CPAs need to be aware of current tax developments in key states to properly advise entities doing business in multiple jurisdictions. Below is an overview of some key developments in the state of California.

On February 9, 2022, California Governor Gavin Newsom signed legislation that, among other coronavirus (COVID-19) relief measures, expands the pass-through entity (PTE) tax, restores the net operating loss (NOL) deduction and business tax credits, and provides relief for restaurant and venue operators, just in time for the March 15, 2022, filing deadline (SB-113 Economic Relief: COVID-19 Pandemic).

Pass-Through Entity (PTE) Tax

The legislation expands the PTE tax (for an overview of California’s PTE tax, see the August/September 2021 column, “California Approves SALT CAP Workaround” Beginning on or after January 1, 2021, the new law—

  • allows the PTE tax to reduce tax owed below the taxpayer’s California tentative minimum tax (TMT);
  • allows a disregarded entity—i.e., a single-member limited liability company (SMLLC)—to claim the credit, however, the election must be made by the owner of the SMLLC;
  • allows pass-through entities that have partnerships as one of their owners to make the election and file a PTE tax return (however, tax still cannot be paid on behalf of partnership owner); and
  • includes guaranteed payments made to partners in the entity’s qualified net income for purposes of computing the tax.

Beginning on or after January 1, 2022, the PTE tax credit will be applied against the net tax after credits for taxes paid to other states.

Retroactive relief for restaurants and shuttered venues.

The legislation, retroactive to the 2020 tax year, conforms California’s tax treatment of the federal Restaurant Revitalization Fund (RRF) grants. In addition, California will partially conform to the Shuttered Venue Operators Grants (SVOG) federal exclusion, retroactive to the 2019 tax year.

NOLs and business credits.

The legislation restores for the 2022 taxable year the NOL deduction currently suspended for businesses with more than $1 million in income and lifts the $5 million business tax credit limitation.

Expanded Return Filing Requirements

On February 14, 2022, the California Franchise Tax Board (FTB) issued Technical Advisement Memorandum (TAM) 2022-01, outlining activities that exceed the federal protections provided by the Interstate Income Act of 1959 (PL 86-272) and, therefore, create an income tax return filing requirement for out-of-state businesses that otherwise would not have to file a California income tax return. As CPAs are generally aware, Congress established PL 86-272 to add restrictions to the way states could claim corporation income tax nexus on companies beyond a physical presence in their respective jurisdictions.

For the most part, TAM 2022-01 incorporates all the Multistate Tax Commission (MTC) positions adopted in its revised “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States under Public Law 86-272” (Aug. 4, 2021). The amended MTC statement focused primarily on which Internet activities would, or would not, be afforded PL 86-272 protections.

In addition, TAM 2022-01 clarifies that the telecommuting of non-sales functions employees exceed the protections under PL 86-272 and therefore create a California income tax return filing requirement.

With respect to Internet activities, TAM 2022-01 provides that the following activities in California exceed the protections afforded under PL 86-272 and therefore create a California income tax filing requirement:

  • Post-sales assistance through online chat and e-mail via a business’s website
  • Solicitation and submission of online applications via a business’s website of branded credit cards that generate interest and fee income
  • The ability to upload or complete resumes on a website for non-sales positions
  • Websites that download Internet cookies and similar items for the purpose of gathering customer information used to adjust inventory, and other business activities such as the production and development of new products
  • Remotely repairing and transmitting a computer code to fix or upgrade previously purchased products
  • Selling extended warranties via a business website
  • Maintaining inventory in California at a marketplace facilitator’s fulfillment center or warehouse.

TAM 2022-01 also provides three activities that do not exceed the limitations of PL 86-272 and, therefore, on their own does not create a California income tax return filing requirement:

  • Post-sales assistance by posting answers to an FAQ on the Internet.
  • Downloading Internet cookies only for purposes of soliciting sales of tangible goods; Internet cookies may be used to—
    • remember items that customers have placed in their shopping cart,
    • store personal customer information so the customer does not need to re-input, and
    • remind customers of previously view items.


  • A website that only sells tangible personal property and whose capabilities are limited to posting product descriptions, selecting items for purchase, choosing delivery options, and issuing payment.

Stay Alert

CPAs should be mindful of the fact that the above tax provisions will benefit many taxpayers in California. Moreover, CPAs also need to be cognizant of the fact that TAM 2022-01 could create nexus and California corporation income tax filing requirements for taxpayers located outside California while benefiting taxpayers located in California. CPAs should review these recent developments to see how the changes may impact specific tax positions or calculations and, if so, whether it would be beneficial to amend tax returns.

Corey L. Rosenthal, JD, is a principal at CohnReznick LLP, New York, N.Y.
Krista Schipp, CPA, is a director, state and local tax services at CohnReznick LLP.