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.

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.

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.