Unless Congress takes action, many taxpayers could be facing an "April surprise" of a federal tax bill for 2012. The reason is Congress hasn't adjusted the exemption for the alternative minimum tax for 2012. (The Congressional correction for this is call an "AMT patch". It's almost an annual ritual.)
This week’s interview on Financial Insider Weekly is with attorney William Mahan, of counsel to Gates, Eisenhart, Dawson. Our interview subject is "Tax and financial considerations of title".
This week’s interview on Financial Insider Weekly is with Phil Price, EA of The Price Company. Our interview subject is "Qualified retirement plans for closely held businesses".
This week’s "Thanksgiving special" interview on Financial Insider Weekly is with Emmett D. Carson, PhD and CEO of Silicon Valley Community Foundation. Our interview subject is "How to promote community giving as a family value".
Although California’s Proposition 39 was “sold” as closing a tax loophole for out of state businesses, it’s not quite as simple as that. Some California businesses will also be affected.
The allocation and apportionment rules apply to all businesses that are “doing business” in California, including corporations, S corporations, partnerships, sole proprietorships and limited liability companies.
The new rules are effective for taxable years beginning on or after January 1, 2013.
Businesses are considered to be “doing business” in California and therefore subject to the allocation and apportionment rules subjecting some of their income to California tax if any of these apply:
1. The taxpayer is organized or commercially domiciled in California.
2. Sales of the taxpayer in California exceed the lesser of $500,000 or 25% of the the taxpayer’s total sales. Sales of the taxpayer include sales by an agent or independent contractor of the taxpayer.
3. The real property and tangible personal property of the taxpayer in California exceed the lesser of $50,000 or 25% of the taxpayer’s total real property and tangible personal property.
4. The amount paid in California by the taxpayer for compensation exceeds the lesser of $50,000 or 25% of the total compensation paid by by the taxpayer.
(California Revenue and Taxation Code Section 23101(b).)
Before the changes, California businesses had a choice to either compute the share of their income taxable by California based on (1) the share of their sales in California divided by their total sales, or (2) a formula based on the share of sales, payroll and property in California.
Under Proposition 39, the second alternative is eliminated.
The reason for eliminating the second alternative is businesses could reduce their California tax by locating their property and employees outside of California. In addition to avoiding California tax, this feature made the second alternative appear to be a “job killer” for California. Of course, there are other disincentives for locating a business in California that are beyond the scope of this article.
There is another feature of this change that hasn’t been widely discussed. It is the definition of whether income from services are “sourced” to California. Under alternative (1), which will now be the only alternative, income from services are allocated according to where the purchaser of the services received the benefit of the services. For example, if a CPA firm prepares income tax returns for a New York client, the income will be sourced to New York. Under the old rules of alternative (2), income from services were allocated according to where the services were performed. For example, if a employees of a CPA firm located in a California office prepared income tax returns for a New York client in the California office and never went to New York, the income would be sourced to California.
(The rule under alternative (1) is at California Revenue and Taxation Code Section 23136(a).)
This change in the source rules for income from services is being adopted in many states, which means more service businesses will have to file income tax returns in many states. This can be a burden, but smaller businesses might fall under an exception like 2. above, having less than $500,000 of gross receipts in the state and less than 25% of total gross receipts in the state.
See your tax advisor for more details about how your business is affected.
Most California residents know that California Proposition 30 includes tax changes projected to raise about $6 billion a year which should mostly be used for funding public education but also to reduce California’s budget deficit.
Everyone who is a resident or visitor in California will be affected by the sales tax change. The California sales and use tax will increase 1/4% effective January 1, 2013. The increase expires after December 31, 2016.
Only a privileged few will be affected by the changes for California income taxes, which are retroactively effective January 1, 2012 and will expire after December 31, 2018.
The California income tax rate will increase from 9.3% to 10.3% for singles and married filing separately with taxable income over $250,000, heads of household with taxable income over $340,000 and married persons filing joint returns with taxable income over $500,000.
The California income tax rate will increase from 9.3% to 11.3% for singles and married filing separately with taxable income over $300,000, heads of household with taxable income over $408,000 and married persons filing joint returns with taxable income over $600,000.
The California income tax rate will increase from 9.3% to 12.3% for singles and married filing separately with taxable income over $500,000, heads of household with taxable income over $680,000 and married persons filing joint returns with taxable income over $1,000,000.
Remember the 1% Mental Health Tax also applies for taxable income over $1,000,000, so those taxpayers will have a total marginal tax rate of 13.3%. (Each dollar of taxable income over $1,000,000 will be taxed 13.3 cents.)
According to the California Franchise Tax Board, there will be no penalty for failure to pay the additional taxes in your 2012 estimated tax payments. The additional tax is due April 15, 2013. You might want to pay the additional tax by December 31 for a deduction on your 2012 federal income tax return, but watch the alternative minimum tax.
The income tax laws include a number of breaks to help victims of disasters, such as Hurricane Sandy.
The IRS issued a reminder that, since Hurricane Sandy is designated as a qualified disaster for federal tax purposes, qualified disaster relief payments made to individuals by their employers or any other person are excluded from taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. Payments to repair or rehabilitate personal residences or to repair or replace the contents to the extent not covered by insurance also qualify.
Employer-sponsored private foundations may also provide disaster relief to employee victims without affecting their tax-exempt status.
(IR-2012-84, November 2, 2012.)
The IRS also announced the postponement of various filing and payment deadlines for affected taxpayers in certain counties in Connecticut (starting October 27), New Jersey (starting October 26) and New York (starting October 27).
Tax returns and payments due for payroll and excise taxes and fourth quarter estimated tax payments due on or after the above dates may be paid without interest and late payment or late filing penalties provided they are paid by Febuary 1, 2013.
The IRS is waiving failure to deposit penalties for federal payroll and excise tax deposits normally due from the above start dates and before November 26, provided the deposits are made by November 26.
(IR-2012-83, November 2, 2012.)
The main item for which a tax deduction is available is the casualty loss for destruction of a residence and furnishings. The loss is the lesser of (1) the tax basis (cost to compute gain or loss on your income tax return) of the residence or furnishings or (2) the excess of the fair market value before the casualty over the fair market value after the casualty.
The loss is reported using federal Form 4684. You can get a copy of the form and instructions at www.irs.gov.
$100 plus 10% of adjusted gross income is subtracted from the casualty loss to determine the deductible amount. The loss is an itemized deduction reported on Schedule A.
A special election is available for losses in a federally-declared disaster like Hurricane Sandy. The taxpayer may elect to deduct the loss on an amended income tax return for the year before the loss, or on the tax return for the year of the loss. For example, Hurricane Sandy victims can elect to amend their 2011 income tax returns now to claim a tax benefit from the 2012 disaster loss and get a federal tax refund sooner than if they wait to deduct the loss on their 2012 income tax returns. The problem is they need to know what they will receive from their insurance and any relief recovery to compute the loss, and might not have that information for some time.
In order to prepare an amended income tax return, you will need a copy of the federal income tax return for 2011. If you lost it and you used a tax return preparer, first try to get a copy from your tax return preparer. Otherwise, you can request a copy of the federal income tax return using Form 4506. The IRS should waive the $57 fee if you write “Hurricane Sandy” on the top of the form.
If you have a gain because the amount recovered for your loss exceeds the tax basis of the property, there is an election available under Internal Revenue Code Section 1033 to defer the taxation of the gain provided you use the proceeds to replace the destroyed or damaged property within two years after the end of the year in which the gain is realized. Consider getting professional help with this election.
Congress may yet pass additional relief measures as they did after Hurricane Katrina. We won’t find out until after the election, when a lame duck Congress reconvenes.
For additional information, see IRS Publication 547, Casualties, Disasters and Thefts at the IRS web site, www.irs.gov. There are also additional information postings by the IRS at the site.
For more details about the areas warranting public or individual asstantce, visit the Federal Emergency Managment Agency (FEMA) web site, www.fema.gov/news/disasters.fema.
This week’s interview on Financial Insider Weekly is with attorney Kathleen Wright with the American Red Cross. Our interview subject is "Financial preparation for a disaster".