The House, Senate and White House have reached a deal on dozens of tax extenders ( many retroactive to 2018) as well as the all new SECURE ACT, which makes significant changes to various retirement-related provisions impacting taxpayers and their employers. The President is expected to sign the bill.
A few highlights of these changes include:
Dear Friends and Valued Clients:
Hoping everyone had the Happiest of Holidays! Congratulations to the Washington Nationals on their first World Series victory in Franchise history. As this is written, the country as a whole is going through some trying times but we will get through them. In the tax world, not too much has happened; mostly clarifications however the State of California is undergoing some large changes which we will discuss.
Let’s talk taxes:
For 2019, the President has ended the shared responsibility penalty which required all taxpayers to have health insurance…in ENGLISH NO PENALTY IN 2019 for not having health insurance; however, you may still have received the government subsidy helping to pay for your coverage. IF so, you will received FORM 1095 A (usually page 9 of the health booklet). I NEED THIS FORM to calculate if you need to pay back some of the subsidy you received. BEGINNING 1/1/2020, CALIFORNIA MANDATES HEALTH COVERAGE FOR ALL CALIFORNIA RESIDENTS. The program is similar to the old Federal program except you need to exceed 600% or the poverty line rather than 400%. There are penalties for not having coverage
$12,200 (Single); $24,400 (MFJ); $18,350 (HH)
ALTERNATIVE MINIMUM TAX:
This is just FYI: Only 78,000 taxpayers were subject to the AMT for the 2018 tax year with the government receiving an additional $967 million; in 2017 4 million taxpayers were subject to the tax and the AMT owed was $21.7 billion…Now that gets a “WHAT A DEAL”.
CHILD TAX CREDIT:
Children MUST have a Social Security number to be eligible.
MILEAGE REIMBURSEMENT FOR 2019:
58 cents. Charity: 14 cents; medical: 20 cents.
Your books (QuickBooks or whatever you are using) MUST break out entertainment from Meals. This is now required or you get nothing on audit.
RENTAL REAL ESTATE AND THE QBI DEDUCTION:
This area has been the “hot” topic for most of 2019. The question…Does rental property qualify for the 20% QBI deduction? Yes, BUT if the owner of the rental property, or agents, spend 250 or more of rental services on the enterprise. A property you may own that is TRIPLE NET LEASE does NOT qualify. Here are the requirements, 1) Separate books and records must be maintained reflecting rental revenue and expense; 2) 250 or more hours of rental service must be performed with respect to EACH rental; 3) MUST keep contemporaneous records (waived for 2019); 4) Must attach a signed election statement to your return and 5) The requirements must be met annually.
Rental services that count towards the 250 requirement; advertising, negotiating leases, Verify information contained in applications, rent collection, daily operation payment of expenses, maintenance including supplies, management, and supervision. DRIVING TO AND FROM REAL ESTATE, although deductible is not part of the 250 hour requirement.
IRS is issuing 1 of 3 letters when they believe you are trading in virtual currency. If you have traded any virtual currency, you have to report it as like kind exchanges are no longer available. In addition, Coinbase has been subpoenaed to provide records of all holders of virtual currency.
Taxpayers can now elect to defer all or a portion of their capital gain if:
ORGANIZERS AND CHECKLISTS:
If you would like an organizer showing the previous year’s items, please call me and I will send you one. If you prefer a checklist, please go to www.censoprano.com. There you can find a generic organizer and the checklists.
S Corporations are due March 15, C Corporations are due April 15; Partnerships are due March 15.
Please let me know if you DO NOT want me to e-file your return. All states are requiring e-filing unless you have reasonable cause.
LATE FILING PENALTIES:
Please note that filing an extension is an extension of time to FILE your tax return; it is not an extension of time to PAY your taxes due. So if you owe money and file AFTER April 15, IRS will charge a penalty which is .5% of the tax due plus 6% interest. This is calculated on a monthly basis. You can only avoid the penalty if you pay your tax IN FULL by the due date. Sometimes that is not possible because you have not received certain information such as a K1 schedule. Beginning in 2019, IRS is mandating that if you file your return subsequent to April 15 and have a balance due, the penalty and interest will be reflected on the bottom of the tax return.
I must have an email or phone call verification from you asking for an extension. This is due to the problems concerning identity theft. Please make sure you let us know you want an extension otherwise it will not be filed.
1099’s AND PENALTIES:
You MUST issue 1099’s by January 31. If you file these later, the penalty is $260 per return not filed.
IF you are sending me your papers by email, please ask me for my portal “VERIFYLE” I will send it to you and your information will be protected. The old email address is being shut down.
In English, this is usually Uber and Lyft drivers; but could also reflect items sold on EBAY. Usually these gig entities do not send a 1099-MISC but rather a 1099-K. Please be aware of this.
I will be posting on the website the various deductions afforded to these drivers.
For divorce decrees finalized in 2019, alimony is not taxable to the recipient and not deductible by the payer. Decrees prior to 2019, if you wish to follow the new rules, you must amend your decree in writing.
Must now exceed 10% of your adjusted income. A DNA collection kit (like 23 and me) is now deductible for health purposes; but any portion of DNA testing that is attributable to ancestry testing is NOT!
If the solar was placed in service ion 2019, the credit is 30%; 2020 26%; 2021 22%
Reached its maximum number of cars sold. IF you took possession in the first half of 2019, your credit is $3750; in the second half you get $1,875.
My musician friends are in a frenzy over this one! Beginning 1/1/2020, most workers will now be presumed to be an EMPLOYEE for purposes of the Labor code following a 3 factor test: A) The worker is free from control and direction of the hiring entity in connection with the performance of the work, B) The worker performs work that is outside the usual course of the hiring entity business; C) The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
There are numerous exemptions from this new rule which I will post on the website.
Maximum IRA $6000 (you might not qualify); Maximum SEP: $56,000 based on a formula;401k maximum $19,000 under age 50; $25,000 50 and older.
The IRS is receiving incredible amounts of questions concerning victims of tax–related identity theft. What is this??
Here is a true example:
THE IRS NEVER SENDS NOTICES OF REFUNDS OR AUDITS BY E-MAIL. THEY NEVER ASK FOR DATA IN AN E-MAIL.
If you believe you might have been a victim of identity theft, call IRS at 800-908-4490.
Effective July 1, 2014, through June 31, 2022, qualified taxpayers who make qualified purchases may claim an exemption from the state portion of California’s sales tax.
The state tax rate is currently 4.1875%. The purchaser must still pay the local/district tax.
A “qualified taxpayer” is a business primarily engaged (more than 50%) in:
A qualified taxpayer with multiple or single physical locations (or portions thereof), designated as “cost centers” or “economic units,” is eligible for a credit where a qualified activity is performed, as long as the taxpayer maintains separate books and records for the establishment.
Example: ABC Winery, LLC is comprised of three different operations: the vineyards, the winery, and a tasting room. The LLC does not qualify at the entity level because more than 50% of the gross receipts come from grape (agriculture) and wine (retail) sales. However, as long as the LLC keeps separate books and records, the winery establishment would qualify as a manufacturer eligible to claim the exemption for qualified purchases.
The 50% test is measured by gross revenue (including inter-company charges) from, or operating expenditures in, a qualifying line of business in the prior financial year.
Alternative ways to qualify
A taxpayer who does not qualify using the standard 50% test may still qualify if:
• At least half of its employee salaries and wages, value of production, or full-time equivalent employees are in a qualifying line of business;
• A combination of its qualifying lines of business exceeds 50% (e.g., its manufacturing activities combined with its R&D activities); or
• It qualifies using any of the standard or alternative tests for the one-year period following the property’s purchase date rather than for the preceding financial year.
Qualified tangible personal property (TPP) includes, but is not limited to:
Not qualified TPP
Qualified TPP does not include:
The property must be used:
Leases of qualified TPP that are classified as “continuing sales” and “continuing purchases” under 18 Cal. Code Regs. §1660 may qualify for the partial exemption as long as all other conditions are met. Rental payments made after June 30, 2014, qualify for the exemption even if the lease was entered into prior to July 1, 2014.
Sellers must obtain a partial exemption certificate at the time of purchase or lease (or lease period beginning after June 30, 2014, for leases entered prior to July 1, 2014).
A special exemption certificate is available for construction contractors. The exemption certificates, including a blanket exemption certificate, are available on the BOE’s website www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Sellers, but sellers may accept any document as long as the document contains specified information.
Taxpayers who realize they have qualified for the exemption after the purchase may provide the seller with an exemption certificate, and the seller must apply for a refund by filing a refund claim (using Form BOE-101, Claim for Refund or Credit) with the BOE within the limitations period established by RT&C §6902. However, if the purchaser paid use tax on the transaction, the purchaser may apply to the BOE for a refund.
January 1, 2014, taxpayers who complete a like-kind exchange of California property for property located out of state are required to file Form 3840, California Like-Kind Exchanges, an information return, with the FTB.
The form (Form 3840) is not yet available for review, but we do have answers to some of the questions you have been asking.
*UPDATE* The form is now available at www.ftb.ca.gov
The filing requirement
The information return must be filed for the year in which the exchange is completed and each subsequent year that the gain or loss is deferred, regardless of whether the seller/exchanger has any other California franchise tax, income tax, or information return filing requirement.
The FTB may estimate net income — using any available information — and assess tax, interest, and penalties if:
However, the FTB has informed us that for reverse exchanges that began in 2013, where the original property was not transferred until 2014, the information return will be required.
Example: Fred exchanged an apartment building in California for another apartment building in Texas through a reverse IRC §1031 exchange. In December 2013, Fred identified the Texas apartment building he wanted and purchased it. At that time, he had not yet sold his California apartment building. Fred sold his California building in January of 2014 and successfully completed his IRC §1031 exchange. Because Fred did not relinquish his California property until 2014, he is subject to the information reporting requirement.
Answers to your questions
In addition to the form, the FTB is working on FAQs on this topic, and here are some of the answers they have provided to us:
Q: If I continue to be a California resident after exchanging California property for out-of-state property, can this form be filed with my California Form 540?
Q: Will the due date of the new information form be the same as the income tax return due date (generally April 15)?
A: Yes, the due date for the information return will be the due date of the income tax return.
Q: Must I track and identify replacement property if that property is disposed of in a subsequent exchange for property outside of California?
A: Yes. You will be required to continue reporting, although you have acquired a new replacement property.
Q: Will the form have a “final” checkbox to indicate no future forms need to be filed? For example, I have disposed of the property and recognized all deferred gain, or the replacement property is passed to beneficiaries upon the death of the owner.
FTB accepting comments
A public draft of Form 3840 will be posted on the FTB’s website around mid-September 2014 to allow for public comment. We will notify you as soon as the form is available.
*UPDATE* The form is now available at www.ftb.ca.gov
In the meantime, an e-mail address has been established for submitting comments or suggestions for Form 3840. While it is difficult to comment on a form you have not yet seen, the FTB has noted that suggestions or concerns can be e-mailed to 1031AnnualFiling@ftb.ca.gov.
Mortgages: Form 1098 (you receive this from the lender) will be different starting in 2016 ( tax filing year 2017). The 1098 will include the amount of mortgage principal at the start of the year, the mortgage origination date, and the address of the property securing the loan.
Estates and Trusts: Effective for Tax form 706 filed after July 31, 2015, heirs are now required to use the value of an inherited asset as shown on the Form 706 as the basis for the asset or the value as adjusted by IRS or court ruling. If you use a basis higher than reported, you may be hit with a 20% substantial understatement penalty.
FILING DUE DATES ARE CHANGING FOR BUSINESS RETURNS:
Beginning in 2016, partnerships are due 2 ½ months after the year end, March 15 for calendar year partnerships. That represents a month earlier than now. This makes partnerships and S Corporations due at the same time. This gives preparers time to transfer the data from the K1 to the 1040 in time for April 15. C Corporations will be due 3 ½ months after the year end., except for fiscal year corporations (June 30 as example). Partnerships can request a six month extension; Corporations 5 months.
Unmarried filers who jointly buy a home get a tax break on the mortgage interest. The $1 million loan cap on home mortgages applies on a PER-TAXPAYER basis and no longer on a PER-RESIDENCE basis. Also applies to the $100,000 home equity debt.
Firms that legally sell marijuana can now deduct the State excise Tax fees on the marijuana sales. They are still not allowed to deduct business expenses except the cost of the marijuana.
Know the Liability Hazards….Whether You Are One or Hire One
by Ronda Jones Forrest T. Jones & Company
Independent contracting for accounting services is a popular way to handle work overflow. However, if the contracting relationship is not handled correctly, it can create significant liability exposure for both sides. It is becoming more common for businesses to hire independent contract accounting or tax professionals to help with seasonal workforce needs or special projects. Whether you are the contractor, or are doing the hiring, be informed about liability exposure differences between independent contractors and employees. Minimize disputes by utilizing a suitable contractor agreement, making sure that insurance policies are in place and confirming the policies contain adequate language to appropriately defend either party in the event of an error or injury. (This article doesn’t particularly address the various IRS-determining criteria factors in these relationships).
The old adage “An ounce of prevention is worth a pound of cure” certainly applies to the decision to utilize a written agreement in an independent contractor relationship, even when involving good friends. Of course, the IRS views a written agreement as one of the determining factors of a true contractor relationship, but here are some considerations about liability.
An employer should consult an attorney about the language of its basic agreement(s) for each category of contractor and for length of hire, in particular as to hold harmless, non¬compete and insurance clauses, and whether a “common-law” employment status could be imposed in your particular jurisdiction or situation. Certain language, such as to non¬compete clauses, could impact the way the IRS categorizes the employer-independent contractor status, and sample agreements from “forms” books usually don’t address unique jurisdictional issues. Also, you should expect the need to occasionally modify the basic agreement language for certain hiring circumstances.
A contractor may wish to consult an attorney before signing a services contract, particularly with respect to any hold-harmless or indemnification agreements to ensure the contractor isn’t being held fully liable for all mistakes, but only those resulting from gross negligence or willful misconduct on their part. Consideration should also be given to insertion of a liability limitation cap for damages clause for errors or omissions you may cause. Confidentiality and non-compete language may need to be modified if it is unrealistic for your future earning potential or tailored to give you adequate protection if you are engaged in a lawsuit.
Here are some insurance concerns to consider, and an attorney may suggest that in some circumstances the contractual agreement also address maintenance of insurance policies.
If you’re the employer, you may require that the contractor provide evidence of certain types of insurance in the event the contractor causes or contributes to a claim. For example, in the case of an accounting firm hiring an independent contractor to prepare and sign off on tax returns for third parties, the employer might require the contractor maintain professional/errors & omissions liability to cover claims arising from errors or omissions.
If the contractor is meeting your clients at the clients’ home or business, or the contractor’s own home or business, the employer’s commercial general liability insurance likely protects the employer for the contractor’s actions, such as an injury to a client or damage to a client’s property, as long as the independent contractor is performing services within the scope of the engagement; however, it is best to notify your agent anyway (because your initial application may have required such disclosure) and get written confirmation of coverage, especially if you can’t find the applicable policy language. Since there is the possibility of a finding against the employer for joint liability with the contractor, the contractor should be required to provide the employer with evidence of homeowners or general liability to cover injuries like slip and fall or damage to the client’s property, if meeting clients off your premises. If the contractor drives your clients or staff, there are auto liability concerns, both as to the contractor and to your clients/staff. You should also consult your insurance carrier when hiring contract labor to ascertain you are covered under your office general liability policy for the exposure of bodily injury of the contractor, since they aren’t covered by your workers compensation plan for job-related injury and the independent contractor could institute a liability suit against you, just like a business client or visitor might.
If you’re the contractor, verify that the employer has the above-mentioned insurance policies in place, and discuss your own, additional liability exposures with your agent, whether you meet clients on your own premises, or that of the client or your employer.
When the employer hiring you for contracting work provides professional services to others (for example, an accounting or tax preparation firm, management consultant, etc., rather than a manufacturer or retail store) and your duties are not performed solely for the employer’s internal accounting functions, it may be appropriate for the employer’s professional/E&O liability insurance policy (if they have one) to cover you as an “additional insured” for errors or omissions involving your services. Here are some examples of appropriate circumstances for you to request “additional insured” protection under an employer’s professional/E&O coverage: you’re hired to prepare tax returns which the employer signs off on; you’re hired to perform bookkeeping or payroll processing under the employer’s general direction; or you support a review or audit process. In these circumstances, many professional liability/errors & omissions policies cover independent contractors as additional insureds already, because the insurance company would want you to readily engage with them in defense of a claim made against your employer involving your services. The employer’s insurance broker can supply you with a certificate of insurance and may agree to notify you in the event of non-renewal or cancellation of coverage.
The employer should request and retain invoices from the contractor. You should consider doing a background check of someone you don’t know and check with state boards for disciplinary actions. Many court records are now online so it is easy to check for criminal or civil actions. You may be found liable for not knowing or disclosing a contractor’s criminal history—if a client suffers a theft by your contractor, for example.
The contractor would be wise to keep a log of what projects you work on, in case your involvement in a matter is ever called into question. In the case of the employer being a provider of professional services for others (such as an accounting firm), this would need to be accomplished without violating the privacy of the employer’s clients and with the employer’s approval, perhaps by logging only a client’s last name, service date and brief description of your duties, with no specifications about the client. Periodic review by the employer and the independent contractor together of the duties being performed, language of the contractor agreement, and each parties’ insurance policies is the best loss prevention tactic and wise risk management.
For information about NSA-endorsed commercial general liability and professional/E&O insurance, contact Rick Jones of Forrest T. Jones & Company at 800-821-7303, x1448. Or visit the FTJ page of the NSA website: http://www.nsacct.org/benefits.asp?id=615
The IRS has posted Q&As on their website answering many of the most common questions regarding FATCA reporting (Form 8938, Statement of Specified Foreign Financial Assets.)
Here are some of the most common questions and the answers from the IRS:
Q: Must a taxpayer report foreign real estate on Form 8938?
A: Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938. For example, a personal residence or a rental property does not have to be reported. If the taxpayer owns the property in his or her own name, reporting is not required.
** The key to understanding FATCA reporting requirements is to keep in mind what asset the taxpayer actually owns. If the real estate is held through a foreign entity, such as a corporation, partnership, trust, or estate, then the taxpayer owns an interest in the foreign entity and that interest is a specified foreign financial asset that is reported on Form 8938.
Q: I directly hold foreign currency (that is, the currency isn’t in a financial account.) Must I report this on Form 8938
A. Foreign currency is not a specified foreign financial asset and is not reportable on Form 8938.
Q: I have an interest in a foreign pension or deferred compensation plan. Must I report it on Form 8938? If so, do I value it?
A: If you have an interest in a foreign pension or deferred compensation plan, you must report this interest on Form 8938.
A: The rights to receive the foreign equivalent of Social Security, social insurance benefits, or another similar program of a foreign government are not specified foreign financial assets and are not reportable.
Q: I am a beneficiary of a foreign estate. Do I need to report my interest in a foreign estate of Form 8938?
A: Yes. An interest in a foreign estate is a specified foreign financial asset.
Q: Is life insurance a reportable foreign asset?
A: Yes, if it has a cash surrender value.
** The IRS didn’t state how to value the policy. Presumably, it would be the cash surrender value.
Q: Is a Mexican residential trust a specified foreign financial asset?
A: The key to determining whether an asset is a reportable asset is to look to what is actually owned. Real estate is not a reportable asset, but an interest in a trust is a reportable asset. In this case, the taxpayer owns an interest in a trust, not the property itself.
Q: What about foreign assets owned by a single-member LLC?
A: Reporting requirements for entities other than individuals are in proposed regulations and will not be in effect until those regulations are finalized. The IRS anticipates having those regulations in place for tax years beginning after 2011.
To date, they have provided no guidance regarding single-member LLCs. Nevertheless, single-member LLCs that have not elected to be treated as corporations are disregarded entities and all income is treated as the income of the owner/member. Therefore, it would seem, the LLC should be disregarded for FATCA purposes and the assets held by the LLC should be reported by the owner.
Q: What about a Canadian RRSP?
A: A Canadian Registered Retirement Plan is treated as a pension and is a reportable asset. However, if the owner of the account has made the election to defer the income in the plan, the owner must file Form 8891, which is one of the forms that counts as duplicative reporting.
The IRS and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS.
Based on the 90,000 complaints that TIGTA has received through its telephone hotline, to date, TIGTA has identified approximately 1,100 victims who have lost an estimated $5 million from these scams.
“There are clear warning signs about these scams, which continue at high levels throughout the nation,” said IRS Commissioner John Koskinen. “Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment. This is not how we operate. People should hang up immediately and contact TIGTA or the IRS.”
New Pub 5172 – Facts about Health Coverage Exemptions Available on IRS.gov
New IRS Publication 5172, Facts about Health Coverage Exemptions, provides information for taxpayers who qualify for and may claim exemption from minimum essential coverage so that they do not need to make individual shared responsibility payments when they file their federal tax returns.
Publication 5156, Facts about the Individual Shared Responsibility Payment, an exemption chart, IRS You Tube video Individual Shared Responsibilities – Overview and Questions and Answers contain more information.
Sal Censoprano is a Certified Public Accountant (CPA) and tax practice owner for over 40 years. He was born and raised in Brooklyn, New York and earned his master’s degree in taxation.