California YCTC zero-earned-income path tests net earned income instead of wages, and ignores self-employment, S-corp and capital losses in the net loss limit #9880

Summary

For a filer with zero or negative earned income, the California Young Child Tax Credit requires net losses of $30,000 or less and wages of $30,000 or less (both indexed; $32,490 in 2022). ca_yctc applies these two tests to the wrong amounts:

1. Wage test: it compares tax_unit_earned_income (wages plus net self-employment income) to the limit. A filer with $71,846 of wages and a $92,009 self-employment loss has earned income of −$20,163, so the wage test passes, although the wages are over the limit.
2. Net loss test: it uses −irs_gross_income. Gross income does not include self-employment, S-corporation or capital losses, so a large business loss gives a "net loss" of $0.

In the TAXSIM-35 census comparison, one California household (2022–2025) has the last pattern; TAXSIM also gives the credit there (question filed separately in PolicyEngine/policyengine-taxsim).

Statute

R&TC § 17052.1(b):

"(1) 'Qualified taxpayer' means an eligible individual who has at least one qualifying child and who satisfies either of the following: (A) Has been allowed a tax credit under Section 17052. (B) Meets all of the following requirements: (i) Would otherwise have been allowed a tax credit under Section 17052, but has earned income, as defined in Section 32(c)(2) of the Internal Revenue Code, as modified by Section 17052, of zero dollars ($0) or less. (ii) Does not have net losses in excess of thirty thousand dollars ($30,000) in the taxable year. (iii) Does not have wages, salaries, tips, and other employee compensation in excess of thirty thousand dollars ($30,000) in the taxable year."
"(2) For each taxable year beginning on or after January 1, 2022, the amounts specified under clauses (ii) and (iii) of subparagraph (B) shall be recomputed annually ..."

Form

2022 Instructions for Form FTB 3514, Step 8, "Qualifications for Young Child Tax Credit (YCTC)":

"Additional requirements must be met if you would otherwise have been allowed the California EITC but you have earned income of zero dollars or less: You do not have total net losses in excess of $32,490 in the taxable year (this amount will be indexed annually). You do not have total wages, salaries, tips, and other employee compensation in excess of $32,490 in the taxable year (this amount will be indexed annually)."

Line 23a: "If the amount entered on line 23a exceeds $32,490, stop here, you do not qualify for the credit."

Line 23b:

"For purposes of this line, total net loss means the amounts by which total losses generated during the year exceeds total income, without regard to utilization limitations. Use Form 540 or Form 540NR, line 17 (without utilization limitations) when calculating the total net loss amount."

Proposed fix

In ca_yctc, for the zero-or-negative-earned-income path:

• (i) require tax_unit_earned_income <= 0;
• (ii) measure the net loss as max(0, −total income), with total income = ca_agi with the capital loss limit removed (− loss_limited_net_capital_gains + net_capital_gains + capital gain distributions);
• (iii) compare employment_income (wages) to the limit.

The phase-out line that #9818 changes is not touched.