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The individual mandate under the Affordable Care Act is repealed.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The Alternative Minimum Tax is repealed for corporations but remains for individuals.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.

Host a Nonprofit Fundraising Event without Getting Tangled up in Government Regulations

Host a Nonprofit Fundraising Event without Getting Tangled up in Government Regulations

by Hillary Erbert, Associate Accountant

A fundraising event is a fun way to raise money for a good cause and attract more attention to a nonprofit organization.  However, they can take a tremendous amount of hard work and financial resources to host.  In addition, the government provides extra hurdles to jump through by requiring permits and enforcing specific regulations concerning how money is reported and how taxes are paid.  It’s important for nonprofits to understand these requirements to avoid unexpected fees and circumstances that could jeopardize the success of the event.  Certain types of events that are subject to these regulations include raffles, auctions, gambling, and events that serve alcoholic beverages.

Considerations for hosting a raffle:     Tickets with numbers in a woven basket

  • The organization must register with the Attorney General’s Registry of Charitable Trusts by September 1st OR at least 60 days before the event.
  • At least 90% of the gross proceeds from the raffle must be used for charitable purposes.
  • A Nonprofit Raffle Report must be submitted by October 1 to the Attorney General the year following the raffle.
  • Prizes may need to be reported on a W-2G.

Considerations for hosting an auction:    gavel

  • A seller permit may be required.
  • Sales tax must be paid on items sold based on the auction price (not the actual value of the item).
  • A sales tax return must be filed with the BOE as soon as the last day of the month following the event.

Considerations for hosting a gaming event:    chips

  • The organization must submit the Annual Registration Form to the Bureau of Gambling Control via mail no more than 90 days and no less than 30 days prior to the proposed date.
  • Games that can be played at the event are limited.
  • Prizes to participants are limited and may need to be reported on a W-2G.

Considerations for serving alcoholic beverages:   drinks

  • The organization may need to hire a licensed caterer or obtain a 1-day license
  • The organization may need to pay tax on beverage sales

In addition, there might be more complicated revenue recognition rules that are specific to your events. DBM is here to help you identify and address those specific reporting requirements.  Ensuring your organization is prepared will save time and costs down the road.

For detailed information on all of these topics, visit our Best Practices on Nonprofit Fundraising Events.

IRS Theft and Scams

IRS Theft and Scams

By Bruce Moeller, CPA, JD, Partner

Unfortunately, there are some people who refuse to earn an honest living.  Recently, a growing number of people have been impersonating agents from the IRS or another tax agency in order to collect confidential information and steal tax refunds. There are things you can do to prevent becoming a victim.

IRS-Impersonation Telephone Scam

An aggressive and sophisticated phone scam targeting taxpayers, including recent immigrants, has been making the rounds throughout the country. Callers claim to be employees of the IRS, but they are not. These con artists sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets, and they usually alter the caller ID to make it look like the IRS is calling.

These criminals appear to be targeting seniors and people who have telephone numbers published in printed phone directories. If your phone number is in a directory, you may wish to instruct the directory to remove your address from their publication.

Potential victims are told they owe money to the IRS, and it must be paid promptly through a pre-loaded debit card, wire transfer, or a cash payment. If the target refuses to cooperate, they are then threatened with arrest, deportation, or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

If the phone isn’t answered, the scammers may leave an “urgent” callback request.

If you have been filing your tax returns and paying your taxes, the IRS can and will use your latest address to contact you. The IRS is required by law to correspond multiple times well in advance of directly contacting you by phone or visit. The IRS is required to mail letters in order to comply with their own rules concerning collection activities and statutes of limitations.

Note that the IRS will not typically:

  1. Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill;
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe;
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card;
  4. Ask for credit or debit card numbers over the phone;
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying; or
  6. Use email for collection activities. The IRS does not permit any collection activities to occur via email.

What to Do if You Become a Target

Never provide any personal information to anyone who calls you, ever. Don’t provide your name, address, phone number, social security number, credit card numbers, banking information, email address, or anything else.

If you receive a phone call from someone claiming to be from the IRS, and you suspect they are not an IRS employee, don’t provide any personal information. Trust your instincts. We deal with the IRS from time to time, and they don’t get abusive and call people names. If you get a call from such a person, they are not from the IRS.

Record the employee’s name, badge number, call back number and caller ID if available. (The IRS ID (Badge) number is a ten digit number.) Call 1-800-366-4484 to determine if the caller is an IRS employee with a legitimate need to contact you.

If the person calling you is an IRS employee, do call them back, after speaking with your tax return preparer. Your CPA or tax return preparer is on your side, and will protect your interests.  Don’t act alone, and don’t become a victim.

If you are confident that it was a scam artist, you can report them at www.tigta.gov or by forwarding the email to phishing@irs.gov