limitations on luxury automobiles. California does not conform to the federal amendments under the TCJA. For more information, get Schedule B (100S), S Corporation Depreciation and Amortization.

Net Operating Losses (NOLs) – The TCJA made changes to the rules for NOLs. California law does not conform to those changes. California taxpayers continue to compute NOLs in conformity to federal rules as of

the specified date of January 1, 2015, with modifications. For more information, see General Information Section X, Net Operating Loss.

Capital Assets – The TCJA amended IRC Section 1221 excluding a patent, invention, model or design (whether or not patented), and a secret formula or process held by the taxpayer who created the property (and certain other taxpayers) from the definition of a capital asset. California does not conform to this amendment under the TCJA. For California purposes, IRC Section 1221 as of January 1, 2015, applies.

Qualiied Opportunity Zone Funds – The TCJA established Opportunity Zones.

IRC Sections 1400Z-1 and 1400Z-2 provide a temporary deferral of inclusion of gross income for capital gains reinvested in a qualified opportunity fund, and exclude capital gains from the sale or exchange of an investment in such funds. California does not conform to the deferral and exclusion of capital gains reinvested or invested in federal opportunity zone funds and has no similar provisions.

Like-Kind Exchanges – The TCJA amended IRC Section 1031 limiting its application to real property that is not primarily held for sale. Additionally, under the TCJA, exchanges of personal property and intangible property do not qualify for non-recognition of gain or loss as like-kind exchanges. California does not conform to the amendments under the TCJA. For California purposes, IRC Section 1031 as of January 1, 2015, applies.

New Employment Credit – The sunset date for the New Employment Credit is extended until taxable years beginning before January 1, 2026. For more information, go to ftb.ca.gov and search for nec or get form FTB 3554, New Employment Credit.

California Competes Credit – The sunset date for the California Competes Tax Credit is extended until taxable years beginning before January 1, 2030. For more information, go to the GO-Biz website at business.ca.gov or ftb.ca.gov and search for ca competes or get form FTB 3531, California Competes Tax Credit.

Conformity – For updates regarding the federal acts, go to ftb.ca.gov and search for conformity.

Important Information

yThe Franchise Tax Board (FTB) offers e-filing for the following entities:

y Corporations filing Form 100S and certain accompanying forms and schedules.

y Corporations filing Form 100X, Amended Corporation Franchise or Income Tax Return.

Check with the software providers to see if they support business e-filing.

yFor taxable years beginning on or after January 1, 2014, California law requires any business entity that files an original or amended tax return that is prepared using tax preparation software to electronically file (e-file) their tax return with the FTB. For more information, go to ftb.ca.gov and search for business eile.

yFor taxable years beginning on or after January 1, 2016, the extension period for filing an S corporation tax return has changed from seven months to six months. Get FTB Notice 2016-04 for more information.

yCorporations can make payments online using Web Pay for Businesses. Corporations can make an immediate payment or schedule payments up to a year in advance. Go to ftb.ca.gov/pay.

yCorporations can use a Discover, MasterCard, Visa, or American Express Card to pay business taxes. Go to oficialpayments.com. Official Payments Corp. charges a convenience fee for using this service.

yCorporations can make an estimated tax or extension payment using tax preparation software. Check with the software provider to determine if they support Electronic Funds Withdrawal (EFW) for estimated tax or extension payments.

yIf the S corporation made purchases from out-of-state or Internet sellers and owes California use tax, the S corporation may report and pay the tax on the S Corporation Franchise or Income Tax Return.

For taxable years beginning on or after January 1, 2015, if an S corporation includes use tax on its income tax return, payments and credits will be applied to use tax first, then towards franchise or income tax, interest, and penalties. For more information, see General Information EE, California Use Tax, and Specific Line Instructions.

yIf the S corporation was involved in a reportable transaction, including a listed transaction, the S corporation may have a disclosure requirement. Attach federal Form 8886, Reportable Transaction Disclosure Statement, to the back of the California return along with any other supporting schedules. If this is the first time the reportable transaction is disclosed on the return, send a duplicate copy of federal Form 8886 to the address below:

TAX SHELTER FILING ATSU 398 MS: F385

FRANCHISE TAX BOARD PO BOX 1673 SACRAMENTO CA 95812-9900

The FTB may impose penalties if the S corporation fails to file federal Form 8886, Form 8918, Material Advisor Disclosure Statement, or any other required information. A material advisor is required to provide a reportable transaction number to all taxpayers and material advisors

for whom the material advisor acts as a material advisor. For more information, go to ftb.ca.gov and search for disclosure obligation.

yCalifornia taxpayers whose taxable year begins on or after June 30, 2016, and who are required to file the federal forms listed below with the Internal Revenue Service (IRS), must also attach copies of these forms to the California tax return:

y Federal Form 8975, Country-by-Country Report

y Federal Schedule A (8975), Tax Jurisdiction and Constituent Entity Information

For additional information, refer to the Instructions for Form 8975, Revenue Procedure 2017-23, 2017-7 Internal Revenue Bulletin 915, and see General Information M, Penalties, and General Information V, Information Returns.

yAn S corporation that expects a net operating loss (NOL) in the 2019 taxable year, can file form FTB 3593, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback, to extend the time for payment of taxes for the immediately preceding 2018 taxable year. This includes extending the time for payment of a tax deficiency. The payment of tax that can be postponed cannot exceed the expected overpayment from the carryback of the NOL. For more information, get form FTB 3593.

yFor taxable years beginning on or after January 1, 2014, the IRS allows corporations with at least $10 million but less than $50 million in total assets at tax year end to file Schedule M-1 (Form 1120S), Reconciliation of Income (Loss) per Books With

Income (Loss) per Return, in place of Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More, Parts II and III. However, Schedule M-3 (Form 1120S), Part I, is required for these corporations. For California purposes, the S corporation must complete the California Schedule M-1. For more information, see the instructions for Schedule M-1, Reconciliation of Income (Loss) per Books With Income (Loss) per Return, in this booklet.

yFor taxable years beginning on or after January 1, 2014, California requires taxpayers who exchange property located in California for like-kind property located outside of California, under

IRC Section 1031, to file an annual

information return with the FTB. For more information, get form FTB 3840, California Like-Kind Exchanges, or go to ftb.ca.gov and search for like kind.

yFor an NOL incurred in a taxable year beginning on or after January 1, 2015, the carryback amount is 100% of the NOL. For more information, see General Information X, Net Operating Loss or form FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Corporations, included in this booklet.

yR&TC Section 25128.7 requires all business income of an apportioning trade or business, other than an apportioning trade or business under R&TC

Section 25128(b), to apportion its business income to California using the single-sales factor formula. For more information, get Schedule R, Apportionment and Allocation of Income, or go to ftb.ca.gov and search for single sales factor.

yR&TC Section 25136 requires all taxpayers to assign sales, other than sales of tangible personal property, using market assignment. For more information, get Schedule R or go to ftb.ca.gov and search for market assignment.

yBeginning on or after January 1, 2012, a type of corporation called a “benefit corporation” can be formed with the purpose of creating general public benefit, provided certain requirements are met. An existing corporation can become a “benefit corporation”, if certain procedures are followed. In addition,

a “benefit corporation” can be created through a merger or reorganization, if certain requirements are met. For more information, see the Corporations Code, commencing with Section 14600.

yBeginning on or after January 1, 2012, a type of corporation called a “flexible purpose corporation” could be formed, provided certain requirements were met. An existing corporation could merge or convert into a “flexible purpose corporation”, upon completion of certain requirements. A “flexible purpose corporation” must have

a special purpose, which may include but is not limited to, charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation. For more information, see the Corporations Code, commencing with Section 2500.

yEffective January 1, 2015, all references to “flexible purpose corporations” in the Corporations Code are changed to “social purpose corporations,” although the requirements are substantially the same as prior law. Any flexible purpose corporation formed before January 1, 2015, may elect to amend its articles of incorporation to change its status to a “social purpose corporation.” If a flexible purpose corporation formed prior to January 1, 2015, does not amend its

articles of incorporation to change its status, any reference to “social purpose corporation” in the Corporation Code is deemed a reference to a “flexible purpose corporation.” For more information, see the Corporations Code commencing with Section 2500.

yR&TC Section 24343.2:

y Disallows the deduction for payments made to a club that restricts membership or the use of its services or facilities on the basis of ancestry or any characteristic listed or defined in Section 11135 of the Government Code.

y Excludes genetic information from the characteristics listed or defined in Section 11135 of the Government Code.

y“Gross receipts” means the gross amounts realized (the sum of money and the fair market value of other property or services received) on:

y The sale or exchange of property, y The performance of services, or

y The use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain,

or loss is recognized (or would be recognized if the transaction were in the United States) under the IRC.

Amounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold. For a complete definition of “gross receipts,” refer to R&TC Section 25120(f).

yR&TC Section 25135(b) adopts the Finnigan rule in assigning sales from tangible personal property.

For more information regarding “gross receipts” or “Finnigan rule,” get Schedule R or go to ftb.ca.gov and search for corporation law changes.

yFor taxable years beginning on or after January 1, 2007, interest and dividends from intangible assets held in connection with a treasury function of the taxpayer’s unitary business, as well as the gross receipts and any overall net gain from the maturity, redemption, sale, exchange, or other disposition of these assets, are excluded from the sales factor. This exclusion encompasses the use of futures contracts and options contracts to hedge foreign currency fluctuations. See Cal. Code Regs., tit. 18 section 25137(c)(1)(D) for more information. For taxable years beginning on or after January 1, 2011, see R&TC Section 25120(f).

yGroup nonresident returns may include:

y Less than two nonresident individuals. y Nonresident individuals with more than $1 million of California taxable income.

An additional 1% tax will be assessed on nonresident individuals who have California taxable income over $1 million. Get FTB Pub. 1067, Guidelines for Filing a Group Form 540NR, for more information.

yIn general, the water’s-edge rules provide for an election out of worldwide combined reporting. By electing water’s-edge,

a California taxpayer elects into a complex blend of state and federal tax concepts. See General Information T, Water’s Edge Reporting; refer to R&TC Sections 25110 and 25113; and get Form 100W, Corporation Tax Booklet – Water’s-Edge Filers, for more information.

yA C corporation is taxed on its earnings at regular corporate tax rates and the shareholders are then taxed on these earnings when they are distributed as dividends. For more information, get Form 100, Corporation Tax Booklet.

yS corporations are required to report withholding payments from the

S corporation that are allocated to all shareholders, as well as payments withheld on nonresident shareholders. Report these withholding amounts on Schedule K-1 (100S), Shareholder’s Share of Income, Deductions, Credits, etc., and Schedule K (100S), S Corporation Shareholder’s Shares of Income, Deductions, Credits, etc.

yUse form FTB 3725, Assets Transferred from Corporation to Insurance Company, to report assets transferred from a parent corporation to an insurance company. Get form FTB 3725 for more information.

yCalifornia follows the revised federal instructions (with some exceptions) for reporting the sale, exchange or disposition of an asset for which an IRC Section 179 expense deduction was claimed in prior years by a partnership, limited liability company, or S corporation.

S corporations should follow the instructions in federal Form 4797, Sales of Business Property, with the exception that the amount of gain on property subject to the IRC Section 179 recapture must be included in the S corporation’s taxable income for California purposes. See General Information FF, Property Subject To IRC Section 179 Recapture, and Specific Line Instructions for Form 100S, line 4, for more information.

Shareholders should follow federal reporting requirements as detailed in federal Form 1120S, U.S. Income Tax Return for an S Corporation, and federal Form 4797 instructions.

yA shareholder’s pro-rata share of

S corporation income is treated like a partner’s distributive share of partnership income. The items of income are characterized as if realized directly from the source from which realized by the corporation, then they are sourced according to the rule for each type of income. Valentino v. Franchise Tax Board (2001) 87 Cal. App. 4th 1284. Income from California sources is subject to California tax.

yIn general, R&TC Section 17024.5 and Section 23051.5 state that federal elections

made before a taxpayer becomes a California taxpayer are binding for California tax purposes.

yWith certain limited exceptions, payers that are required to withhold and remit backup withholding to the IRS are also required to withhold and remit to the FTB on income sourced to California. If the S corporation (payee) has backup withholding, the

S corporation (payee) must contact the FTB to provide a valid taxpayer identification number, before filing the tax return. Failure to provide a valid taxpayer identification number may result in a denial of the backup withholding credit. For more information, go to ftb.ca.gov and search for backup withholding.

yR&TC Section 18662 requires buyers to withhold income taxes when purchasing California real property from corporate sellers with no permanent place of business in California immediately after the transfer. Get FTB Pub. 1016, Real Estate Withholding Guidelines, for more information.

Sellers of California real estate must attach a copy of Form 593, Real Estate Withholding Tax Statement, to their tax return as proof of withholding.

If the corporation needs to verify withholding payments, the corporation may call Withholding Services and Compliance at 916.845.4900 or 888.792.4900.

yFor transactions that require withholding, a seller of California real estate may elect an alternative to withholding 3 1/3% of the total sales price. The seller may elect an alternative withholding amount based on the maximum tax rate for individuals, corporations, or banks and financial corporations, as applied to the gain on the sale. The seller is required to certify under penalty of perjury the alternative withholding amount to the FTB. For more information, get FTB Pub. 1016.

California law conforms to federal law for the following:

yIRC Section 1245(b)(8) relating to amortizable Section 197 intangibles property disposed on or after January 1, 2010.

yThe qualification requirements of

S corporations and their shareholders.

yDisallowing the deduction for club membership fees and employee remuneration in excess of $1 million.

yDisallowing the deduction for lobbying expenses.

yTax-exempt organizations may be shareholders in an S corporation.

yFamily farm corporations with income over $25 million may defer tax on income that was a result of changes in accounting methods required of these corporations. For calendar year taxpayers, the suspense account for these deferrals must be recaptured starting with taxable years beginning on or after January 1, 1998. For fiscal year taxpayers, the suspense account

must be recaptured starting in taxable years beginning after June 8, 1997, if the fiscal year taxpayer’s taxable year ends on or after December 31, 1997.

yFor purposes of inventory accounting, an adjustment for shrinkage, based on an estimate, may be made. Taxpayers can voluntarily change their method of accounting if the method currently being used does not utilize estimates of inventory shrinkage and the taxpayer now would like to use that method.

yRequired recognition of gain on certain appreciated financial positions in personal property.

ySecurities traders and commodities traders are allowed to elect to use the mark-to-market accounting similar to what is currently required for securities dealers. Commodities would include only commodities of a kind that are dealt within the organized commodities exchange. An election to use the mark-to-market method for federal purposes is considered an election for state purposes and a separate election is not allowed.

yLimitation on exception for investment companies under IRC Section 351.

yIf an Employee Stock Ownership Plan (ESOP) is an S corporation shareholder, items of income or loss of the S corporation that pass through to the ESOP are not treated as unrelated business taxable income (UBTI). Previously, such items were treated as UBTI.

yS corporations that establish and maintain ESOPs are not required to give participants the right to demand distributions in

the form of employer securities, if the participants have the right to receive such distributions in cash.

yAn IRC Section 338 election, relating to stock purchases treated as asset acquisitions, is treated as an election for state purposes. A separate election for state purposes is not allowed.

yExpansion of deduction for certain interest and premiums paid for company-owned life insurance.

yModification of holding period applicable to dividends received deduction.

yRepeal of special installment sales rule for manufacturers of tangible personal property.

yPayment of estimated tax for closely held real estate investment trusts (REIT) and income and services provided by REIT subsidiaries.

yReducing the compensation deduction for certain employers from $1 million

to $500,000; and making certain parachute payments nondeductible.

California law does not conform to federal law for the following:

The Federal TCJA of December 22, 2017, made changes to the IRC. In general, the California R&TC does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015,