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

Fraudulent IRS Notices Alert

Fraudulent IRS Notices Alert

By David P. Dillwood, CPA, Partner

About this time of the year, the IRS sends out a flurry of notices to taxpayers alleging a variety of wrongdoing, ranging from mailing in tax forms late to not reporting all of the income which should have been reported.  The notice will claim that there is additional tax, penalties and interest due, usually in a small to annoyingly not-quite-large amount.  The first reaction in seeing correspondence from the IRS is dread.  They like it that way.  They encourage that reaction.  When the envelope is opened and there is a notice of an amount due, say $49, it is often met with a reaction of (somewhat) relief.  In many cases, thinking that it will not pay to do battle with the IRS over such a relatively small amount, the taxpayer simply writes a check to pay the balance, and dutifully sends it in.  The sad part is that most of the time, the error is not the taxpayer’s error, it is the IRS who is in error.

Many of the notices assert that a form was filed late.  For paper filed forms, we always recommend that our client use certified mail with return receipt requested for any document sent to the tax authorities.  Forms that are filed electronically automatically produce confirming evidence of filing and acceptance by the IRS.  Too many important things are date dependent to trust that the US Postal Service and the IRS will promptly deliver and record receipt of correspondence in a timely manner.  Certified mail with return receipt requested is the best way to prove that a package was mailed on the day you mailed it.  This alone could save you lots of money and headache.  In most cases, the monetary penalties for late filing a return are significant enough to warrant the extra step in using certified mail.  What many people forget or don’t know is that there can be other, far more onerous consequences to a late filed return.  Many tax elections, which allow taxpayers to claim favorable treatment for items on their tax returns must be included in a timely filed tax return.  If the election is with a late filed return, the election is invalid.  So while you may be concerned with the notice and a few hundred dollars of assessment, the problem may be far greater.  It could result in thousands of dollars, or even more in extra taxes over time.

Other notices claim that the taxpayer left something off of their return when they prepared it.  The government is relying on their computers to match the amounts taxpayers reported on their returns with the amounts reported to them by banks, brokerage houses and others who issued forms 1099 for the year.  In many cases, there is a problem with the amount in the government’s computer, or a slight difference between what is in the computer and the amount reported on the tax return.  The procedure is to treat any amounts on the taxpayers return as accepted, and then add the amounts from the government system which do not match an amount in the taxpayer’s forms.  In many cases, taxpayers combine stock or mutual fund sales which were reported separately to the IRS by the brokerage house.  This could result in a double counting of the gain or in the worst case, a double counting of the gross proceeds from the transaction.  We have found that in nearly all cases, the government’s notice is incorrect and the amount requested by the government is substantially overstated.  Usually a letter with copies of documents which prove the taxpayer position is enough to have the government reverse their position.

The Franchise Tax Board is also guilty of sending out fraudulent attempts to collect additional tax, routinely claiming that taxpayers aren’t entitled to claim head of household status when they are, and questioning dependency credits.

While it may seem like a lot of trouble to respond to the erroneous notice in order to have it corrected versus just paying the amount requested, taxpayer feedback is an important part of the ongoing integrity of our tax system.  In some ways, responding to erroneous notices demanding that they be corrected is the only way that the government will find out that they are making errors (or, as my cynical mind believes, that we caught them trying to get money they are not entitled to).  If the government does not receive this feedback, they will just continue making the errors or in the worst case, purposefully not correct problems and continue to issue fraudulent notices.

Marital Status, Community Property, and Tax Filing

Marital Status, Community Property, and Tax Filing

By Bruce Moeller, CPA, JD, Partner

Tax Filings –  What to do when your marital status changes during the year?

You got married this year. Congratulations!  You likely had a celebration with friends and family.   Or, you’re separated and in the process of “uncoupling?” You’ve probably met with an attorney. (Hopefully it isn’t too difficult a time and process for you.)

Either way, your tax situation just became substantially more complicated. We can help you understand how those rules affect your tax filings and help in many other ways. Sorting out all the issues can become quite involved, and a lot is at stake! Having a qualified and experienced tax advisor is vital, in addition to working with your qualified attorney. (This article doesn’t address important marital property issues, such as dividing assets, asset valuations, special tax considerations, spousal or child support, etc.) We understand what’s at stake and can help you.

What are the general rules – How do I report my income and file my tax returns?

For purposes of this short article, we’ll assume you are a California resident. California is one of nine community property states, and the rules apply to all residents unless they otherwise have a binding agreement (premarital or anti-nuptial) between themselves. Community property rules govern income and asset divisions. If you are unclear who “owns” the asset, the tax reporting also remains unclear. Ultimately, the court may resolve the issues for you, or you can mediate and agree privately.

Whether you are a husband-wife, or a same sex couple, the rules in California are now basically the same.

Filing Status (Married, Single, or ???)

Filing status is determined on the last day of the year. If you are not married you generally file as “single.” If you are married, you can either file a joint tax return with your partner, or file a return as “married filing separately.” Generally, filing separately causes higher tax, but there are many exceptions and reasons you should file separately. You may also meet an exception and file as “head of household” if you maintained a household for more than half the year for a qualifying household member other than your partner-spouse.

What Income do I report? What is Community Property?

You need to report your separate property income, withholding, payments, credits and deductions plus one-half of your share of the community property items. If you are required to file a tax return, you need to decide whether it’s community or separate, even if the issue is unresolved. If what you reported as separate turns out to be community (or vice-versa) you may need to file an amended tax return.

General Overlay – Community Property

Property acquired during a marriage is presumed to be community property. The basic idea is that property acquired by either partner-spouse during marriage through the time, energy and skill of one or both partner-spouses is treated as owned by the community.  In regard to tax returns, it means that you own one-half of the community income and one-half of the community deductions.

When the marital status changes during the year and the couple files separate returns, income, withholding, deductions and other tax items need to be allocate between community property and separate property. For example, if a couple marries on June 30th,   the community begins June 30th. Income and deductions prior to that date are generally considered “separate” property. When a couple uncouples, the key date is the “date of separation” which is generally defined as the date in which the parties separate with the intent not to return to the marriage.

During the year of marriage or dissolution, your tax professional will need to help you follow the time line and make appropriate distinctions and allocations between the parties.

New Tax Treatment for Section 105 Plans

New Tax Treatment for Section 105 Plans

By Bruce Moeller, CPA, JD, Partner

The Patient Protection and Affordable Care Act (ACA) substantially changed health care law. One little known and surprising feature of the law is that it changed the rules for employers who reimburse employees for their health insurance costs. In the past, an employer could provide a non-taxable benefit to employees to help the employee pay for their health insurance costs.  

 

ACA has changed the Section 105 arrangements. Beginning in 2014, these health insurance reimbursement plans are considered “a separate health insurance plan” that must comply with all provisions of the ACA law.  Such plans do not generally meet the requirements of ACA , so these payments are no longer tax-free.  Employers who do not appropriately deal with this interpretation may be subject to a penalty of $100 per day, per employee, for non-compliance. For one employee out of compliance for one year, the penalty could be as much as $36,500!  The ACA enforcement team, the IRS, will be on the lookout to collect these penalties.

 

For 2014, there may be a “one-time” possible fix for this ACA dilemma.  Employers who provided this benefit in 2014 may be able to escape the penalty provisions if they amend payroll tax returns and treat the Section 105 benefit as taxable compensation, subject to income tax withholding, payroll, and related taxes.  Even so, the penalty may apply.  The rules and regulations surrounding the ACA are complex and expansive.

 

If you have a section 105 plan, or believe you have a plan that may be treated as one, please check with your employee benefit specialist or a qualified labor law consultant or attorney.