Archive for the ‘California Tax’ Category

New Federal and California Developments on Cancellation of Indebtedness from Short Sales

January 15, 2014

On September 19, 2013, the IRS issued a Chief Council Letter where it stated that the short sale of a California principal residence converts the mortgage to a nonrecourse loan and is treated as a sale, not Cancellation of Indebtedness.  Under California law, when agreeing to a short sale, the bank may not go after the borrower for any shortfall on the debt.  The letter stated that, under the anti-deficiency provision of Code of Civ. Proc. §580e, the debt would be a nonrecourse obligation, and for federal income tax purposes the homeowner will not have COD income. Instead, the full amount of the nonrecourse indebtedness is treated as the sales price.

The California Franchise Tax Board has just updated their website to include information about mortgage debt relief for taxpayers who sold their principal residences through a short sale in 2013.  The FTB guidance confirms that California will follow this treatment.  The FTB clearly states that the IRS guidance is limited to California short sales only, and that the IRS guidance did not specifically address other types of real estate transactions, such as non-judicial foreclosures and mortgage loan modifications.

The information posted by the FTB can be found here.

Advertisements

The Basics of SMLLCs

January 6, 2014

By Joanna Nguyen

Single member limited liability companies (SMLLCs), like all LLCs, are designed to protect against personal liability.  An SMLLC is treated as a “disregarded entity” for federal income tax purposes, unless it formally elects to be treated as a corporation.  Thus, its earnings and losses will be reported on an individual member’s personal return on Schedule C as if it were a sole proprietorship.  In other words, an SMLLC will be considered a sole proprietorship for federal tax purposes, but will not lose other benefits associated with being a corporate entity.  Therefore, the SMLLC does not need to file any tax forms for federal purposes.

In most states, an SMLLC is treated as a “disregarded entity” for tax purposes.  For California income tax purposes, payment of the annual tax and LLC fee is required and therefore, a California SMLLC should file Form 568 with Page 1, Page 2, and the LLC Income Worksheet.  The LLC fee is applicable if total California annual income (gross receipts and not net income) is $250,000 or greater.  The fee ranges from $900 to $11,790.

Although an SMLLC protects against personal liability, it will not protect against a claim based on negligence, professional malpractice, or other personal wrongdoing that the owner commits related to the business.  Therefore, if a sole proprietor is able to acquire liability insurance, other types of business formations can be considered.

For more information about SMLLCs, please contact our office at (714) 836-8300.

Out of State Taxpayer Sues California FTB on LLC Doing Business Issue

July 22, 2013

Via Spidell Publishing

An out-of-state corporate taxpayer has filed suit against the California Franchise Tax Board (FTB) to recover taxes, penalties, and interest assessed by the FTB for being a passive member in a California LLC. (Swart Enterprises Inc. v. Franchise Tax Board, filed July 9, 2013, Case No. 13CECG02171)

This case makes public the FTB’s position that a taxpayer’s passive interest in a California LLC is sufficient to determine that the taxpayer is “doing business in California”, and trigger the minimum franchise tax under R&TC §23153.

In Swart, the corporation’s principal place of business is in Iowa. The corporation did no business in California but owned a 0.02% interest in a California LLC that acquired, held, leased, and disposed of capital equipment and interest in capital equipment in various states.

This case will be of great interest to our clients with out-of-state investors and with out-of-state investments.  Especially real estate development and investment partnerships.  We will continue to monitor this case.

Enterprise Zone Bill Waiting for Governor’s Signature 7/11/13 UPDATE: BILL SIGNED

June 28, 2013

The Senate and State Assembly have passed AB 93, which makes major changes to the Enterprise Zone program.  The bill is now awaiting the Governor’s signature.  The Governor has been a supporter of the changes to the Enterprise Zone program, so his signature is essentially guaranteed.  UPDATE: ON JULY 11, 2013, AS EXPECTED, GOVERNOR BROWN SIGNED SB 90 AND AB 93.

The bill eliminates the current Enterprise Zone Hiring Credit for employees hired on or after January 1, 2014. Employees hired and vouchered prior to January 1, 2014 will continue generating credit for their first 60 months of employment. The bill gives taxpayers a 10-year carryforward period to use these credits.

The bill also provides a new sales and use tax exemption for manufacturing equipment beginning in 2014. This benefit will apply for tax years through July 1, 2019 (2021 for taxpayers in certain areas).

A new credit will be available for taxable years beginning on or after January 1, 2014, and ending before January 1, 2021. The new credit applies to fewer employees than the current credit, and certain industries are specifically excluded.

Nienow & Tierney, LLP will continue to keep you updated on the status of AB 93 and other tax laws affecting you and your business.  If you have any questions, please contact our office at (714) 836-8300.

California Imposes New Information Return Requirement for Out of State Like-Kind Exchanges

June 21, 2013

Beginning January 1, 2014, taxpayers who complete a like-kind exchange of California property for property located out of state will be required to file an information return with the FTB.

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. If the taxpayer fails to file an information return, and a required tax return is not filed, the FTB may estimate net income and assess tax, interest, and penalties.

CPA Day at the Capital

January 27, 2013

20130123_125332

 

On January 23rd, CPA’s from all around the State of California converged on our state capital in Sacramento as a part of the annual CPA Day at the Capital.

Meetings were scheduled with each state Senator and Assemblymen/women.  It was an opportunity for the CPA profession to voice a united opinion on the topics which affect our profession and also the taxpayers for whom we prepare tax returns and financial statements.

This year, Stephen Tierney took part in this opportunity to share with our state legislature the issues which we feel are important to clients such as yourself.

We specifically called upon the legislature to forego any effort to impose sales tax on service organizations.  As a profession, we feel that this tax would provide an unfair advantage to service based business owners located outside of the state.  This additional tax would also cause increased costs to our clients for tax preparation services.

As we met with the state representatives, we also promoted a financial literacy program which is sponsored by the California Society of CPA’s.  This program is designed to educate individuals on basic financial issues such as maintaining a budget and how to save for future expenses.  These programs are provided free of charge by CPA’s around the State of California.

Stephen loved the opportunity to meet with our state representatives and participate in helping promote issues for our clients and our profession.  He looks forward to participating in this event in future years.

IRS Releases Outdated Withholding Tables

January 4, 2013

It has come to our attention that the withholding tables released by the IRS in IR-2012-105 and Notice 1036, on December 31, 2012, are based on the now obsolete tax rates, revised in the recent tax legislation.  We understand the IRS will review the tables and update them.  The notice does contain correct information on the return to the 6.2% rate for FICA.

The EDD has updated its withholding tables to include the tax increases contained in Proposition 30. You can find the EDD tables at: http://www.edd.ca.gov/Payroll_Taxes/Rates_and_Withholding.htm#CAWithholdingSchedules.

Effects of Proposition 30

December 7, 2012

The Californian’s have spoken and they have decided on higher taxes. Proposition 30 has officially passed and higher taxes are on the way. What most people do not know about proposition 30 is that most of the laws do not start in 2013 but are actually retroactive to begin January 1, 2012.

Proposition 30 increased state taxes in 2 ways. The first increase is the 0.25% increase in the state sales tax rate. This state sales tax rate is effective for four years beginning January 1 ,2013. The second increase is in the income tax rate on taxpayers making more than $250,000 a year. This increase is retroactive to January 1, 2012. See the table below for the new rates.

10.3% (1% increase) on income of:
$250,001–$300,000 for Single
$340,001–$408,000 for Head of Household
$500,001–$600,000 for Married Filing Joint

11.3% (2% increase) on income of:
$300,001–$500,000 for Single
$408,001–$680,000 for Head of Household
$600,001–$1,000,000 for Married Filing Joint

12.3% (3% increase) on income of:
More than $500,000 for Single
More than $680,000 for Head of Household
More than $1,000,000 for Married Filing Joint

These rates do not include the income in excess of $1 million that is subject to an additional 1% mental health surcharge.

This raises the question of estimated tax payments. Many taxpayers have made their estimated state tax payments according the their estimated liability at the old taxes rates for 2012. Now that the law is retroactive to January 1, 2012 are they are worried that they are going to get penalized for an underpayment penalty. Fortunately proposition 30 provides that affected taxpayers who are underpaid will be held harmless from the underpayment penalty (California Constitution, Article XIII, Section 36(f)(2)(C)(i)). To obtain relief, taxpayers must pay any balance due by April 15, 2013 (calendar-year taxpayers), and complete form FTB 5805, "Underpayment of Estimated Tax by Individuals and Fiduciaries." The FTB will not provide automatic penalty relief.

2012 Year-End Tax Planning

November 12, 2012

Year-end tax planning is always complicated by the uncertainty that the following year may bring and 2012 is no exception. Indeed, 2012 is one of the most challenging in recent memory for year-end tax planning. A combination of events – including possible expiration of some or all of the “Bush-era” tax cuts after 2012, the imposition of new so-called Medicare taxes on investment and wages, doubts about renewal of tax extenders, and the threat of massive across-the-board federal spending cuts – have many taxpayers asking how can they prepare for 2013 and beyond, and what to do before then. The short answer is to quickly become familiar with expiring tax incentives and what may replace them after 2012 and to plan accordingly.

INDIVIDUAL TAX PLANNING

“Bush-era” Tax Cuts – The phrase “Bush-era” tax cuts is the collective term for the tax measures enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). EGTRRA and JGTRRA made over 30 major changes to the Tax Code that are scheduled to sunset at the end of 2012.

The 2010 Tax Relief Act extended the reduced individual income tax rates from the Bush-era tax cuts. Unless extended further, the reduced individual income tax rates will disappear after 2012 to be replaced by higher rates. The current 10, 15, 25, 28, 33 and 35 percent rate structure would be replaced by the higher pre-Bush 15, 28, 31, 36 and 39.6 percent rates.

Strategy: Traditional year-end planning techniques should be considered along with some variations on those strategies. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. Another valuable year-end strategy is to "run the numbers" for regular tax liability and alternative minimum tax (AMT) liability. Taxpayers may want to explore whether certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes.

Qualified Capital Gains – Unless Congress takes action, the tax rates on qualified capital gains are also scheduled to increase significantly after 2012. The current favorable rates of zero percent for taxpayers in the 10 and 15 percent brackets and 15 percent for all other taxpayers will be replaced by pre-2003 rates of 10 percent for taxpayers in the 15 percent bracket and a maximum 20 percent rate for all others.

Strategy: Now is also a good time to consider tax loss harvesting strategies to offset current gains or to accumulate losses to offset future gains (which may be taxed at a higher rate). The first consideration is to identify whether an investment qualifies for either a short-term or long-term capital gains status, because one must first balance short-term gains with short-term losses and long-term gains with long-term losses. Remember also that the "wash sale rule" generally prohibits one from claiming a tax-deductible loss on a security if one repurchases the same or a substantially identical asset within 30 days of the sale.

Dividends – Under current law, tax-favorable dividends’ tax rates are scheduled to expire after 2012. Qualified dividends are currently eligible for a maximum 15 percent tax rate for taxpayers in the 25 percent and higher brackets and zero percent for taxpayers in the 10 and 15 percent brackets.

If Congress takes no action, qualified dividends will be taxed at the ordinary income tax rates after 2012 (with the highest rate scheduled to be 39.6 percent not taking into account the 3.8 percent Medicare contribution tax for higher income individuals).

Strategy: Qualified corporations may want to explore declaring a special dividend to shareholders before January 1, 2013.

3.8 Percent Medicare Contribution Tax – Taking effect immediately on January 1, 2013, the Medicare surtax will be imposed on a taxpayer’s “net investment income” (NII) and will generally apply to passive income. The Medicare surtax will also apply to capital gains from the disposition of property. However, the Medicare surtax will not apply to income derived from a trade or business, or from the sale of property used in a trade or business. For individuals, the Medicare surtax is based on the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income (MAGI) above a specified threshold.

The MAGI thresholds are:

  • $250,000 for married taxpayers filing jointly
  • $200,000 for single

NII includes:

  • Gross income from interest, dividends, annuities, royalties and rents, provided this income is not derived in the ordinary course of an active trade or business;
  • Gross income from a trade or business that is a passive activity;
  • Gross income from a trade or business of trading in financial instruments or commodities; and
  • Net gain from the disposition of property, other than property held in an active trade or business.

NII does not exclude:

  • Distributions from qualified retirement plans or IRAs
  • Veterans’ benefits
  • Gain excluded on sale of principal residence
  • Interest on tax exempt bonds

Strategies:

  • Do not postpone the first year IRA distribution to 2013 on reaching age 70.5.
  • Trust returns are also subject to the Medicare Contribution Tax.  Trust income will often reach the highest tax brackets much quicker than individuals.  Make sure that all income has been distributed from the trust before year end.

Additional 0.9 Percent Medicare Tax – Also effective January 1, 2013, higher income individuals will be subject to an additional 0.9 percent HI (Medicare) tax. This additional Medicare tax should not be confused with the 3.8 percent Medicare surtax. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly) will be subject to a 2.35 percent Medicare tax rate. The additional Medicare tax is also applicable for the self-employed.

Strategy: Taxpayers may want to explore the possibility of accelerating income into 2012.

End of Payroll Tax Holiday – For the past two years, an employee’s share of Old Age, Survivors and Disability Insurance (OASDI) taxes has been reduced from 6.2 percent to 4.2 percent (with comparable relief for the self-employed). Under current law, that reduction is scheduled to expire after December 31, 2012. On January 1, 2013, an employee’s share of OASDI taxes will revert to 6.2 percent, effectively increasing payroll taxes across the board.

Strategy: Taxpayers may want to explore the possibility of accelerating bonuses and wages into 2012.

Alternative Minimum Tax – The alternative minimum tax rates (26 and 28 percent on the excess of alternative minimum taxable income over the applicable exemption amount) are not scheduled to change in 2013. However, exposure to the AMT may change as a result of the scheduled sunset of the regular tax rates. Because the determination of AMT liability requires a comparison between regular tax and AMT computations, the higher regular tax rates post-2012 may help lower AMT exposure by the same amount.

However, taxpayers should not ignore the possibility of being subject to the AMT, as this may negate certain year-end tax strategies. For example, if income and deductions are manipulated to reduce regular tax liability, AMT for 2012 may increase because of differences in the income and deductions allowed for AMT purposes.

As in past years, taxpayers are waiting to see if Congress will enact an AMT “patch” for 2012. The last patch, which provided for increased exemption amounts and use of the nonrefundable personal credits against AMT liability, expired after 2011.  If another “patch” is not enacted by Congress, the AMT exemption will drop from $74,450 (married taxpayers filing jointly) in 2011 to $45,000 in 2012.

Personal Exemption/Itemized Deduction Phaseouts – Higher income taxpayers may also be subject to the return of the personal exemption phaseout and the so-called Pease limitation on itemized deductions. Both of these provisions were repealed through 2012. However, they are scheduled to return after 2012 unless the repeal is extended.

Revival of the personal exemption phaseout rules would reduce or eliminate the deduction for personal exemptions for higher income taxpayers starting at “phaseout” amounts that, adjusted for inflation, would start at $267,200 AGI for joint filers and $178,150 for single filers.

In addition, return of the Pease limitation on itemized deductions (named for the member of Congress who sponsored the legislation) would reduce itemized deductions by the lesser of:

  • Three percent of the amount of the taxpayer’s AGI in excess of a threshold inflation-adjusted amount projected for 2013 to be $178,150 (joint filers), or
  • 80 percent of the itemized deductions otherwise allowable for the tax year.

Strategy: Taxpayers should watch AGI limitations when determining deductions and credits to report in 2012/2013.  Taxpayers should consider paying deductible items in 2013 when tax rates are higher and could result in a more advantageous tax benefit.

Education – American Opportunity Tax Credit. In 2009, Congress enhanced the Hope education credit and renamed it the American Opportunity Tax Credit (AOTC). The temporary enhancements, including a maximum credit of $2,500, availability of the credit for the first four years of post-secondary education, and partial refundability for qualified taxpayers, are scheduled to expire after 2012. Under current law, less generous amounts will be available with the revived Hope education credit.

Coverdell Education Savings Accounts. Similar to IRAs, Coverdell Education Savings Accounts (Coverdell ESAs) are accounts established to pay for qualified education expenses. Under current law, the maximum annual contribution to a Coverdell ESA is $2,000, and qualified education expenses include elementary and secondary school expenses. Unless extended, the maximum annual contribution for a Coverdell ESA is scheduled to decrease to $500 after 2012.

Employer-Provided Education Assistance. Under current law, qualified employer-provided education assistance of up to $5,250 may be excluded from income and employment taxes. However, the 2010 Tax Relief Act only made the exclusion available through 2012.

Student Loan Interest. Individual taxpayers with MAGI below $75,000 ($150,000 for married couples filing a joint return) may be eligible to deduct interest paid on qualified education loans up to a maximum deduction of $2,500, subject to income phaseout rules. The enhanced treatment for the student loan interest deduction is scheduled to expire after 2012.  The student loan interest deduction would be limited to the first 60 months of payment.

Higher Education Tuition Deduction. The above-the-line higher education tuition deduction expired after 2011. The maximum $4,000 deduction was available for qualified tuition and fees at post-secondary institutions, subject to income phaseouts.

Child Tax Credit – Taxpayers who claim the child tax credit need to plan for its scheduled reduction after 2012. Absent Congressional action, the child tax credit, at $1,000 per eligible child for 2012, will be $500 per eligible child, effective January 1, 2013.

Sales Tax Deduction – Before 2012, qualified taxpayers could deduct state and local general sales taxes in lieu of deducting state and local income taxes. The 2010 Tax Relief Act last extended the optional itemized deduction for state and local general sales taxes, which had been available since 2004, to tax years 2010 and 2011. Unless extended again, the deduction for state and local general sales taxes will not be available for tax year 2012 and beyond.

Qualified Mortgage Insurance Premiums – For the period 2007 through 2011, premiums paid for qualified mortgage insurance could be treated as qualified residence interest and deducted as an itemized deduction, subject to certain restrictions. Renewal of this tax break into 2012 is uncertain at this time.

ESTATE/GIFT TAX PLANNING

There have been few areas of the Tax Code that have been subject to as much uncertainty as the federal estate tax.   In 2001, Congress passed legislation that repealed the estate tax in the calendar year 2010.  Under the 2010 Tax Relief Act, federal estate taxes applied to decedents dying after December 31, 2009 but before January 1, 2013.  Through 2012, each individual taxpayer can gift up to $5.12 million out of their estate without paying gift taxes.  Any gifts over the exemption amount are subject to a maximum tax rate of 35%.  Starting in 2013, the estate/gift tax exemption amount is reduced to $1 million and the maximum tax rate jumps up to 55%.

Strategy:  A comprehensive estate plan should be implemented to take advantage of this opportunity to transfer $5 million out of an individual’s estate.  This transfer could ultimately save over $2 million in estate taxes.  Individuals should consider transferring real estate or investments to their beneficiaries now to avoid the estate taxes later.

BUSINESS TAX PLANNING

Code Sec. 179 expensing – Code Sec. 179 gives businesses the option of claiming a deduction for the cost of qualified property all in its first year of use rather than claiming depreciation over a period of years. For 2010 and 2011, the Code Sec. 179 dollar limitation was $500,000 with a $2 million investment ceiling. The dollar limitation for 2012 is $139,000 with a $560,000 investment ceiling. Under current law, the Code Sec. 179 dollar limit is scheduled to drop to $25,000 for 2013 with a $200,000 investment ceiling.

Strategy: Businesses should consider accelerating purchases into 2012 to take advantage of the still generous Code Sec. 179 expensing. Qualified property must be tangible personal property, which one actively uses in one’s business, and for which a depreciation deduction would be allowed.  The amount that can be expensed depends upon the date the qualified property is placed in service; not when the qualified property is purchased or paid for.  Additionally, Code Sec. 179 expensing is allowed for off-the-shelf computer software placed in service in tax years beginning before 2013.

Bonus depreciation – The first-year 50 percent bonus depreciation deduction is scheduled to expire after 2012 (2013 in the case of certain longer-production period property and certain transportation property). Unlike the Section 179 expense deduction, the bonus depreciation deduction is not limited to smaller companies or capped at a certain dollar level. To be eligible for bonus depreciation, qualified property must be depreciable under Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. The property must be new and placed in service before January 1, 2013 (January 1, 2014 for certain longer-production period property and certain transportation property).

Businesses also need to keep in mind the relationship of bonus depreciation and the vehicle depreciation dollar limits.  Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year a taxpayer places a passenger automobile in service within a business, and for each succeeding year. Sport utility vehicles and pickup trucks with a gross vehicle weight rating in excess of 6,000 pounds are exempt from the luxury vehicle depreciation caps.

Expiring business tax incentives – Many temporary business tax incentives expired at the end of 2011. In past years, Congress has routinely extended these incentives, often retroactively, but this year may be different. Confronted with the federal budget deficit and across-the-board spending cuts scheduled to take effect in 2013, lawmakers allow some of the business tax extenders to expire permanently. Certain extenders, however, have bipartisan support, and are likely to be extended.  They include the Code Sec. 41 research tax credit, the Work Opportunity Tax Credit (WOTC), and 15-year recovery period for leasehold, restaurant and retail improvement property.

Small employer health insurance credit – A potentially valuable tax incentive has often been overlooked by small businesses, according to reports. Employers with 10 or fewer full-time employees paying average annual wages of not more than $25,000 may be eligible for a maximum tax credit of 35 percent on health insurance premiums paid for tax years beginning in 2010 through 2013. Tax-exempt employers may be eligible for a maximum tax credit of 25 percent for tax years beginning in 2010 through 2013.

The credit is scheduled to climb to 50 percent of qualified premium costs paid by for-profit employers (35 percent for tax-exempt employers) for tax years beginning in 2014 and 2015. However, an employer may claim the tax credit after 2013 only if it offers one or more qualified health plans through a state insurance exchange.

Today’s uncertainty makes doing nothing or adopting a “wait and see” attitude very tempting. Instead, multi-year tax planning, which takes into account a variety of possible scenarios and outcomes, should be built into one’s approach.

Please contact our office for more details on developing a tax strategy in uncertain times that includes consideration of certain tax-advantaged steps that may be taken before year-end 2012.

How do I start a nonprofit organization–step 1

February 17, 2012

There are many steps involved in forming a nonprofit organization.  When you started your movement, idea, or ministry, you were excited about the goals you were accomplishing.  Your ministry starts developing and you realize that in order for your organization to grow and reach other individuals, you need to get a more formal entity in place.  You are now ready to take it to the next level.

The first step in forming a 501(c)(3)nonprofit charity organization is to form a nonprofit corporation or LLC.  This corporation will be formed at the state level.  You will need to enlist the assistance of an attorney and he/she will guide you in deciding what type of nonprofit corporation will best suite your organization.  In the State of California you will want to go to the Secretary of State office and search to ensure your business name has not already been used.  The website is http://kepler.sos.ca.gov/.

This website is a great resource in helping you start your entity and to stay in compliance with the state.

There are three categories of California nonprofit  corporations.  You will need to decide if your nonprofit corporation will be organized as a Mutual Benefit, Public Benefit or a Religious corporation.

  1. A Religious corporation is one organized to operate a church or structured primarily for religious purposes.
  2. A Public Benefit corporation is organized primarily for charitable purposes and plans to obtain state tax exempt status under California Revenue and Tax Code section 23701(d).  This category covers most of your 501(c)(3) organizations, civic leagues or social welfare organizations.
  3. A Mutual Benefit corporation is corporation organized other than religious charitable, civic league or social welfare purposes.  These organizations may not be planning tax exempt status at all.

Following you will find a link to download the instructions and sample forms needed to file your Articles of Incorporation. 

www.sos.ca.gov/business/corp/pdf/articles/corp_artsnp.pdf

After filing your articles, you will receive back a stamped copy from the state indicating the approval of your Articles of Incorporation and your new state identification number.

You are now ready to move onto the next step.

As always if we can be of service, please contact steve@ntcpas.com