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{The following article is from the USA Weekend Newspaper}
Which comes first: saving more money or paying down debt? There’s no “one size fits all” answer, but there are guidelines to help you decide: They’re not mutually exclusive. While it’s sensible to pay down a credit card with a steep interest rate, try to set some money aside for saving as well. “If you wait until everything is paid off before you start saving, you lose a lot of years of compounding,” says financial planner Glen Clemans of Portland, Ore. Leverage a 401(k). This is a slam dunk. Not only do you lower your taxable income (deposits are made before they’re considered salary,) your employer may offer a match. Try to max out contributions. Slash consumer debt. Credit cards can be costly, particularly since the interest carries no tax advantages (home mortgage interest is tax-deductible.) “People should work towards zero consumer debt as soon as feasible – especially before retirement,” Clemans says. Leave the mortgage. It’s nice to pay off your mortgage, but saving for retirement and trimming consumer debt carry bigger benefits. “Don’t worry about a house payment in retirement as long as you have the income to pay it,” Clemans says. – Jeff Wuorio Just because a taxpayer can form an LLC, doesn’t mean they should.
By Sandy Weiner, J.D. and Renée Rodda, J.D. In a recent article in FTB Tax News, Steve Sims, the FTB’s Taxpayer Advocate, warns taxpayers that “people are often quick to form a limited liability company (LLC) without full consideration of their specific business needs.” This is a good reminder about an issue that we see more and more of. Many people feel they need to form an LLC to protect themselves and their assets. But often these concerns can be more easily addressed with insurance. Furthermore, clients should be aware that the liability protection provided by an LLC is limited, and there are annual taxes and fees that must be considered. Also keep in mind that the FTB’s aggressive pursuit of nonresident LLC members may deter investors. Limited liability protection Members of an LLC are not personally liable for the debts of the LLC. A member’s acts may bind the LLC, but they generally do not subject individual members to personal liability. However, like the corporate shareholder, the LLC member is personally responsible for his or her tortuous or malpractice acts.1 Also, the sole member of a disregarded entity may be held personally liable. An LLC member’s non-LLC assets may be attached if:
What about insurance? For LLCs that hold property, all lenders will require the owner of the property to carry insurance on the property. In checking with various insurance agents, we determined that property insurance policies generally carry between $250,000 and $500,000 in liability protection. This will not only cover any liability but at least a portion of legal expenses incurred in a lawsuit. Depending on the owner’s needs, an individual can purchase an additional $1 million of insurance for in the neighborhood of $250. Cost of insurance is based on a number of factors, including who the carrier is and what other coverage the carrier provides. In short, here’s the choice: Pay the $800 LLC annual tax plus the cost to prepare the return, or pay $250 for $1 million of additional coverage. Example: Lance Landlord owns a rental property. He is concerned about being sued by a tenant, so his cousin, an attorney, forms an LLC for him. Lance’s tenant trips on a downed tree branch and incurs significant medical bills and time off work, eventually resulting in the loss of his job. The tenant sues Lance’s LLC and Lance personally because he had reported the downed tree, and Lance still had not removed it a week later. The injured client’s attorney will vigorously attack Lance personally and may get a judgment against him because he was negligent in fixing the problem. If Lance had avoided the LLC route and instead purchased liability insurance, the carrier would have paid for his legal fees as well as any settlement (up to policy limits). With the LLC, Lance will have to pay an attorney to defend himself in the lawsuit. The annual tax and fee People also need to understand that, at a minimum, the LLC is liable for an $800 annual tax fee, and that obligation is indefinite until the LLC formally dissolves.3 LLCs that have gross receipts attributable to California of $250,000 or more must also pay an LLC fee. All too often, taxpayers find out the hard way that limited liability for an LLC does not include limited liability for taxes. In a recent BOE appeal,5 an LLC that failed to timely file and pay the $800 annual tax had to pay late-filing and late-payment penalties even though the LLC:
The case is a good example of how an attorney’s advice to form an LLC can be costly. The members, who were siblings who inherited a house, formed an LLC on the advice of their attorney when they thought they would turn the property into a rental. However, after they fixed it up, they sold the house and told the attorney to “put a hold on the legal services in progress related to the LLC.” Unfortunately, the attorney never advised them to dissolve the LLC or to file LLC returns, and they were held liable for $1,600 in unpaid annual tax and over $400 in associated penalties. Nonresident member liability If the entity is looking to attract nonresident investors, forming an LLC may have negative consequences. The FTB is taking the position that nonresident members of an active California LLC are themselves “doing business” in California and therefore are required to file a California return. If the nonresidents are LLCs themselves, each of them will be subject to the $800 annual tax and potentially to the LLC. This could be a deterrent to out-of-state investors. 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. Qualified taxpayer 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 property Qualified tangible personal property (TPP) includes, but is not limited to:
A manufacturer may claim the exemption for property purchased for use in its R&D activity and vice versa. Not qualified TPP Qualified TPP does not include:
Qualified use 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. Exemption certificates 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. Refunds 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? A: Yes. 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. A: Yes. 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. Restaurants that are maintaining records consistent with guidance issued in IRS Ruling 2012-18 will be presumed to be correctly reporting taxable mandatory service charges to the BOE when regulatory amendments adopted by the BOE are finalized. The Ruling provides information on the difference between optional tips (which are not subject to sales tax) and mandatory service charges (which are subject to sales tax) and states that the absence of any of the four following factors indicates that the payment from a customer is a taxable service charge:
Sloppy Joe’s Restaurant does not keep adequate records for purposes of the IRS reporting requirements. Its menu contains the following statement:“For parties of 10 or more, a suggested gratuity of 15% will be included on the bill.”
In this case, the tip is a taxable service charge. Example: A restaurant check is presented to the customer with options computed by the restaurant and presented to the customer as tip suggestions. The “tip” area is blank so the customer may voluntarily write in the amount:
The regulatory amendments establishing this new bright-line presumption was adopted by the BOE at their August 5, 2014, meeting.
If approved by the Office of Administrative Law, the changes will apply to sales made on or after January 1, 2015. |
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AuthorSal 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. Archives
March 2020
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