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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: HEALTH INSURANCE: 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 STANDARD DEDUCTION: $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. ENTERTAINMENT: 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. VIRTUAL CURRENCY: 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. OPPORTUNITY ZONES: 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. DATELINE: S Corporations are due March 15, C Corporations are due April 15; Partnerships are due March 15. E_FILING: 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. EXTENSIONS: 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. PROCEDURE: 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. GIG ECONOMY: 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. UBER/LYFT: I will be posting on the website the various deductions afforded to these drivers. ALIMONY: 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. MEDICAL EXPENSES: 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! SOLAR: If the solar was placed in service ion 2019, the credit is 30%; 2020 26%; 2021 22% TESLA: 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. CALIFORNIA LABORERS: 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. RETIREMENT: 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. Dear Client:
Clearly, one of the most important factors in attracting and holding key employees is your company’s program for compensating executives. Naturally, the basic salary is of great importance, but equally important may be special plans of incentive compensation; plans for allowing executives to participate in the ownership of the company through stock options, stock bonuses and other stock-acquiring arrangements; and special plans for deferring compensation. For this reason, many special devices have been developed to compensate the executive. There are three basic types of benefits currently in use for compensating the executive. These are direct compensation; perks or non-cash fringe benefits; and deferred compensation plans. There are basic differences among these three major types of executive compensation, including their respective tax implications for you, as the employer, and the employee. Direct compensation. As its name implies, direct compensation is comprised of immediate pay to executives in the form of salary, cash bonuses and qualified stock bonus plans. Direct compensation differs from fringe benefits in that it typically involves cash payments or other evidences of indebtedness to the executive that can be readily negotiated or sold for cash. Direct compensation also differs from deferred compensation in that its impact is immediate (or within a year’s time) rather than delayed until some future date. Generally, executives must recognize income in the year they receive direct compensation, and employers can deduct corresponding amounts in the year they pay direct compensation. “Perks” or non-cash fringe benefits. Perks are those benefits that most employees think of as being fringe benefits. Thus, the perks that an employer may provide its employees consist of such non-cash benefits as company cars, exercise facilities and employee cafeterias. In the context of executive compensation, however, directors, officers, and managers have come to expect perks “above-and-beyond” those available to the average employee. Therefore, many companies have developed executive perks that consist of such “extra” benefits as chauffeured limousine services, use of corporate stadium skyboxes, and expenses-paid attendance at trade or professional conventions. Perks tend to differ from direct compensation in that they typically involve the use of employer-provided facilities or reimbursement of employer-induced expenses rather than the payment of cash or its equivalent. Like direct compensation and unlike deferred compensation, perks provide an immediate economic and financial benefit to participating employees. Generally, the Internal Revenue Code provides that all perks are taxable as wages to participating employees unless the perk is specifically exempted from taxation. Deferred compensation. Deferred compensation refers to what would otherwise be direct compensation or a perk (i.e., fringe benefit); except that it is so structured as to postpone receipt of a portion of an executive’s taxable compensation until sometime after it has been earned by the executive. Conceptually, deferred compensation plans are a type of benefit located midway between the immediate benefits of direct compensation and perks, and the long-range benefits bestowed under a retirement plan. A common aim of a deferred compensation plan is to shift otherwise taxable compensation into a future year and, thus, defer, if not reduce, the income tax that would otherwise be paid to the IRS. For example, the deferral of income may be for a fixed period of time or until the executive has satisfied obligations to the company. Deferral of taxable income depends, however, on whether a specific provision in the tax code permits such deferral relative to a given form of deferred compensation and upon what conditions. Types of deferred compensation include deferred bonuses, stock options, and the so-called golden parachute payments. Because qualified deferred compensation plans lose favorable tax treatment if they do not met nondiscrimination rules, few, if any, such plans are designed to provide executives with special treatment or benefits. However, a key means by which companies can attract and retain top executive employees is a non-qualified deferred compensation plan. By providing executive compensation through a non-qualified plan, employers can effectively furnish benefits to key employees beyond the benefits typically available to non-management personnel. Non-qualified plans offer flexibility and ease in administration. However, benefits under a non-qualified plan are also not guaranteed and, therefore give employees less security than benefits provided by a qualified plan. In addition, non-qualified plans are subject to election, distribution and funding rules. Individuals who defer compensation under plans that fail to comply with these rules are subject to current taxation on all deferrals and to enhanced penalties. Specifically, compensation deferred under non-qualified plans that do not satisfy the requirements, is subject to tax (and interest and penalties) in the year of the deferral, to the extent not subject to a substantial risk of forfeiture and not previously included in income. Therefore, these plans must be designed carefully to avoid the loss of any possible tax deferral. Considering the importance of a quality compensation plan to retaining key employees, it is essential that a plan be well thought out. We can assist you in developing a plan that will meet your needs and reduce your tax burden. Please call our office at your convenience to arrange an appointment. Sincerely yours, Sal Censoprano, ATA CRTP Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015. Dear Client:
The IRS has finalized, with modifications, proposed regulations providing guidance on stock options granted under an employee stock purchase plan. The IRS has also issued final regulations relating to corporate employers’ return and notification requirements for employee stock options. Under final regulations, a plan must meet certain requirements to qualify as an employee stock purchase plan. These requirements are satisfied either by the terms of the plan or an offering made under the plan. If the terms of an option are inconsistent with the terms of the employee stock purchase plan or an offering under the plan, then an option may not qualify for special tax treatment. The regulations provide guidance for employee stock purchase plans under which more than one offering is made. One or more offerings may be made under the plan and the offerings may be consecutive or overlapping. Although the terms of each offering need not be identical, the terms of the plan and each offering together must satisfy the requirements. The determination whether the terms of a plan and offering satisfy the requirements related to covered and excluded employees is made on an offering-by-offering basis under the final rules. Consistent with the proposed regulations, the final regulations also provide that the date of grant is the first day of an offering period if the terms of an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the offering. However, if the maximum number of shares that can be purchased under an option is not fixed or determinable until the date the option is exercised, then the date of exercise is the date of grant of the option. Final regulations have also been released regarding the corporate employers’ return and notification requirements relating to employee stock options. Corporate employers are required to provide information returns to the IRS and an employee where the transfer of stock is made through the exercise of an option through an employee stock purchase plan or an incentive stock option program. One of the changes from the proposed regulations relates to when a transfer of legal title to stock occurs. Under the final regulations, the transfer of stock to the employee’s third-party brokerage account upon exercise of an option is treated as the first transfer of legal title, necessitating the corporate filing of the information return. Alternatively, if the employer issues a stock certificate directly to an employee or registers the employee’s name in the employer’s record books and employer holds the certificate in book-entry form, the first transfer of legal title does not occur until the employee sells the stock or transfers the stock to a brokerage account. Other changes relate to the amount of compensation income recognized where the exercise price is less that the value of the share on the date of the option grant, the return requirements where the transfer of legal title is a qualifying or disqualifying disposition, and the application of the filing requirements to nonresident aliens performing services outside the Untied States. If you have any questions regarding employee stock purchase plans or the return and notification requirements, please call our office at your convenience. Sincerely yours, Sal Censoprano, ATA CRTP Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015. Dear client:
The IRS has reopened the offshore voluntary disclosure program (OVDP) to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. The newest program is similar to the 2011 program in many ways, but with a few key differences. Unlike the 2011 program, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers or decide to end the program entirely at any point. Under the 2011 Offshore Voluntary Disclosure Initiative (OVDI), the penalty framework required individuals to pay 25-percent of the amount in the foreign bank account in the year with the highest aggregate account balance covering the 2003 to 2010 period. The IRS also created a new penalty category of 12.5-percent for “small offshore accounts.” Taxpayers whose offshore accounts or assets were less than $75,000 in any calendar year covered by the OVDI qualified for this lower rate. In addition, some taxpayers qualified for a 5-percent penalty, including taxpayers who did not open the foreign account, or cause the account to be opened, if additional requirements were met; and foreign residents who were unaware that they were U.S. citizens. The overall penalty structure for the new program is the same as that for the 2011 program, except for taxpayers in the highest penalty category. For OVDP, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. Some taxpayers will be eligible for 5-percent or 12.5-percent penalties; these remain the same in the new program as in 2011. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties. Taxpayers who have come forward to make voluntary disclosures since the 2011 program closed will be treated under the provisions of the new OVDP. The OVDP can be a significant benefit to affected taxpayers. Penalties outside the program can be onerous and can include, among others: penalties for failing to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR); civil penalties; penalties for failing to file a return; and accuracy related penalties. In addition, criminal prosecution may be a risk. The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations, including dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities. If you would like more details, please call our office at your earliest convenience. We will be happy to provide additional information on the offshore voluntary disclosure program. Sincerely yours, Sal Censoprano, ATA CRTP Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015. |
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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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