Instructions For Form Ftb 3801-Cr - Passive Activity Credit Limitations

2004 Instructions for Form FTB 3801-CR

Passive Activity Credit Limitations

These instructions are based on the Internal Revenue Code (IRC) as of January 1, 2001, and the California Revenue and Taxation Code (R&TC).

What’s New?

passive gains (IRC Section 469 and R&TC

A Purpose

Sections 17551 and 17561). You must make this

Use form FTB 3801-CR to determine whether

Military Personnel – Servicemembers domiciled

computation whether you were always a

you have a passive activity credit for the current

outside of California, and their spouses, may

nonresident or a former resident who moved out

taxable year and, if so, how much of the credit is

exclude the member's military compensation

of California.

allowed for the current year. The amount of the

from gross income when computing the tax rate

Part-Year Resident

credit that is unallowed is carried forward.

on nonmilitary income. Requirements for

California taxes residents as if they were

military servicemembers domiciled in California

B Special Note

residents for all prior years. Therefore, a

remain unchanged. Military servicemembers

nonresident who becomes a resident must

domiciled in California must include their

Generally, California law is the same as federal

restate all prior year items using the total taxable

military pay in total income. In addition, they

law concerning passive activity credit limita-

income for all prior years.

must include their military pay in California

tions. Get federal Form 8582-CR, Passive

Renewal Communities

source income when stationed in California.

Activity Credit Limitations, for definitions.

California law does not conform to the tax

However, military pay is not California source

Personal service corporations and closely held

incentives related to “renewal communities.”

income when a servicemember is permanently

corporations subject to the passive activity rules

California law does provide a variety of

stationed outside of California. For more

must use form FTB 3802, Corporate Passive

independent, state-only economic development

information, get FTB Publication 1032, Tax

Activity Loss and Credit Limitations, instead of

area tax incentives to encourage revitalization of

Information for Military Personnel.

form FTB 3801, Passive Activity Loss Limita-

special designated areas. The Government Code

tions, and form FTB 3801-CR.

General Information

provides for the designation of enterprise zones,

Local Agency Military Base Recovery Areas

S Corporations

In general, California law conforms to the

(LAMBRAs), a Targeted Tax Area (TTA), and

The passive activity loss (PAL) rules apply as if

Internal Revenue Code (IRC) as of January 2001.

Manufacturing Enhancement Areas (MEAs).

the S corporation was an individual. This means

However, there are continuing differences

California law does not provide for a lower

that losses from passive activities may not be

between California and federal law. When

capital gains rate in any situation. California law

used to offset nonpassive income, except for

California conforms to federal tax law changes,

generally conforms to the federal rules for

$25,000 in losses from rental real estate

we do not always adopt all of the changes made

expensing IRC Section 179 property with the

activities. See IRC Section 469(i). However, the

at the federal level. For more information

exception that California law allows a maximum

material participation rules apply as if the

regarding California and federal law, please visit

deduction of $25,000. In lieu of this deduction,

S corporation was a closely held corporation.

our Website at and select “Law

the California Personal Income Tax law allows a

The material participation rules for closely held

and Legislation.” Additional information can be

taxpayer with a business in an “Economic

corporations are explained in the instructions for

found in FTB Pub. 1001, Supplemental

Development Area” to elect to expense $20,000

federal Form 8810, Corporate Passive Activity

Guidelines to California Adjustments, the

to $40,000 (depending on the designation) of

Loss and Credit Limitations. See IRC

instructions for California Schedule CA (540 or

certain specified equipment used in the

Section 469(h)(4) and the related regulations for

540NR), and the Business Entity tax booklets.

business.

more information.

Note, the instructions provided with California

Expense treatment for small business, IRC

To compute your California passive activity

tax forms are a summary of California tax law

Section 179(b)(1): California law generally

credit limitations for S corporations, use the

and are only intended to aid taxpayers in

conforms to the federal rules for expensing IRC

worksheets in the instructions for federal

preparing their state income tax returns. We

Section 179 property with the exception that

Form 8582-CR using California amounts. Enter

include information that is most useful to the

California law allows a maximum deduction of

the amount from line 21 of Form 100S,

greatest number of taxpayers in the limited

$25,000.

California S Corporation Franchise or Income

space available. It is not possible to include all

Tax Return, on line 10 and line 22 of form

The following may affect the computation of

requirements of the California Revenue and

FTB 3801-CR in place of the federal modified

your passive activity credit limitations:

Taxation Code (R&TC) in the tax booklets.

adjusted gross income.

Passive loss rules, IRC Section 469(c)(7):

Taxpayers should not consider the tax booklets

Beginning in 1994, and for federal purposes

C Who Must File

as authoritative law.

only, rental real estate activities of taxpayers

For taxable years beginning on or after

Form FTB 3801-CR is filed by individuals,

engaged in a real property business are not

January 1, 2002, California law was changed to

estates, trusts, and S corporations with any of

automatically treated as a passive activity.

clarify the method used to calculate loss

the following credits from passive activities:

California did not conform to this provision. For

carryovers, deferred deductions, and deferred

California purposes, all rental activities are

Credit

Code

income for nonresident and part-year resident

treated as passive activities.

Orphan drug credit carryover

185

taxpayers. This law changed the tax computation

Low-income housing

172

Amortization of certain intangibles (IRC

to recognize those items, and established a new

Research

183

Section 197): Property classified as IRC

method to determine percentages for computing

Targeted jobs*

166

Section 197 property under federal law is also

tax for all nonresidents and part-year residents.

*For suspended credit generated prior to

IRC Section 197 property for California

The nonresident tax forms (Long and Short

January 1, 1996.

purposes. There is no separate California

Form 540NR) have been revised to more clearly

election required or allowed. However, for

Note: Make sure to enter the code number for

show that nonresidents pay tax to California only

California purposes, in the case of IRC

your credit on your return when you are able to

on their California taxable income.

Section 197 property acquired before January 1,

claim the credit.

For further information get FTB Pub. 1100,

1994, the California adjusted basis as of January

Taxation of Nonresidents and Individuals Who

D Passive Activities

1, 1994, must be amortized over the remaining

Change Residency.

federal amortization period. Therefore, you may

See the instructions for federal Form 8582-CR

Nonresident

have a difference in net income (loss) from

for information about passive activities and

In determining California taxable income,

passive activities which involve amortization of

passive activity credits.

nonresidents compute prior year items by taking

certain intangibles.

Dispositions

into account only those items with a California

Unallowed passive activity credits, unlike

source, subject to any limitations provided by

law. For example, passive losses are limited to

unallowed passive activity losses, are not

FTB 3801-CR Instructions 2004

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Instructions For Form Ftb 3801-Cr - Passive Activity Credit Limitations - 2004

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