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. 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. 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. {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
December 2020
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