Tax News and Tips

Franchise Tax Board get help from DMV

2010-01-07T08:16:00.000-08:00

The Franchise Tax Board has a new test program with the DMV to use vehicle registrations in some unique ways. The DMV will share information on registrations of vehicles valued at over $40,000. The Franchise Tax Board will be looking to see if the owners have filed tax returns and also to see if any owners have the ability to pay outstanding debts that were previously determined to be uncollectible.

Use Tax Registration Forms Arriving

2009-10-22T08:32:00.000-07:00

In case you haven’t heard, the State of California is having a bit of a budget crisis these days. You are probably like me—simply at a loss (after having spent countless sleepless hours trying to find a way to do your part and chip in to help Arnold out of this mess). Well our friends at the Board of Equalization (BOE) can now sleep better knowing that they have done their part after their recent announcement of a plan to raise an expected $81 million to add to the state coffers. Who knows how they came up with that number?

The BOE has announced that, beginning next April, businesses that don’t even have resellers permits will now have to submit a report and remit “use” tax to the state. What you may be thinking is use tax. Use tax is the term used to describe the sales tax that you avoid by buying computers or any other product out-of-state and the vendor doesn’t charge sales tax. Venders will only charge CA sales tax on out-of-state purchases if they have an office in California. Believe it or not, we are supposed to pay use tax on all of those out-of-state purchases to make up the loss of sales tax revenue to California and create a more level playing filed for California businesses. With our local sales tax at 8.85% it can be pretty inviting to look for out-of-state vendors. I just received the registration form yesterday.

So now you’re thinking so what?

Here’s what: The BOE has started sending out notices of these new rules to 184,000 businesses with gross revenues over $100,000. Even if you don’t receive a notice letter from the BOE, all businesses with gross revenues over $100,000 including service businesses will now be required to register and of course report and pay use tax (if they owe any).

While this is nickel-and-dime stuff for many small businesses, and just another example of nuisance regulation and reporting, larger businesses can get stuck paying a big bill. One of my clients (without consulting me) made some purchases of chemical products out of state and was subsequently audited by the BOA. He was audited in spite of the fact that he is a construction contractor and was not making retail sales and he was stuck with a $30,000 bill for unpaid use tax. Another client bought an industrial oven out of state for $100,000 (without consulting me) and he was also audited and stuck with a hefty bill.

Everyone needs to know this

In case you didn’t know, there is also a line on your personal tax return where you are supposed to report your personal use tax form all of your personal purchases out of state. See California Form 540, line 49. For some reason no one seems to voluntarily report anything on this line.

On a happier note, the state has come up with enough cash to start paying out refunds. If you, like me, received a voucher instead of a check for your state tax refund, you can now send back the voucher and get an actual refund as of September 4, 2009. Oddly enough the State didn’t do much to publicize that they had moved the date up from mid-October.

Use Tax

2009-09-26T09:20:00.000-07:00

Beginning April 2010, California businesses will be required to report and pay any use tax owed for subject purchases made in the preceding year, 2009, under legislation recently enacted, it was announced today by the Board of Equalization (BOE). The BOE announces that it has begun notifying 184,000 businesses in the state. Here's a link to the announcement.

Click here for Board of Equalization's Use Tax Announcement

Workers Comp Issue

2009-08-04T14:28:00.000-07:00

I have a client who hired an employee in another state a couple of years ago. Initially he thought that his insurer would have to write an additional policy and the cost would outweigh the benefits. In 2008 he added an additional employee in a third state. He asked for my assistance in calculating the subject wages for his insurance broker and I took the initiative to make a phone call and inquire about the two out of state employees. It turns out that only an additional rider to the policy is required so they will now have full coverage instead of a potential loss if one of those two employees is injured on the job and files a claim. It always pays to make the extra phone call.

Make Work Pay Credit

2009-02-27T17:44:00.000-08:00

The new federal tax credit will show up at $10 extra take how per week starting April 1, 2009 as new withholding table are issued. Well that should ensure good times for all and an end to the current recession. The first time home buyers credit is much more significant. It offers an $8,000 credit for first-time homebuyers who buy a residence before December 1, 2009 and unlife the $7,500 credit enacted last year this credit doesn't have to be repaid unles syou sell your home within three years.

OT Exemption for Computer Professionals

2009-01-22T17:12:00.000-08:00

Effective Jan 1, 2009, California has increased the minimum hourly rate to $37.94 or a salary of $79,950 in order to qualify for the overtime exemtion. Workers must be paid at least that amount AND qualify under a definition for a skilled employee who spends at least 50% of his/her time in top-level intellectual or creative work that requires the exercise of discretion and independent judgement. Typically we are talking about software engineers, programmers and systems designers who are highly skilled. Other than high-tech and engineering employees it's hard to meet this definition. See CA Labor Code Sec. 515.5 for the law. You can Google it of course.

Small Business Audits Up

2009-01-02T16:06:00.000-08:00

The December 2008 issue of the California CPA references a Univ. of Syracuse study finding that small business audits were up 41% in 2007 versus 2005.

Latest IRS audit statistics

2008-12-23T09:31:00.000-08:00

As reported by Associated Press yesterday.

The number of audits of individual returns increased slightly in 2008. Those who earned less than $200,000 had about a 1 percent chance of being audited. Those with incomes of $200,000 and more had about a 3 percent chance of being audited.

Meanwhile, taxpayers with incomes of more than $1 million had a 5.6 percent chance of being audited, a drop from 6.8 percent the year before. The number of audits for millionaires dropped even though their ranks increased by nearly 54,000.

FTB Audits Muni Interest

2008-12-14T08:36:00.001-08:00

We've received word through the grape vine that the Franchise Tax Board has begun sending out audit notices on 2005 tax returns and assessing tax on muni bond interest on tax returns where it's not clearly indicated that the interest is from California bonds. With the state budget crisis, FTB may find a bountiful harvest in this area.

Breaking News

2008-12-01T09:36:00.000-08:00

I just this Breaking News email from CNN -- "The U.S. entered a recession in December 2007, according to the National Bureau of Economic Research." I almost fell off my chair laughing. How can they call it breaking news to annouce something that apparently took place a year ago. It only took researchers a year to figure this out.

2009 Mileage Rates

2008-11-26T13:07:00.000-08:00

The IRS just released the 2009 optional standard mileage rates to be used for business, medical and charitable purposes.

55 cents per mile for business
24 cents per mile for medical
14 cents per mile for charitable purposes

These rates are slightly lower for business and medical than the rates for the 2nd half of 2008 which were 58.5 and 27 cents with no change to the rate for charitable purposes.

Possible moratorium on required distributions

2008-11-20T12:35:00.000-08:00

A US Senate proposal released yesterday includes numberous pension related provisions one of which would place a one year moratorium on required minimum distributions from
individual retirement accounts for 2009. If passed into law this would be a nice break for retirees who don't want to draw down their already reduced investments.

12/14/08 Update. The Worker, Retiree and Employer Recovery Act (H.R. 7327) suspends the IRS requirement that individuals withdraw a minimum amount of money from their retirement accounts every year once they reach the age of 70-1/2. Passed by the House and Senate and expected to be signed into law. Will apply only to 2009 required distribution not the 2008 rmd.

Who gets the deduction?

2008-10-18T14:45:00.000-07:00

This comes up fairly often with the mortgage interest deduction. Taxpayer qualifies for a loan so his/her child can live in the house and the child pays the mortgage and property taxes. Nice to see that the taxpayer got a favorable decision. In a recent tax court case N.G. Njenge, the court ruled that a married couple could get the mortgage deduction because they were beneficial owners of the house in spite of the fact that they were not listed on the title since they paid all the payments and maintenance for the house. In the court case both the title and the mortgage were in the name of their son.

IRS New Computer System

2008-10-17T10:07:00.000-07:00

Today's LA Times reports the the IRS is putting into service $2 billion worth of new computer systems in spite of warings from the Inspector General of Tax Adminsitration over security issues.

http://www.latimes.com/business/la-fi-irs17-2008oct17,0,2203857.story

This just confirms my fears about providing bank account information to the IRS for electronic payment or electronic deposit of refunds. I think I'd rather use a check.

I think the way the IRS spokesman stated that no data had been compromized so far. Sounds like only a matter of time before we read about a massive hack into the IRS database.

New Tax Bill

2008-10-07T08:10:00.000-07:00

There are numerous tax related provisions included in the Emergency Economic Stabilization Act that President Bush just signed. Details to follow in a couple of weeks after the dust settles.

AMT relief

2008-09-20T13:22:00.000-07:00

Congress is getting ready to renew dozens of expiring tax breaks and credits and do it's usual one year patch for the AMT. At least this year, they're not waiting until December to act.

In the article I read on the website www.cqpolitis.com, Charles Rangel is quoted saying that the Senate's bill "presents problems", none of which I think will be overwhelming. Chas has his own problems these days dealing with an IRS investigation to determine why he can't figure out how much income he needs to report on his tax return.

Back to the AMT, without seeing the legislation, I assume this year's bill will simply increase the exemption amount a few thousand dollars from last year so as no to ensnare even more unwary taxpayers in its evil web. The more things change, the more they stay the same, at least on a real dollar basis.

New Mileage Reimbursement Rates

2008-06-24T09:48:00.001-07:00

The IRS Announces New Mileage Rates

Effective July 1, 2008 through December 31, 2008, the new mileage rate is 58.5 cents a mile for business miles driven, and 27 cents a mile for medical and moving miles. Charitable mileage rate remains unchanged at 14 cents a mile.

Use Tax Audits

2008-06-21T12:04:00.001-07:00

In 2007 the California Board of Equalization performed 117 use tax specific audits assessing over $10 million in tax on businesses that failed to report use tax on their purchase of business assets and supplies. Many businesses assume that if they are wholesalers or service providers that they'll never get audited but the Board of Equalization. Think again. Not only does the BOE look for use tax omissions on sales tax audits but they also randomly audit businesses that don't ordinarily charge tax on their sales. That doesn't sound like a lot of audits but those 117 are in addition to the 8000 sales tax audits performed every year. One more reason to make sure that you understand the rules.

How Do You Calculate Income?

2008-06-01T12:33:00.000-07:00

The IRS just released a fact sheet to help small business owners get a better understanding of how to determine their income and it's available for your viewing pleasure at:

http://www.irs.gov/newsroom/article/0,,id=182821,00.html

"IRS research indicates that understated business income contributes significantly to the tax gap..."

Well that's no surprise to anyone who has an IQ over 80.

California conformity to new Federal depreciation rules

2008-05-15T10:30:00.000-07:00

California legislators always manage to stay a few steps behind federal law changes. The federal Economic Stimulus Act of 2008 has some nice accelerated depreciation incentives that are not yet available under CA law. New legislation is now being proposed in the CA assembly to conform to those new federal rules but don't hold your breath. We've seen a pretty consistent pattern of CA not conforming to changes that reduce taxes due to the state budget crisis so I'll be surprised if this goes anywhere. We're still waiting for CA to conform to changes allowing HSA deductions and conformity and that issue has been in limbo for several years.

Economic Act Stimulus Rebates

2008-04-24T10:08:00.000-07:00

There is still time to submit a 2007 form in order to receive an economic stimulus payment, even though April 15 has passed. People with no tax filing requirement, but at least $3,000 in qualifying income, should file a Form 1040A. To receive an economic stimulus payment this year, the form must be filed by October 15. The rebate will be between $300 and $600 per person for low income filers.

Qualifying income includes earned income, and certain Social Security payments. These Social Security benefits include retirement, disability and survivor payments, but not Supplemental Social Security Income (SSI).

If you're filing for an elderly parent, be careful to see whether the parent can be claimed as your dependent.

2008 Mileage rates

2007-11-28T07:32:00.000-08:00

The IRS just released the standard mileage rate for business mileage for 2008 which will increase to 50.5 cents per mile, an increase of two cents over the 2007 rate. Employers can reimburse their employees at any rate up to the IRS rate however, if they reimburse at a higher rate the excess is treated as compensation to the employee.

For some strange reason the rate for medical mileage has been decreased from 20 to 19 cents for 2008 and the charity rate stays the same at 14 cents.

Senate Bill on Independent Contractors

2007-11-16T11:54:00.000-08:00

Federal legislation. Sen Bill 2044, has been introduced to eliminate the IRC section 530 protections for businesses that employ contractors. Sec 530 allows a business to avoid penalties for misclassifying employees as contractors if the business can prove that this is the industry practice. We'll see if this goes anywhere.

Used Clothing Donation.... DENIED!

2007-08-16T16:35:00.000-07:00

Can you believe that the IRS actually questioned a mere $55,000 charitable deduction claimed for used clothing on the 2002 tax return of a New York investmnet banker who earned $115,000. Not to be a chauvenist, but it was a woman. The audit ended up in tax court and she was allowed a $9,000 deduction and the $3,000 accuracy related penalty was abated.

IRC § 6662 imposes an accuracy-related penalty on any portion of an underpayment attributable to one or more of the following: (1) negligence or disregard of the rules or regulations; (2) any substantial understatement of income tax.

I don't know how she managed to pay her rent and buy all of those clothes on such a low salary. Her credit card bills must be quite large.

Burden of Proof

2007-08-09T08:53:00.000-07:00

Two recent tax court memos emphasize that taxpayers must be able to prove their deductions. In both court cases the IRS disallowed deductions and the taxpayers could not produce decent books and records to support their claimed deductions. In the case of Hon Pui Yip, the IRS disallowed $276,362 of expenses reported on Sch C as self employment expenses. Ouch.

Moral: Don't expect to get a break from the IRS if get audited and have poor records or worse yet no records at all, so save those receipts, bills and invoices.

S Corp. Compensation Issue - Salary vs. Distribution

2007-07-28T14:17:00.000-07:00

The IRS is getting more aggressive in questioning low salaries of shareholder/officers when compared to their distributions. This area has been open to abuse as many owners have been taking zero or little salaries to avoid paying payroll tax and instead paying themselves through corporate distributions. Another area that the IRS is increasingly questioning in audits is whether the shareholder/officers who own more that own 2 percent of the stock have been excluded from the corporation's fringe benefit plans. This rule although seemingly unfair is frequently ignored can result in a quick audit adjustment. It's also one of the advantages of creating a C corporation when compared to creating an S corporation. For older shareholders having higher insurance costs and more out of pocket medical expenses, the ability to participate in a medical reimbursement plan and obtain a deduction at the corporate level can be a deciding factor in entity selection. According to a recent article in Accounting Today, the IRS audited nearly 14,000 S corporations in 2006 up 34% from 2005.

IRS announces more individual audits to be done

2007-06-30T13:25:00.000-07:00

Coming this October, the IRS will launch a new National Research Program (NRP) compliance study on individuals to update the agency's audit selection tools. They call this a research program which makes it sounds very scientific. Most individuals will have specific lines of their returns confirmed through in-person audits with an IRS examiner. That sounds like fun for the lucky chosen candidates. However, some will not be contacted if the IRS can obtain matching and third-party data that confirms the accuracy of their return. That's nothing new. The targeted research design of the new individual research program avoids the need for IRS agents to routinely check all the lines of a taxpayer's return. Basically, these are called line item audits so be careful what you claim. Of course, nothing stops an agent from asking more questions once they start lookng at your return.

Tax Return Retention Policy

2007-06-14T08:40:00.000-07:00

How long should you keep you personal and besiness tax returns? You should keep you personal returns permanently and any corporate or partnership returns at least six years after the dissolution of the entity. If it's too much paper to handle you can always scan them and burn them onto a CD, although I imagine CD's will be as common as floppy disks in a few years.

New Tax Provisions - Small Business & Work Opportunity Tax Act

2007-05-31T08:08:00.000-07:00

On May 25th, President Bush signed this new law with a long name. Only a few of the tax provisions are likely to affect the middle class and all of the business provisions are specific to small audiences. The new law raises the age of those subject to the "kiddie tax." from under-18 to under-19 (under-24 if a student) at which a child's unearned income in excess of $1,700 is taxed at the parent's rate. Until 2006, the cut-off age was 14 and now it's been increased again to prevent parents from shifting investment income down to their children at the child's lower tax rate.

The law also increases the penalty for bad checks written to the IRS from $15 to $25.

IRS Sends out erroneous notices

2007-05-10T13:50:00.000-07:00

I just received this alert hot off the presses.

According to the IRS, taxpayers are erroneously receiving CP2000 notices informing them that they did not include their state tax refund as income when they were subject to AMT in the prior year. The IRS is taking immediate action to prevent further erroneous notices from being issued. Programmers are currently working to identify and stop erroneous notices that have not yet been mailed. The IRS has also issued an alert to all Automated Under Reporter tax examiners of the issue so errors can be resolved. If any of your clients have received an erroneous notice, please respond as directed in the notice. The IRS has apologized for all of the confusion and inconvenience.

Comment: Since the programers are working overtime to make corrections the problem should be resolved by the end of the year 2010.

Deadly Deadlines & AMT Rumours

2007-05-02T17:22:00.000-07:00

The IRS allows three year to amend tax returns. In a recent federal district tax case a taxpayer learned that deadlines can be deadly. The taxpayer filed his amended return three years and two days after the original April 15 deadline because April 15 fell on a weekend and his return was due on April 17. The court ruled that the three year statute runs from April 15 even if the deadline is extended when April 15 falls on a weekend so the taxpayer forfeited his refund.

In other news, members of Congress are rumoured to be considering renaming the AMT (Alternative Minimum Tax) the Almost Miniscule Tax or possibly the Absolutely Manageable Tax to assuage rising public anger about the AMT.

April News - Conversations with the IRS

2007-04-19T16:14:00.000-07:00

The IRS Commissioner Mark Everson resigned today after a four year reign. He's moving on to lead the Red Cross. Our gain is their loss. Some credit him for bringing the IRS into the technology age. Well... I beg to differ. The IRS is still way behind the times. The IRS computers are very old and the service reps can't access all of the information that should be available to them. I always dread calling the IRS even though I supposedly get special service by calling the "Practitioner's Help Line". Today, I spent an hour on the phone working my way through four service reps in my attempt to find out how to file back payroll tax returns for a client that got caught issuing a Form 1099 to a service provider who later filed an unemployment claim. The EDD determined that the person was really an employee, hence my phone call to the IRS. The last rep starting quizzing me on where I found my information about internal revenue code section 3509 on the IRS website. Code section 3509 provides relief from penalties for employers caught in this all too common situation. Aren't they supposed to help me find information and not the other way around? The moral of this story is talk to your accountant before assuming the person you hire is actually an independent contractor. The IRS has published a 20 factor list to use as a guideline. Just Google "20 factor IRS list" to find it. Of course the State of California's EDD has their own list which is slightly different to complicate matters.

March 2007 News

2007-03-15T15:16:00.000-07:00

The National Taxpayer 2006 Annual Report to Congress was just issued. This annual report lists the top 20 problems facing the taxpayer (us) today. At the head of the class is the AMT. Congress keeps pretending to do something about eliminating the AMT but nothing seems to get done except a lot of name calling and complaining about how cruel this tax is to the middle class.

According to a current article in Accounting Today on proposed new tax legislation, Congress is attempting to tie an increase in the minumum wage to a "Small" business relief package under the premise that small businesses will be hurt by the increase to the minimum wage. Bob Scharin, senior tax analyst at Thompson Tax and Accounting is quoted saying "the ones paying the extra wages may not be the ones getting the tax relief". Why does this not surprise me? The tax relief will go to larger small businesses, those that could be aptly named smaller large businesses or not too big - not too small businesses.