Chapter 9B – Federal vs. California Nonconformity in Individual & Small-Business Tax Rules

Moving Expenses

  • Federal rules
    • Since TCJA (Tax Cuts and Jobs Act) the deduction is “suspended” 2018\text{–}2025.
    • Only exception: active-duty military moving under military orders.
    • All other taxpayers: expense is non-deductible (treated as a personal, disallowed item).
  • California rules
    • Conforms to pre-TCJA treatment: moving expenses remain a for-AGI deduction (i.e.
      deductible on Schedule CA (540) – the state analogue of federal Schedule 1).
    • Requirements mirror the old federal test:
    • New principal work location must be at least 50 miles farther from the former home than the old workplace was.
    • Must work full-time near the new location for a minimum period (detail not given in video, but historically 39 weeks / 78 weeks tests).
    • Example
    • Taxpayer moves for Intel from California to Austin.
    • Unreimbursed cost =\$6{,}000.
    • Federal: $0$ deduction.
    • California: \$6{,}000 claimed as a miscellaneous itemized deduction on Schedule CA (540).

Educator Expense Deduction

  • Federal
    • Eligible educators (K–12 teachers, aides, counselors, principals, etc.) may deduct up to \$300 each for unreimbursed classroom supplies and professional development.
    • Spouses who are both eligible educators can each claim \$300 (total \$600 if MFJ).
    • Claimed above-the-line on Schedule 1.
  • California
    • No equivalent provision – deduction is disallowed.
  • Commentary: University/college instructors receive no benefit under either system.

Cannabis / Marijuana Business Deductions

  • Federal (IRC §280E)
    • Cannabis is classified as a Schedule I controlled substance (illegal trafficking activity).
    • Only deduction allowed: Cost of Goods Sold (COGS).
    • No deduction for wages, rent, insurance, advertising, depreciation, etc.
  • California
    • Cannabis is legal and regulated at the state level for licensed businesses.
    • Treated like any other Schedule C (sole proprietorship) or other business entity.
    • All ordinary & necessary business expenses are deductible.
    • Creates a major federal/state divergence in taxable income.

Entertainment & Meal Expenses

  • Federal (post-2017 rules)
    • Entertainment expenses (sporting events, concerts, golf outings, club dues, etc.) are 0 % deductible.
    • Business meals remain 50 % deductible (§274). (Temporary 100 % restaurant deduction for 2021–2022 has expired.)
    • No specific prohibition on private clubs that discriminate.
  • California
    • Allows 50 % deduction for BOTH entertainment and business meals.
    • Additional public-policy restriction: no deduction for expenses incurred at private clubs that discriminate on the basis of sex, race, color, or religion.
  • Numerical Illustration
    • Luxury suite at a Warriors game costs \$10{,}000, of which \$1{,}000 is food.
    • Federal
    • Entertainment portion =\$9{,}000 \times 0 \% = 0.
    • Meals portion =\$1{,}000 \times 50 \% = \$500 deductible.
    • California
    • Entertainment portion =\$9{,}000 \times 50 \% = \$4{,}500.
    • Meals portion =\$1{,}000 \times 50 \% = \$500.
    • Total CA deduction =\$5{,}000.

Employer Credit for Child & Dependent Care Facilities (Employer-side)

  • Federal (§45F)
    • Non-refundable business credit up to 25\% of qualified child-care expenditures + 10\% of certain resource & referral expenditures.
    • Maximum credit: \$150{,}000 per year.
    • Any remaining, unrecovered amounts are still deductible as a wage/benefit expense.
  • California
    • No analogous credit – none of §45F is adopted.

Excludable Employer-Provided Dependent Care Assistance (Employee-side)

  • Separate from the §45F employer credit.
  • Both Federal and CA: Employer may provide up to \$5,000 (or \$2,500 MFS) per employee tax-free under §129.
  • Employer deducts as wages; employee excludes from gross income (reported on Form W-2, Box 10).

Misclassification of Workers (Employee vs Independent Contractor)

  • Why it matters
    • Employers try to avoid payroll tax, workers’ comp, and various labor-law obligations by labeling workers as independent contractors (ICs).
  • Federal classification test (Rev. Rul. 87-41, common-law control test)
    • “20-factor” checklist, broadly grouped into Behavioral, Financial, and Relationship-of-the-Parties control.
  • California – AB 5 / Labor Code §2775 et seq. (the “ABC” test)
    • A worker is presumed to be an employee unless ALL THREE of the following are met:
    1. A – Worker is free from the hiring entity’s control & direction in performing the work, both contractually and in fact.
    2. B – Work performed is outside the usual course of the hiring entity’s business.
    3. C – Worker is customarily engaged in an independently established trade, occupation, or business of the same nature.
    • Numerous statutory carve-outs (doctors, lawyers, real-estate licensees, some creatives, etc.) revert to the older Borello multi-factor test.
  • Penalties on Advisors (tax preparers, consultants)
    • California can impose criminal penalties + monetary penalties on any paid tax preparer who knowingly advises a client to misclassify.
    • Statutory citation (Labor Code): Potential joint & several liability, plus civil penalty up to \$25,000 per misclassified worker.

Unique “Statutory Employees”

  • Certain workers are treated as employees for employment-tax purposes, yet report income/expenses on Schedule C:
    • Agent-drivers or commission-drivers distributing beverages or laundry.
    • Full-time life-insurance salespersons.
    • Homeworkers under right-to-buy contracts.
    • Traveling or city salespersons working on the employer’s behalf.
  • Federal and California conform on this point.

Independent Contractor Reporting (California-specific)

  • Federal: No requirement to report a new 1099-NEC payee to the IRS when you hire them (only year-end 1099 reporting).
  • California: Mandatory “Independent Contractor Reporting” to EDD.
    • Trigger: Payments ≥ \$600 or a contract for any amount, whichever occurs first.
    • Deadline: Within 20 days of either (a) entering into the contract or (b) making payments reaching \$600.
    • Report electronically via EDD site; provides payer & payee info, SSN/EIN, start date, etc.
    • Purpose: Promote tax compliance & facilitate child-support enforcement.
  • Year-end Forms
    • Payers still file Form 1099-NEC with IRS; IRS forwards data to the CA Franchise Tax Board (FTB).

Qualified Business Income (QBI) Deduction (§199A)

  • Federal
    • Up to 20 % deduction of qualified business income for sole proprietors, partnerships, S corporations.
    • Calculated on Form 8995 or Form 8995-A.
  • California
    • No QBI deduction; entire business net income is taxable.
    • No CA equivalent form.
  • Impact: Creates potentially large federal/state taxable-income spread for pass-through owners.

Practical & Ethical Takeaways

  • Always test federal vs CA rules; many provisions do not conform.
  • For cross-border (multistate) moves, employees must track moving-expense deductibility separately.
  • Cannabis operators need dual books: one for federal (COGS-only) and one for CA (full deductions).
  • Entertainment deductions can differ by thousands of dollars (be careful with Warriors-suite-type events).
  • Employers considering on-site child-care must weigh the lost CA credit.
  • Misclassification carries severe civil and criminal exposure, especially in CA—advisors must document their recommendations.
  • Failure to file IC reports with EDD can trigger penalties and signal broader noncompliance.