Corporate Net Income

Chapter 7 of Part 11 of Division 2 of the Revenue and Taxation Code deals with net income under the Corporate Tax Law in California. Article 1 deals with deductions.

Section 24341 defines the term “net income.”

Section 24343 states that Section 162 of the Internal Revenue Code, relating to trade or business expenses, applies. The amendments made by Section 13601(a), (b), (c), and (d) of the Tax Cuts and Jobs Act to Section 162(m) of the Internal Revenue Code, relating to certain excessive employee remuneration, applies.

Section 24343.1 provides that the amendments made by Section 13531(a) of the Tax Cuts and Jobs Act, relating to the disallowance of FDIC premiums paid by certain large financial institutions, applies.

Section 24343.2 includes legislative statements regarding the purposes of these laws. “The expenditures covered by this receipt are nondeductible for state income tax purposes or franchise tax purposes.” The terms “expenses” and “club” are defined.

Section 24343.3 states that any employer contribution to a medical savings account, if otherwise deductible under this part, must be allowed only for the taxable year in which paid.

Section 24343.5 requires a deduction to be allowed to an employer as an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business for those expenses involved in any of the 10 specified ridesharing arrangements. The following terms are defined: “employer,” “employee,” “commuting student,” “employer-sponsored ridesharing incentive program,” “company commuter bus or van,” “vanpool,” “monthly transit pass,” “transit,” “subscription taxipool,” “ridesharing arrangement,” “carpool,” “buspool,” and “private commuter bus.”

Section 24343.7 states that Section 162(k)(2)(A)(ii) of the Internal Revenue Code does not apply.

Section 24343.8 prohibits a deduction from being allowed for the amount of any fine or penalty paid or incurred by an owner of all or part of a professional sports franchise, where that fine or penalty is assessed or imposed by the professional sports league that includes that franchise.

Section 24344 states that Section 163 of the Internal Revenue Code, relating to interest, applies.

Section 24344.5 states that a deduction, determined in accordance with Section 163(e) of the Internal Revenue Code, is allowed to the issuer of an original issue discount bond.

Section 24344.7 states that the amendments to Section 163 of the Internal Revenue Code, relating to modification to limitation on deduction for certain interest, applies.

Section 24345 require a deduction to be allowed for taxes or licenses paid or accrued during the taxable year, except in eight specified instances.

Section 24343.5 prohibits a deduction from being allowed for the fee imposed by subsection (a) of Section 9008 of the Patient Protection and Affordable Care Act.

Section 24345.6 prohibits a deduction from being allowed for the excise tax imposed by Section 4501 of the Internal Revenue Code, relating to repurchase of corporate stock.

Section 24345.7 prohibits a deduction from being allowed for the excise tax imposed by Section 5000D of the Internal Revenue Code, relating to designated drugs during noncompliance periods.

Section 24346 explains that when property is sold during any real property tax year, then four specified instances take effect.

Section 24347 applies to California law Sections 165, 166, and 582.

Section 24347.3 relates to securities held by financial institutions. Section 582(c)(2)(C) of the Internal Revenue Code, relating to limitations on foreign banks, applies.

Section 24347.3 states that Section 165(i) of the Internal Revenue Code, relating to disaster losses, is modified to additionally provide that an appraisal for the purpose of obtaining a loan of federal funds or a loan guarantee from the federal government as a result of a presidentially declared disaster may be used to establish the amount of any loss.

Section 24347.5 explains that an excess disaster loss it so be carried to other taxable years with respect to losses resulting from any of the 43 specified disasters.

Section 24347.14 provides before January 1, 2029 that Section 165(i) of the Internal Revenue Code, relating to disaster losses, is applicable to any loss sustained as a result of any disaster occurring in any city, county, or city and county in this state that is proclaimed by the Governor to be in a state of emergency.

The election under Section 165(i) of the Internal Revenue Code, relating to disaster losses, 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.

Section 24348 allows as a deduction either worthless debts or a reasonable addition to a reserve for bad debts determined in accordance with Section 585 of the Internal Revenue Code, relating to reserves for losses on loans of banks, except as otherwise provided.

When satisfied that a debt is recoverable in part only, the FTB may allow that debt, in an amount not in excess of the part charged off within the taxable year, as a deduction;. However, if a portion of a debt is claimed and allowed as a deduction in any year, no deduction is allowed in any subsequent year for any portion of the debt which in any prior year was charged off, regardless of whether claimed as a deduction in that prior year.

Section 24349 allows as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or business or held for the production of income. The term “reasonable allowance” is defined. The allowance is computed under any of four specified methods.

Section 24349.1 states that Section 280F of the Internal Revenue Code, relating to limitations on depreciation for luxury automobiles and certain property used for personal purposes, applies. The terms “deduction” or “recovery deduction” and “recovery period” are defined. The provisions of Section 280F of the Internal Revenue Code which relate to the investment tax credit do not apply.

Section 24349.2 states that Section 280G of the Internal Revenue Code, relating to golden parachute payments, applies.

Section 24351 provides that, where the taxpayer and the FTB have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate agreed upon is binding on both the taxpayer and the FTB in the absence of facts or circumstances not taken into consideration in the adoption of such agreement.

The responsibility of establishing the existence of such facts and circumstances rests with the party initiating the modification. Any change in the agreed rate and useful life specified in the agreement is not effective for taxable years before the taxable year in which notice in writing by certified mail or registered mail is served by the party to the agreement initiating such change.

Section 24352 states that, in the absence of an agreement under Section 24351 containing a provision to the contrary, a taxpayer may at any time elect in accordance with regulations prescribed by the Franchise Tax Board to change from the method of depreciation described in law.

Section 24352.5 allows a taxpayer, for purposes of computing the allowance under Section 24349 with respect to personal property, to reduce the amount taken into account as salvage value by an amount which does not exceed 10 percent of the basis of the property. The term “personal property” is defined.

Section 24353 explains that the basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property must be the adjusted basis for the purpose of determining the gain on the sale or other disposition of the property. If any property is acquired subject to a lease, each of the specified items apply.

Section 24354 states that, in the case of property held by one person for life with remainder to another person, the deduction is computed as if the life tenant were the absolute owner of the property and be allowed to the life tenant.

Section 24354.1 states, in the case of property of the type defined in Section 1250(c) of the Internal Revenue Code, specified state law does not apply and the term “reasonable allowance” includes an allowance computed in accordance with regulations prescribed by the FTB, under any of the specified methods.

Section 24355 states that Section 167(f) of the Internal Revenue Code, relating to treatment of property excluded from Section 197, applies.

Section 24355.3 states that, for purposes of computing the depreciation deduction pursuant to Section 24349, the useful life of any Alaska natural gas pipeline, is seven years.

Section 24355.4 states that, for purposes of computing the depreciation deduction under Section 24349, a class life of four years is to be used for any qualified rent-to-own property.

Section 24355.5 states that Section 197 of the Internal Revenue Code, relating to amortization of goodwill and certain other intangibles, applies. Section 13261(g) of the Revenue Reconciliation Act of 1993 (P.L. 103-66), relating to effective dates, applies.

Section 24356.1 states that the amendments made by Section 124 of the Consolidated Appropriations Act, 2016 to Section 179 of the Internal Revenue Code, relating to elections to expense certain depreciable business assets, applies. The amendments made by Section 13101 of the Tax Cuts and Jobs Act, 2017 to Section 179 of the Internal Revenue Code, relating to elections to expense certain depreciable business assets, does not apply.

Section 24357 allows a deduction of any charitable contribution the payment of which is made within the taxable year. A charitable contribution is allowable as a deduction only if verified under regulations prescribed by the FTB.

Section 24357.1 provides that the amount of any charitable contribution of property otherwise taken into account is reduced by the amount of gain that would have been realized if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of that contribution). This applies in cases of a charitable contribution of tangible personal property if either of two specified conditions is satisfied.

Section 24357.2 provides that, in the case of a contribution (not made by a transfer in trust) of an interest in property which consists of less than the taxpayer’s entire interest in the property, a deduction is allowed only to the extent that the value of the interest contributed would be allowable as a deduction if the interest had been transferred in trust. A contribution by a taxpayer of the right to use property is treated as a contribution of less than the taxpayer’s entire interest in the property.

Section 24357.3 states that, in determining the value of a remainder interest in real property, depreciation (computed on the straight line method) and depletion of the property is taken into account, and the value is discounted at a rate of 6 percent per annum, except that the FTB may prescribe a different rate.

Section 24357.4 provides that, if in connection with any charitable contribution a liability is assumed by the recipient or by any other person, or if a charitable contribution is of property which is subject to a liability, then, to the extent necessary to avoid the duplication of amounts, the amount taken into account as the amount of the charitable contribution must be reduced as specified, including in the case of a bond.

The reduction cannot exceed the interest (including interest equivalent) on the bond which is attributable to any period before the making of the contribution and which is not (under the taxpayer’s method of accounting) includable in the gross income of the taxpayer for any taxable year. The term “bond” is defined.

Section 24357.5 states that no deduction is allowed for a contribution to or for the use of an organization or trust described in Section 4948(c)(4) of the Internal Revenue Code.

Section 24357.6 states that no deduction is allowed under this part for an out-of-pocket expenditure made on behalf of an organization described in Section 24359, (relating to churches) if the expenditure is made for the purpose of influencing legislation.

Section 24357.7 defines the terms “qualified conservation contribution” and “qualified organization.”

Section 24357.8 provides that, in the case of a qualified research contribution, the amount otherwise allowed as a deduction is reduced by that amount of the reduction provided by Section 24357.1 which is no greater than the sum of the two specified amounts.

Section 24357.9 provides that, in the case of a qualified computer contribution, the amount otherwise allowed as a deduction is reduced by that amount of the reduction that is no greater than the sum of the specified amounts. The term “qualified computer contribution” is defined.

Section 24357.10 states that 80 percent of any amount described in this section is treated as a charitable contribution. An amount is described in this subdivision if each of the specified provisions applies.

Section 24358 provides that the total deductions under Section 24357 for any taxable year cannot exceed 10 percent of the taxpayer’s net income computed without regard to any of the three specified provisions of state law. Section 170(b)(2)(B) of the Internal Revenue Code, relating to qualified conservation contributions by certain corporate farmers and ranchers, applies.

Section 24359 defines the term “charitable contribution.” Also, a A corporation, trust, or community chest, fund, or foundation must meet four specified requirements.

Section 24359.1 states that any credit or deduction allowed cannot be disallowed on the basis that the contribution is made for the primary or incidental purpose of benefiting the donor in any of the specified ways.

Section 24360 provides that, in the case of any bond, the specified rules apply to the amortizable bond premium.

Section 24361 specifies that the amount of bond premium, in the case of the holder of any bond, is determined with specified references and adjustments. The amortizable bond premium of the taxable year is the amount of the bond premium attributable to the year.

Section 24362 applies specified section to the bonds only if the taxpayer has elected to have these sections apply; in the case of any taxpayer, bonds the interest on which is not excludable from gross income. The election authorized under this section must be made in accordance with such regulations as the FTB prescribes. If the election is made with respect to any bond of the taxpayer, it also applies to all bonds held by the taxpayer at the beginning of the first taxable year to which the election applies.

Section 24363 defines the term “bond.”

Section 24363.5 states that, in the case of any taxable bond, each of the specified provisions apply. The term “taxable bond” is defined.

Section 24364 provides that all expenditures (other than expenditures for the purchase of land or depreciable property or for the acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical) to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical is allowed as a deduction, with exceptions.

Section 24365 states that Section 174 of the Internal Revenue Code, relating to research and experimental expenditures, applies. Section 174(b) of the Internal Revenue Code is modified as specified, as well as Section 174(c).

Section 24368.1 states that Section 167(e) of the Internal Revenue Code, relating to certain term interests not depreciable, applies. The provisions of Sections 7622(b) and 7645(b) of Public Law 101-239, relating to the effective date of changes in treatment of transfers of franchises, trademarks, and trade names, as well as the effective date of disallowance of depreciation for certain term interests, apply.

Section 24369 states that Section 175 of the Internal Revenue Code, relating to soil and water conservation expenditures, applies.

Section 24369.4 states that Section 198 of the Internal Revenue Code, relating to expensing of environmental remediation costs, applies. Section 198(b)(2) is modified as specified, along with Section 198(f).

Section 24370 provides that there is an allowable deduction in the case of a mutual savings bank, the entire amount of interest paid to depositors possessing no proprietary interest in the institution or in its surplus, and interest on their deposits to members.

Section 24372.3 states that Section 169 of the Internal Revenue Code, relating to amortization of pollution control facilities, applies. The deduction allowed by this section is available only with respect to facilities located in this state. The term “state certifying authority” is defined.

Section 24372.5 states that Section 194 of the Internal Revenue Code, relating to amortization of reforestation expenditures, applies. The deduction allowed by this section is available only with respect to qualified timber property located in this state.

Section 24373 states that Section 178 of the Internal Revenue Code, relating to the amortization of cost of acquiring a lease, applies.

Section 24377 explains that a taxpayer engaged in the business of farming may elect to treat as expenses which are not chargeable to capital account expenditures (otherwise chargeable to capital account) which are paid or incurred by it during the taxable year for the purchase or acquisition of fertilizer, lime, ground limestone, marl, or other materials to enrich, neutralize, or condition land used in farming, or for the application of such materials to such land. The expenditures so treated is allowed as a deduction.

The term “land used in farming” is defined. The election for any taxable year is made within the time prescribed by law (including extensions thereof) for filing the return for that taxable year. The election is made in the form and manner as the FTB may prescribe. The election may not be revoked except with the consent of the FTB.

Section 24379 states that Section 83 of the Internal Revenue Code, relating to property transferred in connection with performance of services, applies.

Section 24382 states that Section 216 of the Internal Revenue Code, relating to deduction of taxes, interest, and business depreciation by cooperative housing corporation tenant-stockholder, applies. Section 6282(b) of Public Law 100-647, relating to the effective date for distributions by cooperative housing corporations, applies.

Section 24383 specifies that every taxpayer, at the election of the taxpayer, is entitled to a deduction of the cost of repairing or remodeling any building, facility or transportation vehicle owned or leased by the taxpayer at the time of the repairing or remodeling, in order to permit handicapped or elderly individuals to enter or leave the building, facility or transportation vehicle, to increase the access handicapped or elderly individuals would have to such building, facility or transportation vehicle, or to allow handicapped or elderly individuals more effective use of the building, facility or transportation vehicle, provided that the repair or remodeling meets one or more standards established by law.

In the absence of state standards, those standards established by the Secretary of the Treasury of the United States with the concurrence of the Architectural and Transportation Barriers Compliance Board must be used. The installation of emergency egress/safe area refuge systems is eligible for deductions. The deduction authorized by this section must be taken with respect to the taxable year in which the repairing or remodeling is completed.

Article 2 deals with special deductions.

Section 24401 provides that, in addition to the deductions provided in Article 1 (commencing with Section 24341), there is allowed as deductions in computing taxable income the items specified in this article.

Section 24402 specifies that a portion of the dividends received during the taxable year declared from income which has been included in the measure of the taxes imposed upon the taxpayer declaring the dividends. The portion of dividends which may be deducted under this section is specified. The terms “more than 50 percent owned corporation” and “20 percent owned corporation” are defined. No deduction is allowed under this section in respect of any dividend on any share of stock.

Section 24403 states that, in the case of a building and loan association, organized and operating wholly or partly on a mutual plan, or a federal savings and loan association, organized and operating wholly or partly on a mutual plan, the return paid or credited on or apportioned to their withdrawable shares.

Section 24404 provides that, in the case of farmers, fruit growers, or like associations organized and operated in whole or in part on a cooperative or mutual basis, for the purpose of marketing the products of members or other producers, or for the purpose of purchasing, or producing, supplies and equipment for the use of members or other persons, all income resulting from or arising out of the business activities for or with their members carried on by them or their agents; or when done on a nonprofit basis for or with nonmembers. The term “all income resulting from or arising out of such business activities for or with their members” is defined. 

Section 24405 states that, in the case of other associations organized and operated in whole or in part on a cooperative or a mutual basis, all income resulting from or arising out of business activities for or with their members carried on by them or their agents, or when done on a nonprofit basis for or with nonmembers, are an allowable deduction. However, the deduction allowable under this section does not apply to those cooperative or mutual associations whose income is principally derived from the sale in the regular course of business of tangible personal property other than water, agricultural products, or food sold at wholesale. The terms “food sold at wholesale” and “for or with” are defined. 

Section 24406 states that, in the case of other associations organized and operated as co-operative corporations, whose income is principally derived from the sale in the regular course of business of tangible personal property other than water, agricultural products or food sold at wholesale, all patronage refunds paid or accrued to patrons if the patronage refunds are made and allocated as specified.

Section 24406.5 explains that, in the case of gas producers’ cooperative associations organized and operated as cooperative corporations, whose income is principally derived from the sale in the regular course of business of tangible personal property other than water, agricultural products or food sold at wholesale, all patronage refunds paid or accrued to patrons if the patronage refunds are made and allocated as specified.

Each cooperative corporation is required to certify to the Franchise Tax Board its eligibility for the deduction provided by this section. Certification is made at the time and in the manner prescribed by the FTB in forms or instructions.

Section 24406.6 prohibits net earnings from being reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation, bylaws of the organization, or other contract with patrons provide that those dividends are in addition to amounts otherwise payable to patrons that are derived from business done for or with patrons during the taxable year.

Section 2447 specifies that the organizational expenditures of a corporation may, at the election of the corporation be treated as deferred expenses. In computing net income, the deferred expenses remaining, if any, must be allowed as a deduction ratably over that period of not less than 180 months as may be selected by the corporation (beginning with the month in which the corporation begins business). The corporation is allowed a deduction for the deferred expenses in an amount equal to the lesser of either of the specified amounts.

Section 24408 defines the term “organizational expenditures.”

Section 24409 deals with the Section 24407 election, the period so elected must be adhered to in computing the income of the corporation for the taxable year for which the election is made and all subsequent taxable years.

Section 24410 explains that the allowable dividends received deduction with respect to qualified dividends received by a corporation during the taxable year from a corporation that is an insurer within the meaning of Section 28 of Article XIII of the California Constitution, whether or not the insurer is engaged in business in California, if at the time of each dividend payment at least 80 percent of each class of the stock of the insurer was owned, directly or indirectly, by the corporation receiving the dividend must equal the percentage specified of the amount of the qualified dividends received.

Section 24411 states that, for purposes of those taxpayers electing to compute income under Section 25110, 100 percent of the qualifying dividends and 75 percent of other qualifying dividends to the extent not otherwise allowed as a deduction or eliminated from income. The term “qualifying dividends” is defined. The water’s-edge group consists of corporations whose income and apportionment factors are taken into account pursuant to Section 25110. The terms “construction project” and “location of which is not subject to the taxpayer’s control” are defined.

Section 24414 states that Section 195 of the Internal Revenue Code, relating to startup expenditures, applies. References to Sections 163(a), 164, 165, and 174 of the Internal Revenue Code, relating to interest, taxes, losses, and research and experimental expenditures, are modified as specified.

Section 24415 specifies that there is allowed as a deduction to a taxpayer those payments of the taxpayer which are made pursuant to an interindemnity arrangement and which are paid to a trust of members of a cooperative corporation and the members of which consist solely of physicians and surgeons licensed in this state.

The deduction authorized is taken with respect to the taxable year in which the payment is made and taken only to the extent that the payment does not exceed the amount which would otherwise be payable to an independent insurance company for similar coverage for medical malpractice insurance in that taxable year.

Any portion of the payment in excess of that amount is treated as a payment under the interindemnity arrangement for five succeeding taxable years and may be carried forward as a deduction to those five succeeding taxable years until used. The terms “payment,” “taxpayer,” and “trust” are defined. Upon request, the trust must submit to the FTB the names and membership dates of all participating corporations.

Section 24416 provides that a net operating loss deduction is allowed in computing net income under Section 24341 and is determined in accordance with Section 172 of the Internal Revenue Code, except as otherwise provided.

Section 24416.1 explains that a qualified taxpayer may elect to take the deduction provided by Section 172 of the Internal Revenue Code, relating to the net operating loss deduction, as modified by Section 24416, in computing net income, with three specified exceptions. Corporations whose income is subject to the provisions of Section 25101 or 25101.15 must make the computations required. The election to compute the net operating loss under this section is made in a statement attached to the original return, timely filed for the year in which the net operating loss is incurred and is irrevocable.

Section 24416.7 defines the term “qualified taxpayer” for purposes of a corporation that conducts a farming business that is directly affected by Pierce’s disease and its vectors. Specified provisions are applicable.

Section 24416.22 states that a net operating loss attributable to a taxable year beginning on or after January 1, 2008, is a net operating carryover to each of the 20 taxable years following the year of the loss,