Glenn Carlson, E.A.
t: 415.519.1728 • f: 650.437.1040

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Tax News

Important 2019 Tax Dates

January 15: 4th quarter estimated tax payment for 2018 due.
January 31: W2s and 1099s due to employees/contractors.
February 15: Brokerage and financial documents due to account holders (hahaha).
March 15: Calendar year partnership and S corporation returns due.
April 15: Individual and corporate tax returns due.
April 15: 1st quarter estimated taxes due.
June 17: 2nd quarter estimated taxes due.
September 16: 3rd quarter estimated taxes due
October 15: Individual returns on extension due.
January 15, 2020: 4th quarter estimated taxes for 2019 due.

Important Tax Changes

The Qualified Business Income Deduction: For business owners and some other taxpayers, the new Section 199A Qualified Business Income Deduction (QBID) is potentially the most beneficial portion of the Tax Cut and Jobs Act. The QBI deduction allows exclusion from tax of up to 20% of regular net business income from S Corps, partnerships, LLCs and sole proprietorships. Not surprisingly the QBI deduction is complicated, with plenty of special rules and strings attached, but taken at its most basic, you can deduct 20% of the lesser of net business income (Sch C), K1 Box 1 ordinary income (S Corps, LLCs and partnerships) or your 1040 taxable income. Regular C Corps do not qualify; they are already benefitting from the reduced corporate tax rates.

Wages paid to S Corp owners and guaranteed payments to partners never qualify for the QBI deduction, so there is now greater need of end of year tax planning and review of how bonus payouts, distributions etc. should be made. Further planning areas involve accelerating business income or deferring expenses, as well as expensing or depreciating business assets, all of which impact the QBI deduction.

What about Schedule E rental property? Net income from rental activity can qualify for the QBI deduction if you perform 250 hours of service in the property. This includes time spent in direct services and oversight services, but not travel to or from the property. Detailed, contemporaneous logs of services performed must be maintained.

I Owe USE TAX?! Happy Cyber Monday Everyday!

Cyber Monday -- the big online shopping day! Of course, e-commerce is hardly limited to one day. More and more of us are online -- desktop, phone, and tablet -- spending not just our holiday dollars but a large portion of our household and business dollars for all types of purchases, all year round. In 2017 e-commerce accounted for 9% of all US sales and this is expected to increase to 13% by 2020.

And that brings us to a topic I have not visited for a few years -- Use Tax.

Once behemoth Amazon (with its astounding 44% share of all e-commerce) began collecting sales taxes across the country, use tax became less of an issue. BUT never underestimate the State of California's insatiable search for tax dollars. Starting November 2018, the California Department of Tax & Fee Administration (CDTFA) -- formerly the State Board of Equalization -- began an "outreach program" sending letters to selected California taxpayers informing them of their potential use tax liability. They are being cheery about it: "California Use Tax. Good For You. Good For California."

A quick primer: As we all know, when we make an in-state purchase of most types of retail goods, we pay sales tax, and we know this because the seller adds it to our bill; they're collecting the tax and sending it to the State on our behalf. Merchants without a sufficient physical presence in the State (aka nexus) typically have not been required to collect and remit California sales tax when selling to a California resident.

But here's the kicker: While the seller doesn't collect it, the buyer remains responsible for paying it! Yep, it is a common misconception that buying online from an out-of-state seller makes the purchase "sales tax free". Nope. We are not off the hook. When we as buyers are responsible for paying this tax directly ourselves, the CDTFA calls it Use Tax.

Use Tax is calculated using the same tax rate as Sales Tax collected in your local county and can be paid directly online or ever so conveniently on your annual California income tax return.

So back to the CDTFA letters. What if you receive one? Not to worry for now. The CDTFA has stated these letters are not an audit but merely meant to be informational. So how were the taxpayers selected to receive these letters? CDTFA won't say. Was specific information reported to the State on purchases that would lead to an expectation of a Use Tax liability? CDTFA won't say. Nifty.

There was a question about use tax liable purchases on the tax organizer my software generated. Your 2017 California tax return had a box that I checked "no use tax due" absent any other information from you. Obviously California feels this box should not have been checked on a lot of returns, and is expecting a lot more taxpayers to fork over the tax due on their online purchases. This year I will make this use tax issue part of the engagement letter to remind you.

Any questions about Use Tax let me know.

California Here I Come ... or go?

There's a lot of talk of the exodus from our increasingly crowded, expensive, sky-high taxes of a State. But does the data bear that out? Or is the ingress of the young and tech-savvy still on the ascendent?

According to a study reported by the Tax Foundation, California falls in the middle of our national mobility with only a 4.4% net population egress in 2018. So where are people really moving from? Illinois, New Jersey, and Connecticut. And they're moving to Vermont, Oregon, and Idaho. Interesting.

Donating to Charity on the California Tax Return

If you look at Page 4 of the California Form 540, the entire page is dedicated to a list of approved charities you can donate to via the tax return. Donations made will reduce your overpayment/refund and the Franchise Tax Board will remit the donation to the Fund immediately. It is quick and easy and, if you itemize, tax deductible on your next year's Federal and California return (i.e. contributions made on your 2018 tax return filed in 2019 are deductible on your 2019 tax return filed in 2020). Keep in mind the donation is irreversible; it cannot be revoked or amended once the return is filed, even if later changes to the return are made.

Here is a list of the Form 540 charities and the amounts donated to them in 2018 through taxpayer returns:

Alzheimers Disease Fund – $555,000
Breast Cancer Research Fund – $425,000
Cancer Research Fund – $497,000
California Domestic Violence Fund – $233,000
California Firefighters Memorial Fund – $251,000
California Peace Officers Memorial Fund – $152,000
California Sea Otter Fund – $329,000
California Senior Advocacy Fund – $91,000
California YMCA Youth & Government Fund – $62,000
Emergency Food for Families Fund – $516,000
Habitat For Humanity – $151,000
Keep Arts in School Fund – $302,000
Native Wildlife Rehabilitation Fund – $254,000
Prevention of Animal Homelessness and Cruelty Fund – $303,000
Protect Our Coasts and Oceans Fund – $362,000
Rare and Endangered Species Fund – $481,000
Revive the Salton Sea Fund – $64,000
School Supplies for Homeless Children Fund – $579,000
Special Olympics Fund – $109,000
State Parks Protection Fund – $509,000
State Prevention of Child Abuse Fund – $258,000
Type 1 Diabetes Research Fund – $105,000

Who Pays Income Taxes Anyway?

The top 25% of all taxpayer earners paid 85.9% of all income taxes collected in 2016
(to be in top 25% your 2016 adjusted gross income exceeded $80,921)
The top 10% of all taxpayers paid 69.5% of all income taxes collected
($139,713 puts you in the top 10)
The top 5% of all taxpayers paid 58.2% of all income taxes collected
(top 5% means rich, right? Well, $197,651 put you in such rarified air)
The top 1% of all taxpayers paid 37.3% of all income taxes
(the oft maligned 1%ers, with income of $480,804+ are obviously doing okay)
Taxpayers reporting AGI under $80,921 in 2016 paid 14.1% of all income taxes collected, and those reporting under $40,738 (half of all tax returns filed) paid 3.4%
(taxfoundation.org) latest IRS compiled data is from 2016

So, who pays the fairest share?

Who's Preparing Your Taxes?

Do you realize that in 47 states there is no oversight, minimum or continuing education standards, nor any proof of competency required of anyone charging to prepare tax returns (the "paid preparer"). The gal who used to cut my hair had to demonstrate more competency in order to be licensed than tax preparers in most states, and her mistakes grew back!

Of course, for those of you who engage the services of an enrolled agent, this has never been an issue. EAs have already passed an extremely comprehensive three part examination on the tax code and regulations, ethics, tax calculations and application for individuals, businesses and any other entity with a filing requirement. Furthermore, we must complete no less than 72 hours of ongoing education every three years (90 hours for NAEA/CSEA members). The IRS recognizes "Enrolled Agent" as the only designation with proven expertise in ALL areas of taxation.

Fighting An IRS Audit: You're On The Clock

There's nothing worse than seeing a letter in the mail box from the IRS. Actually there is something worse — doing nothing. One very important thing you should be aware of: When the IRS sends out a notice to you, the clock is ticking. Failure to respond escalates matters and, eventually, it's like not showing up in court ... BAM! Guilty! You have rights to dispute IRS claims, but they must be used within very specific timeframe's. Here's a LINK to a great article discussing the IRS timeline for its notices and collections processes. Remember: Anything from the IRS in the mailbox means call your enrolled agent today.