Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.

Will any of these extenders cut your tax bill for 2018 or 2019?

  •    
  • mike   

The domestic spending bill, H.R. 1865, Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, includes the extension of several tax breaks that previously expired on December 31, 2017.

If you qualify, you can amend your 2018 federal income tax returns to claim a refund and use the tax breaks on your 2019 federal income tax returns.  Remember the breaks might not apply to your state income tax return.  See your tax advisor.

Here are some of the extended tax breaks.

  • The exclusion for up to $2 million ($1 million for married, filing separately) of discharged qualified principal residence indebtedness has been extended to discharges before January 1, 2021.
  • The treatment of mortgage interest insurance premiums as residential mortgage interest has been extended to payments before January 1, 2021.
  • The “above the line” deduction for up to $4,000 of qualified education expenses for taxpayers with modified adjusted gross income up to $65,000 ($130,000 for married, filing joint returns) has been extended to payments before January 1, 2021.  If modified adjusted gross income exceeds the thresholds, the deduction limit is reduced to $2,000 until the taxpayer’s adjusted gross income reaches $80,000 ($160,000 for married, filing joint returns.)
  • The floor for the medical expense deduction is reduced from 10% to 7.5% and there is no alternative minimum tax adjustment for payments before January 1, 2021.
  • The Health Insurance Costs Credit has been extended to payments before January 1, 2021.  It was previously scheduled to expire on December 31, 2019.  Since it won’t apply to most people who read this, I won’t get into the details here.
  • The Energy Efficient Home Credit is extended through 2020 for homes acquired through 2020.  The credit applies to contractors who construct or manufacture qualifying energy efficient homes in the year the homes are sold or leased for use as a residence.  The credit is $2,000 or $1,000, depending on whether the home is constructed or manufactured and on the energy savings standards satisfied.
  • The Nonbusiness Energy Property Credit is extended to property placed in service before 2021.  The nonbusiness energy property credit is (1) 10% of the amounts paid or incurred for qualified energy efficiency improvements installed during the tax year, and (2) 100% of the amounts paid or incurred for qualifed energy property, subject to limits.  The maximum lifetime credit is $500.
  • The Qualified Fuel Cell Motor Vehicles Credit has been extended to motor vehicles purchased before 2021.  The credit applies for vehicles propelled by combining oxygen with hydrogen and creating electricity.  The base credit is $4,000 for vehicles weighing 8,500 pounds or less.  Heavier vehicles can qualify for up to a $40,000 credit.
  • The Two-Wheeled Plug-In Electric Vehicle Credit has been extended to vehicles acquired before 2021.
  • The Alternative Fuel Refueling Property Credit has been extended to property placed in service before January 1, 2021.  The credit is 30% of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the tax year.
  • The Employer Credit for Paid Family and Medical Leave has been extended through 2020.  Eligible employers may claim a general business credit equal to an applicable percent of the amount of wages paid to qualified employees during any period in which the employees are on family and medical leave, provided the rate of payment under the program is at least 50% of the wages normally paid to the employee.
  • The Work Opportunity Credit has been extended through 2020.  Employers are generally allowed a 40% credit for qualified first-year wages paid during the tax year to individuals who are members of a targeted group of employees.

This list is not complete.  See your tax advisor for more details.

Urgent news if you have a retirement account with a Conduit Trust named beneficiary

  •    
  • mike   

Legislation called the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted December 20, 2019, renders any estate plan involving a Conduit Trust beneficiary of a big retirement account (including 401(k) accounts and IRAs) obsolete.

A provision of the Act repeals “stretch” payments over the life expectancy of most successor beneficiaries for inherited retirement accounts of decedents who die after December 31, 2019.  The maximum time for distributions is 10 years after the death of the decedent/plan participant.

What is a Conduit Trust?  The purpose of a Conduit Trust was to control a retirement account, usually with a minor beneficiary, and still qualify for distribution of the account over the beneficiary’s life expectancy, called stretch distributions.  In order to qualify, the account had to be disregarded for income tax reporting with respect to the retirement account distributions.  The way this was accomplished was to require that any retirement account distributions received by the trust be immediately distributed to the beneficiary.

Since life expectancy distributions are usually very small, a huge distribution would be payable to the beneficiary 10 years after the death of the account owner, probably subject to very high federal income tax rates and possibly subject to mismanagement by the beneficiary.

There are some exceptions to the new rule, including (1) the surviving spouse of the employee/participant, (2) a child who is under age 21, (3) certain disabled persons, (4) certain chronically ill persons, and (4) an individual not previously described who is not more than 10 years younger than the employee/participant.

When a child of the decedent reaches age 21, the balance of the account must be distributed within 10 years.

If a beneficiary of a retirement account inherited from a person deceased before 2020 is deceased after 2019, the 10 year limit applies to that person’s successor beneficiaries.

Since the Conduit Trust no longer provides a tax benefit, employees/participants with retirement accounts should consult with their attorney and tax consultant about eliminating the Conduit Trust as a beneficiary and making alternative estate plans for their retirement accounts.

Major federal retirement changes enacted, Kiddie tax change repealed

  •    
  • mike   

As part of the domestic spending bill, H.R. 1865, Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, major federal retirement changes were enacted in Division O, the Setting Every Community Up for Retirement Enhancement Act of 2019, nicknamed the SECURE Act.  As part of the SECURE Act, Congress also repealed changes to the Kiddie tax enacted in the Tax Cuts and Jobs Act of 2017.  Taxpayers may elect to amend their 2017 and 2018 individual income tax returns to use this Kiddie tax change.

Here are highlights.  Please consult with your retirement plan consultant or tax consultant for more details.

  • Effective for plan years beginning after December 31, 2020, the rules for multiple employer plans have been relaxed so that if one employer violates the qualification rules, the entire plan won’t be disqualified.  (The “one bad apple rule.”)
  • Effective for plan years beginning after December 31, 2019, the maximum default contribution for a plan with automatic enrollment is increased from 10% to 15%.
  • Effective for taxable years beginning after December 31, 2019, the tax credit for retirement plan startup cost for small employers is increased from the lesser of (1) $500 or (2) 50% of qualified startup costs to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of nonhighly compensated employees of the employer who are eligible to participate in the plan or (b) $5,000.  The credit applies for the first three years of the adoption of the plan.  It’s also available for employers that convert an existing plan to an automatic enrollment design.
  • Effective for taxable years beginning after December 31, 2019, amounts includable in an individual’s income paid to aid the individual in pursuing graduate or postdoctoral study, such as a fellowship, stipend, or similar amount, is treated as compensation for the limitation on IRA contributions.
  • Effective for taxable years beginning after December 31, 2019, the prohibition of contributions to an IRA by an individual who has reached age 70 ½ has been repealed.  The excludable amount for direct distributions to a charity after age 70 ½ is reduced by any contributions to an IRA after age 70 ½.
  • Effective for plan loans made after December 20, 2019, amounts loaned from a plan using a credit card or similar arrangement will be treated as deemed plan distributions and not as loans.
  • Effective for plan years beginning after December 31, 2019, when a plan will no longer accept a lifetime income option, such as an annuity, as a plan investment, employees will be able to make direct transfers of the lifetime income investment to an IRA or another retirement account within the 90-day period ending on the date when the lifetime income investment is no longer accepted by the plan.
  • Effective for plan years beginning after December 31, 2020, employers are required to permit employees to make elective deferrals if the employee has worked at least 500 hours per year with the employer for three consecutive years and has met the age requirement (age 21) by the end of the three-year period.  Each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service for vesting purposes.  This (500 hour) requirement will not apply for collectively-bargained plans.   Employers may elect to exclude these employees for the nondiscrimination and top-heavy requirements.  Employer contributions won’t be required for these individuals.
  • Effective for distributions made after December 31, 2019, distributions of up to $5,000 per birth or adoption can be made free of the 10% early distributions penalty during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.  (An eligible adoptee is any individual, other than a child of the taxpayer’s spouse, who has not reached age 18 or is physically or mentally incapable of self-support.)  Taxpayers must include the name, age, and taxpayer identification number of the child or adoptee on their tax return.  The distributions may be recontributed to an individuals eligible retirement plan, subject to certain requirements.
  • Effective for distributions after December 31, 2019, the age at which distributions are required to be made from an IRA or a qualified plan is increased from age 70 1/2 to age 72.  The age at which qualified charitable distributions of up to $100,000 per year from an IRA is unchanged at 70 1/2.
  • Retroactively effective for plan years beginning after December 31, 2017, the actuarial rules for defined benefit plans of privately-owned community newspapers are relaxed.  This is targeted relief benefiting this group.
  • Retroactively effective for defined contribution plan years beginning after December 31, 2015 and effective for IRA contributions after December 20, 2019 , difficulty of care payments that are excludable from gross income are treated as compensation for nondeductible IRA contribution limits.  These are payments by (1) a state or political subdivision of a state, or (2) a qualified foster care placement agency as compensation for providing additional care needed for qualified foster individuals.  The payments are provided when a qualified foster individual has a physical, mental or emotional disability for which the state has determined (1) there is a need for additional compensation to care for the individual; (2) The care is provided in the home of the foster care provider; and (3) the payments are designated by the payor as compensation for that purpose.
  • Effective for taxable years beginning after December 31, 2019, an employer may adopt a qualified retirement plan up to the extended due date of the employer’s federal income tax return and the plan can be retroactively effective for the taxable year.  Although employee contributions can’t be made after the year-end, employer contributions can be made up to the extended due date of the income tax return.  (This rule currently applies to SEP accounts.)
  • Effective for plan years beginning after December 31, 2021, the IRS is to issue procedures for employers who have similar individual account or defined contribution accounts to elect to file combined annual reports (Form 5500.)
  • The IRS is to issue model disclosures showing the estimated lifetime income based on the account balance of a plan participant, to be reported at least annually.  The IRS is also required to provide guidelines for how the income amount should be computed.
  • A fiduciary safe harbor is adopted so plan fiduciaries will satisfy the prudence requirement when selecting an insurer for a guaranteed retirement income (annuity) contract and will be protected from liability for losses that result to to participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the contract.  (A favorable provision for insurers, not so great for participants and beneficiaries.)
  • Effective on December 20, 2019, and electively retroactive to plan years beginning after December 31, 2013, the nondiscrimination rules are modified to protect older, longer service participation.  These rules are complex and beyond the scope of this explanation.  The rules will allow a closed or frozen plan to continue in existence.
  • Effective for distributions made after December 31, 2018, from Section 529 (educational savings) plans, registered apprenticeship expenses will be considered “qualified higher education expenses.”  Expenses for fees, books, supplies and equipment required for the designated beneficiary to participate in a registered apprenticeship program are qualified expenses for distributions from such a plan.
  • Effective for distributions made after December 31, 2018, up to $10,000 of qualified education loan repayments will be considered “qualified higher education expenses” for distributions from a Section 529 plan.  Student loan interest paid using distributions from a Section 529 plan won’t otherwise qualify for a tax deduction.
  • Effective for distributions made with respect to employees or plan participants who die after December 31, 2019, inherited retirement accounts must generally be distributed within 10 years after the employee or participant’s death.  There is an exception permitting “stretch” distributions based on life expectancy to (1) the surviving spouse of the employee/participant, (2) a child of the employee/participant who hasn’t reached majority, (3) certain disabled beneficiaries, (4) chronically ill beneficiaries, or (4) other beneficiaries who are not more than 10 years younger than the employee.  Once a child of the employee/participant reaches majority, the balance of the account must be distributed within 10 years after the date majority is reached.

The effective date for collective bargaining agreements and government plans will generally be for distributions with respect to employees or plan participants who die after December 31, 2021.

There is an exception for certain existing annuity contracts.

The ten-year distribution requirement also applies to successor beneficiaries of beneficiaries who inherited accounts before December 20, 2019.  (If an employee/participant was deceased during 2019, a surviving spouse might decide to disclaim IRA survivor benefits so that successor beneficiaries will be able to claim “stretch” distributions of benefits for which the election would otherwise be lost.)

Commenters have suggested  designating a charitable remainder trust as a beneficiary of a retirement account as a way to avoid the 10-year limit.  The plan distribution to the trust isn’t subject to current taxation.  Distributions are required to be made annually to the beneficiary(ies) of the CRT, which will probably carry taxable income.  Depending on how long the beneficiary(ies) live, some or all of the balance could go to a charity.  Seek tax and legal counsel when considering this alternative.

  • A provision of the Tax Cuts and Jobs Act of 2017 changed the Kiddie Tax that apples to the unearned income of certain individuals.  The rule applies to a child who (1) is required to file a tax return; (2) does not file a joint income tax return for the tax year; (3) the child’s investment income exceeds a threshold ($2,200 for 2019); (4) either of the child’s parents are alive at the end of the year; and (5) At the end of the tax year, the child is either (a) under age 18; (b) under age 19 and doesn’t provide more than half of his or her own support with earned income; or (c) under age 24, a full-time student, and does not provide more than half of his or her own support with earned income.  Under the Tax Cuts and Jobs Act, the child’s income tax is computed using the tax rate schedule that applies to estates and trusts.  This provision was causing a hardship, especially for survivors of military casualties.   Under the SECURE Act, this change is repealed, effective for tax years beginning after December 31, 2019.  Taxpayers may elect to retroactively apply the change for tax years 2018 and 2019.   This means children will generally be taxed on their unearned income at their parent’s marginal tax rate.  For 2019, the 37% marginal tax rate applies for single persons with taxable income over $510,300 and for estates and trusts with taxable income over $12,750.

IRS proposed regulations will keep more in retirement accounts

  •    
  • mike   

The IRS has issued proposed regulations relating to required minimum distributions from retirement accounts, including, 401(k), IRA and Roth IRA accounts.  (Proposed Regulations REG-132210-18, Proposed Regulations Section 1.401(a)(9)-9.)

The required minimum distribution is generally computed using a life expectancy table issued by the IRS, called the lifetime distribution table.  The life expectancy tables haven’t been updated for many years.  The proposed regulations include new life expectancy tables.

(If a taxpayer fails to take a required minimum distribution, the federal penalty is 50% of the undistributed amount.)

Since life expectancies have been increasing, required minimum distributions will be smaller using the proposed tables, potentially leaving larger balances to accumulate future earnings.  Bigger distributions can optionally be taken at the risk of exhausting the account before the employee or plan owner’s death.

The proposed regulations are proposed to be effective for retirement plan distributions for tax years beginning on or after January 1, 2021, provided they are adopted as final regulations by that date.

Required minimum distributions for a non-spouse beneficiary of a deceased employee or a deceased plan owner are based on the life expectancy determined using the Single Life Table of the beneficiary as of the date of death of the employee or plan owner, minus one for each subsequent year.  Under the proposed regulations, the beneficiary will be able to recompute his or her life expectancy as of the date of death of the employee or deceased plan owner using the new lifetime distribution table starting January 1, 2021.

 

IRS gives more guidance for virtual currency transactions

  •    
  • mike   

The IRS is very concerned that taxpayers aren’t properly reporting their transactions for Bitcoin and other virtual currencies.  Previously, guidance was issued in Notice 2014-21.  Now it has released additional guidance about this subject.

In Revenue Ruling 2019-24, the IRS discusses “hard forks”.  A hard fork is like a spinoff for a stock.  New cryptocurrency is created on a new distributed ledger.  According to the Revenue Ruling, if the new currency is “airdropped” to a distributed ledger address owned by the taxpayer, it is an accession to wealth that is taxable as ordinary income equal to the fair market value of the currency received.  If the new ledger isn’t owned by the owner of the base currency, no taxable income results for that individual.

The IRS has also issued additional Frequently Asked Questions about virtual currency at its website.  Here is a link to the FAQ.  https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

One of the FAQ items relates to virtual currency received in exchange for performing services.  The answer provided is that virtual currency received in exchange for performing services is taxable as ordinary compensation income, based on the fair market value of the currency received.

Another FAQ makes it clear that virtual currency transactions can be reported using the specific identification method.  The taxpayer must specifically identify the batch of units sold and when they were acquired.  A unit of virtual currency can be identified by documenting the specific unit’s unique digital identifier such as a private key, public key, and address or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet or address.  The information must show.

1. The date and time each unit was acquired,

2. The taxpayer’s basis and the fair market value of each unit at the time it was acquired,

3. The date and time each unit was sold, exchanged, or otherwise disposed of, and

4. The fair market value of each unit when sold, exchanged or disposed of, and the amount of money or the value of property received for each unit.

Taxpayers who don’t specifically identify units of virtual currency that are sold, exchanged or otherwise disposed of are deemed to have sold the units on a first-in, first-out basis.

Transactions other than ordinary income transactions should be reported on Schedule D and Form 8949.

I recommend that taxpayers who participate in virtual currency transactions should get professional help when preparing their income tax returns.

Under a new California law, more workers will be classified as employees

  •    
  • mike   

The California legislature has passed AB5, which puts the California Supreme Court’s Dynamex ruling into California’s employment law.  Governor Newsom signed the bill on September 18, 2019.

The text of the bill can be found at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5

Since California is a bellweather state, similar legislation could be proposed in other states.

Under the new law, most workers are presumed to be an employee unless the hiring entity satisfies a three-factor test.  Unless an exception applies, all three tests must be met in order to treat an employee as an independent contractor.

  1. The worker is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract for the work and in fact;
  2. The worker performs work that outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

There are many exceptions to the new rules, including professionals such as medical doctors, dentist, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, private investigators and accountants.  There are also exceptions for insurance salespersons, enrolled agents, securities broker-dealers, investment advisors, direct sales salespersons, commercial fishermen, marketing professionals, human resource administrators, travel agents, graphic designers, grant writers, fine artists, photojournalists, still photographers, freelance writers, licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers, licensed cosmologists, and real estate licensees.  Generally, these individuals are required to have a business license.  (This list is not complete and additional conditions may apply to be exempt.)

Although the new law is targeted at shared-economy businesses like Uber, Lyft and DoorDash, it will have far-reaching effects, including newspaper delivery persons, truck drivers and cleaning companies.

Shared economy businesses have vowed to fight the new legislation by sponsoring ballot initiatives for override by California voters.

This issue is important because employers can be subject to many expenses and government reports for employees that might not apply to independent contractors, including minimum wages, employment taxes, unemployment insurance, worker’s compensation, and employee benefits like sick pay, vacation pay, medical insurance and retirement plans, .

California businesses who use independent contractors should consult with their lawyers about the impact of this new law, whether their independent contractors are exempt, and what they should do to comply with it.

 

 

 

Here are simple FREE ways to help defend your credit from identity theft

  •    
  • mike   

Almost all of us are victims of identity theft.

Have you ever been issued a new credit card number by your credit card company without requesting one?  That’s an indication your number was possibly acquired by computer hackers or there was unauthorized activity on the credit card.

Here are some FREE steps you can take to defend your credit from identity theft.

The first is to periodically get and review your credit report.  You can get it for free at annualcreditreport.com.  By limiting your request to one credit bureau, you can get a report quarterly.  The major credit bureaus are Equifax, Experian, TransUnion and Innovis.

A second step is to get a credit freeze.

In a mortgage update class yesterday, I learned about some smartphone apps for quick and easy control of access to your credit files. It’s controlled using an “on/off” switch. You can get them at the Apple Store or Google Play. They are free.

For Equifax, the app is Lock & Alert.

For Experian, the app is Identity Works.

For TransUnion, the app is MyTransunion.

There’s no need to get an “enhanced” version of an app for which you are charged. The basic “free” app is sufficient.

It’s also a good idea to request a credit freeze for your minor children.  Children are the most popular targets of identity thieves today, because “no one is looking” until the child is age 18.

Telephone numbers for requesting a credit freeze are:

  • Equifax 800-349-9960, option one (automated) or 888-298-0045 (attended.)
  • TransUnion 888-909-8872, Option 3
  • Experian 888-397-3742, Option 1, Option 2

You must request the credit freeze for each credit bureau.

You can also request free Fraud Alerts.  If you request them from one credit bureau, the others are also notified.

  • Equifax 800-525-6285
  • Experian 888-397-3742
  • TransUnion 800-680-7289

Be alert for “phishing” texts, telephone calls and emails trying to get access to your computer, smart phone or other information.  People are commonly getting telephone calls from the “IRS” and the “Social Security Administration” alerting them to collection actions or other matters.  These agencies do not call people.  They send letters.  Emails are also being “sent” by major institutions like Wells Fargo and Bank of America.  Don’t respond to them by clicking on anything in the email.  Look at your account online or call a representative using the telephone number on your credit card.

It’s a shame that identity thieves are making the internet and smart phones unsafe.

It’s prudent to protect yourself.  Anyone who has had a serious identity theft experience can tell you it’s miserable to clean it up.

 

How to make a retroactive small business accounting election for California

  •    
  • mike   

The Franchise Tax Board has released preliminary guidance about how to make a small business accounting election on a 2018 income tax return.  California recently passed legislation, the “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019”, adopting some of the provisions of the federal Tax Cuts and Jobs Act of 2017, including elections for certain small businesses that were previously required to use the accrual method of accounting to use the cash method and other accounting simplification measures.  The effective date for these accounting changes is for years beginning on or after January 1, 2019, but taxpayers may elect to apply the changes for years beginning on or after January 1, 2018.

Until formal procedures are issued, taxpayers may make the election by providing the following information to the Franchise Tax Board:

  1. A statement with the original or amended California income tax return stating the taxpayer’s intent to make a small business accounting election and which election(s) the taxpayer is making;
  2. On the top of the first page of the original or amended tax return, write “AB 91 – Small Business Accounting Election” in BLUE INK; and
  3. Mail the return to:

Franchise Tax Board

PO Box 942857

Sacramento, CA  94257-0500

Note:  These returns must be PAPER-FILED.

(Spidell’s Flash E-mail: How to make a retroactive small business accounting election, July 31, 2019.)

Heterosexual couples under age 62 can now be registered domestic partners in California

  •    
  • mike   

Governor Newsom approved Senate Bill No. 30 on July 30, 2019.  The bill was authored by Senator Scott Weiner (Democrat state senator from San Francisco).  Under the new law, California’s Family Code is amended to allow heterosexual couples (a man and a woman) under age 62 to be registered domestic partners.

Before the change, only same-sex couples and heterosexual couples age 62 and greater could be registered domestic partners in California.

This change is important because registered domestic partners have essentially the same legal rights as married couples in California (including community property rights), and the relationship is not recognized as being married by the federal government.  THEREFORE, HETEROSEXUAL COUPLES WHO ARE CALIFORNIA REGISTERED DOMESTIC PARTNERS CAN AVOID THE FEDERAL INCOME TAX MARRIAGE PENALTY.

The federal marriage penalty means that a couple that files their income tax returns as married persons generally pays more income taxes than they would as unmarried persons.  The federal marriage penalty was increased under the Trump tax legislation, the Tax Cuts and Jobs Act of 2017.

Registered domestic partners are treated the same as married persons for California income tax reporting.

Be aware that registered domestic partners don’t qualify for some federal tax benefits that married couples do qualify for.  For example, gifts to a spouse who is a U.S. citizen qualifies for an unlimited marital deduction.  A bequest to a spouse who is a U.S. citizen also qualifies for an unlimited marital deduction.  The executor of a deceased spouse can elect on an estate tax return to give any unused lifetime exemption of the deceased spouse to a surviving spouse.  Only married persons are allowed to treat property settlements incident to a divorce as tax-free.

Heterosexual couples who are California residents and are planning to be married should consider being registered domestic partners, instead.

Heterosexual married couples who are California residents and who are paying a substantial federal marriage penalty should consider terminating their marriages and becoming registered domestic partners.  (Consult with your tax advisor to find out if you actually have a marriage penalty.)

I recommend consulting with a lawyer that specializes in family law and estate planning before making your decision.

(California S.B. 30, July 30, 2019.)

California sales tax relief for small businesses

  •    
  • mike   

Thanks to the Supreme Court’s Wayfair decision, retailers that sell tangible personal property to customers located in states where they don’t have a physical presence may be required to collect sales and use tax.  For example, a company located in Nevada that sells furniture to a California customer may be required to collect California sales and use tax and report the sale and pay the tax to California.

The same concept can require a retailer located in one sales tax district, say Santa Clara County, that sells property to a customer located in another district, say Los Angeles County, to collect and remit the sales and use tax to the district where the customer is a resident (in this example, Los Angeles County.)  (This requirement has long applied to sales of motor vehicles.)

Initially, California’s Department of Tax and Fee Administration (CDTFA) issued rules imposing this collection requirement when a taxpayer had in either the preceding or current calendar year either (1) sales into the state or district exceeding $100,000 or (2) 200 or more separate transactions.

The new requirements were proposed to be effective on April 1, 2019.

Smaller retailers complained that the requirements were too burdensome — especially because they might have 200 separate transactions with a small dollar amount.

On April 25, 2019, Governor Newsom approved Assembly Bill No. 147, which provides relief to smaller retailers.

The new threshold for the requirement to collect California state and district sales and use taxes is more than $500,000 of sales of tangible personal property to customers located in California.  (Sales of motor vehicles are still subject to the use tax reporting requirement, regardless of the amount.)

The second threshold of 200 or more separate transactions has been repealed and is disregarded.

The new $500,000 of sales threshold is retroactively effective on April 1, 2019.

A change in the new law this isn’t favorable to small businesses doing business in California is that district sales and use taxes for all districts must be collected and reported when a business reaches the $500,000 threshold for all of California.  Under the previous guidelines, reporting and collection was only required when the $100,000 or 200 transactions threshold was reached for the district.  To help get the rates that apply, the CDTFA has on online lookup tool, Find a Sales and Use Tax Rate by Address.  Here is a link to the tool. https://gis.cdtfa.ca.gov/public/maps/taxrates/  (Spidell’s California Taxletter, May, 2019, p. 3, California adopts $500,000 economic nexus threshold for use taxes.)

Retailers with a physical presence in California are still required to report and collect California sales and use tax and local district sales and use tax.  They only need to be concerned about the $500,000 threshold as it relates to sales to customers located in another district.

The new law also includes a new requirement that requires “marketplace facilitators” that sell goods for other companies on their web sites, like Amazon and EBay, to treat those sales as made by the marketplace facilitator.  The marketplace facilitator will report the sales and collect and remit the sales and use taxes when it exceeds the $500,000 of sales threshold for the State of California and the various districts.

If the marketplace facilitator reports the sale and collects and remits the sales and use tax, the retailer isn’t required to do so.

The marketplace facilitator rules won’t be effective until October 1, 2019.

Some retailers might have to report sales made through a marketplace facilitator from April 1 through September 30, 2019 and their reporting burden may be shifted to marketplace facilitators thereafter.

There may be audit issues with the new marketplace facilitator reporting requirement, because the sales reported on the sales tax report won’t agree to the books and records of the retailer and the marketplace facilitator.

Despite the complexity of the new reporting requirements, many smaller retailers will find a lot to be thankful for in this relief legislation.

Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.