Prepare Now for Whatever Life Brings You in the Future

As we enter the second month of Coronavirus Social Distancing and Shelter in Place, there are many lessons that we have learned.  Some of these are affirmations of effective advance planning and preparation we thought may never have been necessary.  Others are reminders that no matter how much planning and preparation you do, there are always ways to improve – things that you could have done better, if you had a better crystal ball.

Now is the time to take stock of what went well (enough) during this crisis so far, as well as what can be done better.  Some of the necessary improvements may be able to be done now, to improve the situation at hand and to improve the potential outcome as we emerge from this situation in the coming weeks, months and possibly, years. 

We have been tested in many ways by fires, flooding and other natural disasters over the past several years leading up to this new, invisible enemy, which seems to be the worst of all.  There is no reason to believe that we will not be subject to future challenges of this nature.  The situation in California is particularly vulnerable.  We are prone to wildfires, which can lead to subsequent flooding.  And there is always the threat of a devastating earthquake.  We are also a hub of travel for commerce and leisure.  Our state welcomes millions of people each year from other countries to do business in our state (the fifth largest economy in the world) and our resorts and attractions bring in travelers from all over the world.  California is a great place to be, but our state has a certain fragility. 

We should plan for future disruptive events and have systems in place to mitigate the impact these events can cause.  It is imperative to our families, our employees, and our friends that we all do what we can to make sure that we each can do our part to be prepared.

Things that can be done to prepare for future challenges include:

  1. Examine your computer systems.  We are all so reliant on our networks for communication and commerce that it is imperative that we have back up plans, including the necessary equipment and procedures to survive in the event of a local or widespread power disruption, loss of access to a facility, etc.
  2. Review your insurance policy
  3. Determine if your essential information is protected and that you have redundant backup in an alternate location
  4. Do you have an acceptable method of communicating with the people who are important to you?  Do you have a secondary method?  A tertiary method?
  5. Are your files accessible in the event of a local disaster?  A widespread disaster?
  6. Do you have a plan to have mail forwarded to an alternate location?
  7. Do you have a method to transfer your telephone communications to an alternate source?  Are you able to do that remotely?
  8. Do you have the capability of moving your employees from working “on site” to working remotely?  Can it be done quickly from a remote location?
  9. Do your customers know how to reach you in the event of a disruptive event?
  10. Does your company have a plan to continue communication in the event of a disaster?  Is everyone aware of it?
  11. Do you have a plan to process mail?  Process deposits and maintain controls? Process accounts payable and pay your bills?  Have you cross trained your employees to make sure there is coverage?

These suggestions and questions may seem like common sense, but in this crisis which has tested us all, there have been moments in which everyone finds themselves questioning whether they could have planned better.  Prepare now for whatever life brings you in the future.

Recovery Advisory Services is Here for You

We at DBM are proud to be a part of this resilient community. As our community recovers from week-long disruptions from the fire evacuations to power outages, we want you to know that you have us here ready to help you.  

One of the top priorities of the recovery is to file your claims with your insurance companies.  Processing a claim can be a lengthy process if you cannot provide the requested documents and records timely.  Our consulting service team is here to help you facilitate recovery through a wide range of advisory services, such as preparation for insurance claims to calculating loss figures due to the fires/power outages/evacuations. We will translate the terminology and concepts that can be inherently confusing to you and coordinate assembling of the required documentation, in the manner consistent with the insurance carrier’s expectations. Through the same process, we can help you prepare for possible loan and other financing options if necessary.

The assistance we can provide includes but is not limited to the following:

  • For Businesses:
    • Overview of possible applicable insurance coverages with review of the Business Owners insurance policies
    • Help identify decreases in various revenue streams
    • Help identify increases in various costs
    • Help identify alternative business flows to position business owners to “get back into business” as soon as possible, and to lessen further damages for any subsequent event
    • Help develop a business operation plan for future emergency situations
  • For Individuals:
    • Overview of possible applicable insurance coverages with review of the Homeowner’s and Rental insurance policies
    • Help identify decreases in various income/wages sources  
    • Help identify increases in various additional living expenses

Subject Matter Expert: Dominic P. Bosque, CPCU, Director of Management Advisory Services

In addition to providing consulting services for financial service firms for over 35 years, Dominic has extensive knowledge in the insurance service industry. From the claim filing perspective, Dominic has direct experience in supporting businesses recover in post-disaster circumstances here in Sonoma County and across other disaster areas of the country.  From the insurance service providers’ perspective, he has years of experience training claims service professionals improving claims-handling procedures. With these insights of rebuilding, Dominic can successfully enhance a business’s core operational abilities to become stronger and more resilient to meet the next set of future challenges.

Also here are some links to some pertinent websites to help businesses and individuals navigate this process.

Sonoma County Business Recovery Resource Guide

Business Recovery Tools

Residential Property Claims Guide

Wildfire Resources

Top Ten Tips for Wildfire Claimants

Don’t Get Burned after a Disaster

Preparedness for Business

Tax Reform 2018

On December 22, the President signed the new tax bill, “Tax Cut and Jobs Act (2017).” The big question is “How will the reform affect me?”

As is the case with most tax issues, the answer is “It depends.”

Itemized deductions are changing for all taxpayers.  Fewer deductions will be allowed, and there are limitations on the amount allowed. Mortgage interest is limited to the interest on a $750,000 mortgage balance (no home equity interest allowed), and state income and property taxes are limited to $10,000.

Standard deductions are increased, but personal exemptions are suspended.  Other deductions that are modified or suspended include moving expenses and gambling losses.  Net operating losses can no longer be carried back two years, but are carried forward indefinitely.  Certain farming losses incurred may still be carried back two years.

To offset the loss of deductions for taxpayers, new tax rates are lower than current rates.

There are also new credits to help taxpayers lower the tax due.  Credits are advantageous to taxpayers because they directly offset tax due dollar for dollar, as opposed to itemized deductions or personal exemptions which lower the total income that is taxable.  The child tax credit increases to $2,000 per child and is refundable up to $1,400, subject to income phase-outs.    There is also a new family credit and non-child dependent credit.  Education credits are combined so that there is only one credit available, the American Opportunity Credit.

The individual mandate under the Affordable Care Act is repealed.  For months after 12/31/2018 the Shared Responsibility Payments for taxpayers who lack health insurance is reduced to “0.”

For businesses, there are changes to lower taxable income as well.    Rules are in place to allow expensing 100% of the cost of new and used equipment in the year purchased.  More entities are able to use the cash method of accounting, as the gross receipts threshold is increased.  New tax rates will lower the corporate rate from 35% to 21%.  There are provisions to reduce taxation of income from pass through entities.

There are changes to suspend some current deductions and credits to offset the reduction in tax rates.  For instance, deductions for entertainment expenses are disallowed as well as the deduction for domestic production activities.  There are additional modifications and repeal of business credits.

The Alternative Minimum Tax is repealed for corporations but remains for individuals.  The exemption amounts for AMT, however, are increased, so fewer individuals may be subject to AMT.

This article is a highlight of the provisions included in the tax act.  There are more provisions for changes that Dillwood Burkel & Millar, LLP continues to review.   We are especially looking to see how the legislation will impact you, our clients.  We will continue to keep you abreast of the legislation and the impacts on taxpayers.

Tips for 1099 Filing

Are you a business owner, CFO or bookkeeper?  January is the time to file end of year reports including 1099s.   Here are a few tips to ensure that the 1099s are filed timely and correctly.

Taxpayer Identification Numbers:

The IRS has clarified how to report the recipient’s information on the 1099. If the recipient is a sole proprietor, use their individual name and their social security number.  For single member LLCs, use the owner’s name and their social security number as well.  Sole proprietors and LLCs may have Employer Identification Numbers (EIN), but using the EIN causes confusion for the IRS.  By using social security numbers, the IRS is able to match 1099s to individual tax returns where the income is reported.

For all other entities including LLCs that file as a partnership, use their employer identification number.

You may truncate the recipient’s social security number on their copy of the 1099.  Use “X’s” for the first five numbers and then print the last four of their social security number.  You cannot truncate the numbers on the copy that is filed with the IRS.

Should you file 1099s?

For a business, the most common 1099 filed is the 1099-MISC.  If you pay $600 or more to an individual or business for services (not goods) during the year, you must file a 1099.   Payments to corporations do not need to be reported.  Failing to file a required 1099 can cause you to incur significant penalties and may cause the IRS to disallow a deductible expense, thereby increasing your taxable income.

Items that require a 1099 include payments for services (such as professional, accounting, legal, repair and maintenance, web and graphic design, and computer services), rent, prizes and awards, or attorney fees.  Please contact DBM for a comprehensive list of the expenses that may trigger a required 1099.

You may also need to file a 1099-INT if your business is paying interest of $10 or more to an individual or another business that is not a corporation.

Individuals who receive a 1099 for income that belongs to someone else must file a 1099 to let the IRS know that the income belongs to another recipient.  For instance, if you receive a 1099-MISC for rental income that is reported by your sister, you must file another 1099 to indicate that your sister is the recipient (you would be the filer).  The IRS will then look at your sister’s tax return to ensure that the income is reported.

Deadlines:

  • If you are reporting non-employee compensation, the 1099-MISC is due to the recipient and the IRS by January 31, 2018. They can be paper-filed (if you are filing under 250 forms) or electronically filed.
  • All other 1099s are due February 28, 2018 if paper filed and March 31, 2018 if filed electronically.
  • The IRS suggests that if you file 1099-MISC for non-employee compensation, you submit the 1099s and the Summary Form 1096 as one package. This advice applies to all 1099s filed for non-employee compensation, even if they are filed late.
  • Submit all other 1099s in a separate package with a separate Form 1096.

Filing 1099s can be confusing.  Consequences for missing deadlines or for not reporting can be painful and expensive.  Should you have any questions, please contact DBM.

DBM is Here for You

Our thoughts and prayers go out to all of those who have been affected by the fires in Sonoma, Napa and the neighboring counties.  Thank you for your calls, emails and messages of concern.  Our office has been open since last Tuesday, the day after the fire.  While some of us are working remotely as we deal with our own losses, the office is fully functional, and we are here to answer questions and help you plan for your future needs.

On Thursday October 13, both the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) announced a special tax relief and an extension for the tax filing due date.  For those who are residents of counties impacted by the fires, the due date has been extended to January 31, 2018, and penalties for late filing are waived.  The counties included in the disaster area are Sonoma, Napa, Solano, Lake, Mendocino, Butte and Nevada.

As we start to rebuild, there are several areas of concern that may arise.  DBM is here to help you steer through some of these issues.  If you have questions about any of the following, please give us a call:

  1. Tax treatment of casualty/disaster losses. There are special rules that may benefit you if you have suffered a loss or damage to your home and business.
  2. Establishing a value to your home or business to document your loss.
  3. Assistance negotiating with your insurance company to maximize your insurance settlements.
  4. Calculating taxable income for 2017 to revise estimated tax payments and withholding.
  5. Determining the best timing to report your loss. The IRS and the FTB both allow you to claim the loss in tax year 2016 or 2017.  We can evaluate which option is the best for you.

We at DBM are proud to be a part of this wonderful community.  We are here to help you recover and rebuild.  Be well, be safe, and stay in touch.

Repair and Maintenance Costs under the Tangible Property Regulations (TPR)

Starting in 2014, business returns including businesses conducted by taxpayers on Schedules C, E or F of their form 1040s are required to follow new guidelines with regard to repair and maintenance costs on property as well as smaller additions of fixed assets.

For a sample Capitalization Policy, visit Best Practices under Resources on DBM website.

In general, the new rules are more formulaic compared to the way things used to be. In the past “facts and circumstances” were considered in determining whether or not costs incurred needed to be capitalized as an asset and depreciated over time, or whether they could be expensed immediately as repairs or maintenance.

Some of the logic from the old facts and circumstances protocols remains. Expenditures which enhance the asset, or which alter the asset to a new use are supposed to be capitalized whether or not the expenditure might otherwise be a current period expense under these new rules.

Care must be taken as well, because as part of the new protocols, if the IRS determines that expenditure should have been expensed and not capitalized in a prior period, they may disallow depreciation deductions on the cost that they determine was inappropriately capitalized.

To complicate matters there are elections which can be made to capitalize certain items, or everything in a certain year.

For expenditures which would generally be considered repairs, meaning that they pass the tests which would otherwise require the capitalization of the cost due to a change or enhancement, there is a subsequent test of magnitude. In general, if the expenditure for a repair is more than 30% of the remaining adjusted tax cost basis of that asset, it must be capitalized. (Example: major repair or new roof on a 25 year old residential rental property).

There is a silver lining to the new rules. For small or “de minimis” purchases of new assets, there is no need to capitalize the purchases at all, and this is on a line item basis. For taxpayers with an “applicable financial statement” meaning audited financial statement, the limit per asset for purchases of assets not requiring capitalization is $5000. For taxpayers who do not have their financial statements audited, the threshold is $2500. Again, this threshold is on a line item basis, so if an invoice comes in with a stove, a dishwasher, a refrigerator and a microwave oven for a rental, the $2500 threshold is applied on an item by item basis. It is likely that none of those items need to be capitalized. They can be expensed if their individual cost is under the threshold amount.

In order to qualify for this advantageous treatment, the taxpayer needs to follow the asset capitalization policy that it maintains on its books. The IRS also would prefer that the asset capitalization policy be written and exist prior to the beginning of the tax year that it applies to. Following is a draft asset capitalization policy which can be used to document your own capitalization policy. Please remember that if your asset capitalization policy exceeds the amount that the IRS allows, you will be limited to the IRS limitation on your tax return. This will create a book to tax difference which will need to be separately tracked to make sure that you do get your full depreciation deductions on into the future.

Personal Privacy – More State-Sanctioned Information Available on the Internet

As you’re well aware, personal information is a form of currency. Some people use this information to advertise to you, but others may want to steal your identity or engage in other criminal activities. If you are concerned about personal privacy, it is time to take steps to reduce your risk. The State of California provides personal information on the internet that may give thieves more information about you than ever before.

The California Secretary of State started sharing a PDF image of a business’s “Statement of Information” on 12/15/16.

The Statement of Information is a required filing for corporations doing business in CA. A similar statement of information is required for LLC’s.

The statement requires disclosure of the names and addresses of the principal officers of the entity and the agent who will receive service of process on your behalf. If the form is not filed electronically, it may reveal your actual signature.
What can you do? Consider using your business address or a PO Box rather than your home address on this form. Listing your home address on the form exposes your personal security to scam artists and potential criminals. To see how this data appears, click on the link, below.

https://businesssearch.sos.ca.gov/

Some companies appoint a corporation as the agent for service of process for limited liability entities so that personal ownership of a business is afforded an additional level of protection. For example, Facebook, Inc. appointed CSC, Corporation Service Company in Sacramento as their agent for service of process.

State of California – Unclaimed Property

The state also maintains a database of unclaimed property. At last report, the state has more than $8,000,000,000 in unclaimed property. Some of it may be yours. This site can be used to locate forgotten assets that have been turned over (escheated) to the state. If left long enough, ownership of the property changes to the State. So…if you’ve forgotten about a bank account, stock, insurance proceeds, safe deposit boxes, etc., the state hopes you won’t try and reclaim it. The state does virtually nothing to help you get your property back and they make it difficult for you to reacquire the property with red tape, etc.

This website is a wealth of information for hackers, identity thieves, and criminals. Unclaimed property can be searched by name, and it generally lists your address.

Check to see if you have some property at: https://ucpi.sco.ca.gov/UCP/Default.aspx

County and other Websites

If you own real estate, or have had lawsuits or liens filed against you, there isn’t much you can do to hide the internet footprint. It is a matter of public record. There may, however, be a process to disguise or obfuscate your personal information.

If you want more information on how to remove yourself from a website, please check with a competent information technology advisor.

Year-end Reporting Tips #2: General Rules for Filing Form 1099s

If your trade or business makes payments to contractors or vendors, it is very likely that you will be required to file Form 1099s.  The following are a list of general rules to keep in mind:

  • A 1099 is only necessary if the total payments for the year are $600 or more
  • In general, corporations do not need to receive a 1099. However, Payments for legal and medical services are reported on 1099s whether or not the entity is incorporated.
  • When using a SSN to report, the 1099 must start with the person’s name. When using an FEIN, the 1099 must start with the entity name.  It’s okay to have additional names on the second line of the 1099, however, the first line must match the ID number.

Year-end Reporting Tips #1: Documenting Independent Contractors and Vendors

In order for tax payers to protect themselves from IRS penalties, it is important to collect a Form W-9 from all workers and vendors.   While not required, it’s highly recommended for two reasons:

  1. The Form W-9 provides proof that the information on an issued 1099 is as represented by the vendor. If the IRS determines that the 1099 is incorrect and imposes a penalty, the W-9 shows that the misinformation came from the vendor and thus shifts the penalty to the vendor.
  1. It is also important to collect the W-9 before any payments are made to the vendor. If the W-9 is not provided, a percentage of the payment, or a backup withholding, must be withheld and remitted to the IRS and FTB.  There are penalties to the tax payer for failure to do the backup withholding.

For more information on how the IRS defines employee versus independent contractor, please review the following summary.

CA Update: HWHFA Requires All Employers to Review their Paid Sick Leave Policies

HWHFA Requires All Employers to Review their Paid Sick Leave Policies

by Hillary Erbert, Associate Accountant

On September 10, 2014, Governor Brown signed into law the “Healthy Workplaces, Healthy Families Act of 2014” (HWHFA), which establishes minimum requirements for paid sick leave accrual for most employees who work in California.  This law impacts all employers, regardless of their size or nonprofit status.  Companies that already provide paid sick or personal leave will need to carefully review their policies to ensure they meet all the requirements.

Employee Rights under HWHFA:

  • Employees who work 30 days or more during a year are entitled to accrue paid sick leave. The bill does not define how many hours of work is considered one work day, and the 30 days of work must be with the same employer.
  • The minimum accrual rate is 1 hour of leave for every 30 hours worked.
  • Accrual begins on July 1, 2015 or the date of employment, whichever is later.
  • An employee is eligible to use their paid sick days beginning on the 90th day of employment.
  • Sick leave can be requested verbally or in writing.
  • Employees cannot be required to find a replacement as a condition for using sick days.
  • Employees can take paid leave for their own or a family member’s diagnosis, care, or treatment, and for certain preventative treatments.

For example, suppose a small business hired a temporary employee to work part-time for 14 weeks during a peak period of business.  The temporary employee agreed to work 4 hours per day twice a week.  The employee would work a total of 112 hours, accruing 3.7 hours of sick leave from the date they begin working, and potentially be eligible to use the sick leave after the first 90 days of employment (the 90th day of employment would occur during week 13). However, because the employee did not work for 30 days (2 days a week x 14 weeks = 28 days total), they are ineligible to use any of the paid sick leave.

Requirements for Employers:

  • Display a poster on paid sick leave where employees can read it easily.
  • Provide written notice to employees of paid sick leave rights at the time of hire.
  • Provide the minimum amount of paid sick leave described above.
  • Allow eligible employees to use their sick leave upon reasonable request.
  • Show how many days of sick leave an employee has available. This must be on a pay stub or on a document issued the same day as a paycheck.
  • Maintain records going three years back showing how many hours have been earned and used.
  • Employers are prohibited from discriminating against an employee who reasonably requests paid sick days.

Employer Rights:

  • Employers can limit the amount of paid sick leave that an employee can use in one year to 24 hours.
  • Sick leave can be carried over from year to year, but employers can limit the total sick leave to 48 hours.
  • Employers are not required to pay out unused sick leave when employment ends.

If an employer does not comply with these regulations, they may be subject to fines up to $4,000 per violation.

Feel free to contact our firm if you have specific questions or concerns on how this law will impact your business.

There is additional information and resources on California’s website under the Division of Labor Standards Enforcement, http://www.dir.ca.gov/dlse/ab1522.html.