California can be a great market for selling goods with its large and diverse population. However, entering this market is fraught with additional tax requirements and fees. For instance, Corporations are taxed at 8.84% in additional to their minimum $800 yearly minimum franchise tax. Additionally, pass-through entities such as S Corporations are taxed at 1.5% plus an $800 yearly fee and Limited Liability Companies (LLCs) must pay taxes ranging from $800 to $6,800 each year. If you’re an individual residing in California this pass-through income is then taxed again at up to 13.3%, the highest state income tax rate in the country!
It can come as a surprise to some businesses with no sales or business assets in California that there could still be a filing requirement and of course tax due. For instance if a business is headquartered in any state such as Nevada or Arizona, performs all work in their home state, but makes the mistake of hiring some employees that reside in California, then they are considered “doing business” in California. If California considers that you are doing business in their state then tax filings and minimum fees are required. Another example is if you’re a Nevada LLC that has a small ownership in a California company that could also be considered doing business in California.
Most of the time selling goods profitably in California are worth the extra expense and headaches. An individual can easily avoid having all their income, including social security, pensions, business income from outside California, or investment income being taxed by California by becoming a nonresident. There are many tests that California uses to determine if a person is a resident of California. The main qualifiers to be classified as a nonresident and avoid California’s onerous taxes, are to spend less than six months in California, keep your main home outside of California and moving various business contacts, bank accounts, automobile registrations, and professional services such as your CPA outside of the State.
The Tax Cuts and Jobs Act (TCJA) has done a stellar job of removing all or part of the “deduction” from the Meals and Entertainment Deduction.
Business related entertainment deductions turned out to be a big loser when the dust settled after the passage of the TCJA in late December 2017. Entertainment expenses were hit particularly hard as the TCJA completely eliminates the deduction for entertainment expenses (including food purchases), for activities such as taking clients or prospective clients to concerts, movies, the theater, sporting events or amusement parks. The Act also eliminates deductions for amounts paid for memberships in any club organized for business, pleasure, recreation or social purposes.
One entertainment expense that did survive the new law is expenses employers incur for recreational, social, or similar activities primarily for the benefit of employees, such as expenses incurred for an annual holiday party or summer outing or picnic.
Businesses are allowed a 50% deduction for amounts paid for meals in conjunction with the active conduct of the taxpayer’s trade or business. However, we must take note of two changes made by the new tax act relating to meals.
First, a definition for “business meal” has been removed, and meals provided to employees traveling on business are still deductible at 50%. However, beginning in 2018 through the end of 2025, the cost of meals provided for the convenience of the employer, such as meals provided to employees who need to be available throughout the mealtime, are only deductible at 50%. Prior to TCJA these types of meals were deductible at 100%. Also, the new tax law expands the definition of meals for the convenience of the employer subject to the 50% limitation to include meals provided in the employer’s on-site dining facility. Further, beginning in 2026, no deduction will be allowed for meals for the convenience of the employer and for the cost, including meals, of operating an on-site dining facility.
While the new law ratchets down on the meals and entertainment deduction that we have become used to over the years, the deduction does survive in some forms. While customers and clients will likely enjoy fewer trips to the ball field or concert venue, employees should continue to look forward to a nice summer picnic and festive holiday party with their coworkers.
The Tax Cut and Jobs Act – How does it affect non-corporate taxpayers with business income?
The Tax Cut and Jobs Act decreased the tax rate for corporations from graduated rates of up to 35% to a flat rate of 21% beginning after December 31, 2017. The Act also added a 20% deduction for non-corporate taxpayer with domestic qualified business income from sole proprietorship, partnership, limited liability company (LLC) and S corporations, effective for tax years after December 31, 2017 and before January 1, 2026.
The 20% deduction is allowed as a deduction reducing taxable income and not allowed in computing adjusted gross income. The deduction is limited to the greater of:
The 20% deduction is also limited to qualified non-personal service businesses income. Qualified non-personal service income is defined as the net amount of domestic qualified items of income, deduction and loss from trade or business other than health, law, consulting, athletics, financial services, brokerage services or any business where the main asset of the business is the reputation or skill of one or more of its employees or owners.
The above limitations do not apply for taxpayers with taxable income below the “threshold amount” ($315,000 for couples filing jointly, $157,000 for other individuals). The 20% deduction is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly, $50,000 for other individuals.
Basically, non-corporate taxpayers with taxable income below the $157,000 or $315,000 threshold may generally claim the full 20% deduction. Non-corporate taxpayers with taxable income above the threshold with non-personal service business income may claim the deduction, but may be limited by the wage and capital limit exception or may be completely phased out.
It may not be the first thing on everyone’s mind as we head in to the holiday season but for your local CPA, taxes are certainly on the mind. Year end tax planning is always a good idea for a proactive business owner or individual but this year it may be even more important than ever with tax reform coming down the pipeline.
You can’t open a newspaper lately without seeing talks about tax reform. The back and forth and uncertainties surrounding tax legislation is making for an entertaining situation for your local tax nerd. Both the House and Senate have their own plans that are changing by the second; odds are the analysis you read one day will completely change a week later and many details we are hearing about now may be totally different by the time legislation comes across the President’s desk (if that even happens). As your average everyday business owner and taxpayer, you care about the financial well being of you and your company, but chances are you don’t have the time or patience to keep up on the constant changes happening on Capitol Hill. While you may not think any legislation will affect you in the short term, you may be wrong and there may be moves you need to make by the end of 2017.
With uncertainty in the air and the year quickly coming to an end, right now is a great time to get in touch with your accountant. We can educate you about tax reform and its specific effects on you, and help you make sure you make the right moves by year end. Having a good CPA as part of your advisory team is an invaluable resource during times like this.
It’s only November but there’s still time to make the filing of your 2017 tax return less taxing in 2018.
Withholding and Estimated Taxes. Make sure enough taxes are withheld to avoid surprises at tax time. Generally taxes are withheld from wages and other income such as pensions, bonuses, commissions and gambling winnings. Taxpayers with interest, dividends, capital gains, rents and royalties will usually make additional tax payments by making estimated tax payments. Self-employed individuals who do not pay tax through withholding will also pay estimated taxes.
Name changes. Taxpayers with name changes due to a marital status change should notify the Social Security Administration. SSA should also be notified if there’s a name change for a dependent. Notifying the SSA with name changes will ensure that the new name on the tax return matches the SSA records to avoid any delay in the processing.
Individual Taxpayer Identification Numbers. Taxpayers who use Individual Taxpayer Identification Numbers which have expired or are due to expire should apply to renew their ITIN to avoid processing delays next year. A Form W-7 must be completed as well as submission of original or certified copies of identity documents to renew an ITIN.
Between Hurricane Harvey, the fast-approaching Hurricane Irma and the various wildfires ravaging the west, unfortunately natural disasters have been all too common this summer.
The last thing on anyone’s mind living in those areas is taxes, but nonetheless, there are various tax aspects of a disaster that people should be aware of. Fortunately, this is one area that the IRS makes rapid decisions to help those in need. Below is a sampling of the latest relief for victims of Hurricane Harvey from the IRS. Those impacted by disasters should check the IRS’s page frequently as other disasters may get similar relief from the IRS in the near future.
Finally, for those who want to help and support those victims of any natural disaster, be cautious of who you make donations to. In order for donations to be tax deductible, they must be made to recognized charitable organizations under the IRS. For instance, Go Fund Me donations are typically not deductible as they go to a person and not a charitable organization. If you are donating online, make sure you are on the legitimate website for the charity. Unfortunately, it is all too common for charity scams to pop up during disasters with fake websites that are very similar to legitimate ones. You should ensure that the organization clearly has their Employee Identification Number (EIN) posted and you can use that and their name to check their exempt status on the IRS website. If you are donating a significant sum, that little bit of homework on your part is well worth it.
Recently I had the delight to visit Graceland, Elvis Presley’s former home and now an excellent place to reflect on Elvis’ life and get taken back in time to the 1970s. There I viewed many of Elvis’ cars including his pink Cadillac, a couple Rolls Royce’s and Mercedes, Lincolns and his Ferrari. His home was just how he left it back in 1977 with his dozen TVs scattered throughout the home, shag carpeting and roof, the colorful kitchen, his dad’s old office, and many other furnishings that were a flashback to the 70s.
As a CPA and tax guy, I was also fascinated with the financial documents that were displayed detailing many of Elvis’ large purchases and even his dad’s tax return after he was born showing he paid 1% tax on his income . Elvis must have trusted his dad immensely as there were dozens of checks signed by Elvis’ father Vernon as Vernon took care of all of his son’s finances. This is surprising given that Vernon spent a year in jail during Elvis’s childhood for check forgery and only had an eighth grade education.
Elvis would have benefited immensely if he would have utilized a CPA to assist his dad in tax planning and financial management. Even though Elvis was the largest U.S. taxpayer in 1973 and the highest paid entertainer for many years, he died with an estate worth “only” $10.2 million dollars. Apparently Elvis didn’t like to utilize pertinent tax deductions and had a horrible deal with his manager Colonel Tom Parker, who received over 50% of Elvis’ earnings . Parker even convinced Vernon to pay him 50% of the income from the Elvis’ estate after he died! With this mismanagement, Elvis’ estate lost $9 million in value over two years, and was only worth $1 million in 1979.
Many lessons can be learned with Elvis, but one financially is the importance of trusts for estate planning in which attorneys can be invaluable and utilizing competent and qualified CPAs to assist with tax, estate and financial planning.
In September of 2016, the IRS announced that it would start using private debt collectors to recover certain overdue federal tax debts in the spring of 2017. To implement this new program, the IRS contracted with four private collection agencies: CBE Group, Conserve, Performant, and Pioneer. In carrying out their collection efforts, these four companies are required to respect taxpayer rights and obey the consumer protection regulations established in the Fair Debt Collection Practices Act.
How does this new program work?
Considering the continual mail and phone scams that keep emerging, the IRS Commissioner warned taxpayers to be alert for new scams related to this program. When a taxpayer’s account is transferred to a private debt collection agency, the IRS will give the taxpayer written notice of the transfer. In addition, the private collection agency will then send a second, separate letter to the taxpayer verifying this transfer. The private collection agency will not ask for payments to be made on a prepaid debit card or for checks to be made out to the collection agency. All checks should be made payable to the U.S. Treasury. The IRS emphasized that even with private debt collection, taxpayers should not be receiving phone calls from the IRS insisting on immediate payment. The IRS always mails multiple collection notices before making phone calls.
There are several types of accounts that the IRS will not transfer to private collection agencies. Some of these accounts include taxpayers who are deceased, in designated combat zones, victims of identity theft, or in presidentially declared disaster areas and requesting relief from collection. If a taxpayer does not want to work with a private collection agency appointed to his or her account, he or she must notify the private collection agency in writing. Also, the IRS urges taxpayers who are unsure if they have unpaid taxes due from a previous year to check their account balances on www.irs.gov/balancedue.
For more information on private debt collection visit the Private Debt Collection page on the IRS website.
On May 11, 2017, the Tax Court issued a Memorandum Decision (TC Memo 2017-79) that addressed, among other things, the Taxpayer arguing that the software “lured” him into claiming too many deductions on his tax return.
There were a number of issues on this return that caught the eye of the IRS: alimony paid deduction, interest deduction, and deduction for other expenses. When examined by the IRS, the Taxpayer did not have much in the way of paperwork to support his positon for the deductions reported.
In addition to disallowing the majority of the deductions taken, the Taxpayer was assessed an accuracy related penalty for substantial understatement of income tax. For this penalty, the burden shifts to the Taxpayer to show that his mistakes were reasonable and in good faith. “He admitted during trial that he deducted items he shouldn’t have, and that he overstated certain losses. He tried to blame TurboTax for his mistakes, but tax preparation software is only as good as the information one inputs into it,” the Court concluded.
Tax preparation software must be used correctly to be useful for purposes of showing reasonable cause and good faith as a defense to accuracy related penalties. The majority of court cases have rejected this defense.
When preparing your return, ensure you are reviewing the return before filing it. I just received a phone call this week from someone that was asking if his tax software was properly calculating the tax on rental property he had sold. A first for him. I commend him for wanting to understand what he was filing.
Remember: You can’t blame the software!
Right before this year’s tax deadline, the IRS put out a release reminding people that some of us may not have to ask for an extension. While this advice is coming a bit late from me for the current tax year, it is definitely something to keep in mind. As the IRS notes “Taxpayers in Presidentially-declared disaster areas, members of the military serving in a combat zone and Americans living and working abroad get extra time to both file their returns and pay any taxes due.”
If you are a taxpayer in a disaster area you will often have extended time to file and pay. These extensions of time also apply to other tax-related items like contributing to an IRA. The IRS states that generally any area given a disaster declaration by FEMA is provided this relief, which is extended to relief workers, businesses and anyone who has their tax records located in the disaster area.
If you are a member of the military or eligible support personnel serving in a combat zone you will have at least 180 days after you leave the combat zone to file your tax returns and pay your taxes. As with the disaster relief, this extension also pertains to other tax-related items like contributing to your IRA. The IRS suggest checking Publication 3, Armed Forces’ Tax Guide, for further details.
For U.S. citizens and resident aliens who are living and working outside the United States and Puerto Rico, you have until June 15, 2017 (for the current tax year) to file your return and pay any taxes due. This also applies for military members on duty outside the U.S. who do not qualify for the combat zone extension. The IRS does note two items with this category of extended filing: 1) Attach a statement with your return explaining which situation applies for you; and 2) interest still applies to payments received after the standard filing deadline (generally April 15). See Publication 54 for more information.
For everyone else, just remember to ask for more time by filing Form 4868.