BAY AREA TAXES

The FTB has announced that they will accept applications until August 15th.  For daily updates and instructions, see http://www.ftb.ca.gov/individuals/new_home_credit.shtml

California has a separate New Home Tax Credit for purchasing a home in which you will be the original occupant.  Applications for this tax credit have come in much more slowly than the first-time buyer credit, so there is room left now.  Status and instructions are available at the same web site as above.

Comments (0)     

Congress has left Washington, and the legislation which would have raised revenue by subjecting all S corporation profits to payroll taxes has died.  When Congress re-convenes in mid-September, this may come up again.  If so, new legislation will be written from scratch and may be very different than what we've been watching the past few months.

Comments (0)     

To take advantage of either the New Home Credit or the First-Time Buyer tax credit, buyers must close escrow and submit applications right away.  When the California legislature created these tax credits, it capped each one at $100 million. 

The First-Time Buyer tax credit is going fastest.  The FTB estimates that it will reach the limit very soon.  So fax over your application the minute escrow closes.  Fax it from the title company's office!

You can check the FTBs special website for the New Home / First-Time Buyer credits for the latest update.

These are California tax credits, separate from the federal credits for first-time homebuyers and replacement home buyers.  The federal credits are scheduled to expire in a few days -- 6/30/10.  But legislation is in the works to extend the deadline.  See my blog posts below regarding progress (or lack of progress) of the extender bill.

Comments (0)     

Joseph Henchman has written an excellent bulletin about legislation being considered which would let the DMV sell ad space on license plates.  Creative ways to find more cash without raising taxes?  Priceless.

Comments (0)     

The U.S. Senate did not vote today on the American Jobs and Closing Tax Loopholes Act of 2010.  Maybe next week.

Today's debate added one more tax benefit (in addition to those I listed at the bottom of yesterday's post.)  The new homebuyers' credit may be extended to purchases with binding contracts before 5/1/10 and official closings before 10/1/10.

Comments (0)     

Legislation is in the works which would make all profits of S corporations subject to federal payroll taxes.  It's a safe bet that California would conform.

Currently, S corporation owners only pay payroll taxes and income taxes on their salaries.  Any additional profit is only subject to income tax.  This is a substantial tax break, and about 1/2 of my corporate clients here in the Bay Area take advantage of it.

Legislation has been passed by the House of Representatives and is now being processed by the Senate Finance Committee, which yesterday announced a few proposed details.  The new law would apply only to personal service S corporations.  Would the definition of a "personal service corporation" be the same as in other parts of the tax code?  Now, that term includes doctors, lawyers, CPAs, engineers, and some other occupations.

The Senate is hoping to vote to end debate and move to final passage as soon as Friday, June 18th.

The purpose of this tax law change is to raise revenue to cover the cost of extending many tax breaks for one year.  These are the ones most used by my clients in the Burlingame - San Mateo - Foster city area:

• a variety of energy-related credits
• the itemized deduction for state and sales taxes
• the property tax deduction for non-itemizers
• a variety of charitable-giving provisions
• the research and development tax credit
• 15 year straight-line depreciation for qualified leasehold improvements

Aside from the payroll tax break (which may be gone with this new law) there are other reasons you may want to operate as an S corporation.  My web site contains information about Entity Choice and a comparison of LLCs versus S Corporations.

Comments (0)     

You have about 10 more weeks to redeem your IOU.  After that, it will be worthless.  And it hasn't earned interest since last September.  So now is the time to cash it in.

Over 53 thousant IOUs were still outstanding at the beginning of May, with a total value of over $16 million.

I believe that the easiest and most reliable way to redeem an IOU is to use it as a tax payment.  Mail it to the FTB with a Form 540-ES (personal tax) or Form 100-ES (C corporations.)  Mailing addresses are on the forms.  Must be postmarked by 9/3/10.

IOUs can also be cashed in in person M-F, 9am to 3pm, or by mail.  The address for both walk-ins and mail-ins is:  Attention:  Registered Warrant Desk, State Treasurer's Office, 915 Capitol Mall, Sacramento, CA 95814.

Comments (0)     

The short answer is, "Probably not."  Several people have asked me about this, so here are the facts:

Your salary or wages are currently being taxed 2.9% for Medicare. (You pay 1/2 and your employer pays 1/2.)  In 2013 (2 1/2 years from now) the Medicare tax is going to expand to include "unearned" income:  interest, dividends, capital gains, and rental income, and the rate will be 3.8%

The Medicare tax will only apply if your Adjusted Gross Income (AGI) is very high: over $200,000 for a single person or $250,000 for a married couple filing jointly.  The Medicare tax only applies to the amount of your income over the threshold, or the amount of your unearned income, whichever is less.

If your AGI is more than the threshold amount, does the Medicare tax apply to you?  Here are some things to keep in mind:

1.  Items which are nontaxable for regular tax are also not taxable for the Medicare tax.  So the $250,000/$500,000 exemption for gain on the sale of your home also applies for the Medicare tax.  To pay the Medicare surtax when you sell your home, both of these things must be true:

A) Your income is higher than the $200,000/$250,000 threshold, and

B)  The gain on the sale of your house is higher than the $250,000/$500,000 exemption.

2.  Most rental properties show a loss for tax purposes, so rents received will usually not be subject to the Medicare tax.

3.  If you are in the happy position of selling assets (stocks, bonds, real estate) at a profit, you may also be selling other assets at a loss.  The Medicare surcharge applies any to net profit.  And again, remember that your AGI, including the net profit, must be more than the threshold amount for the Medicare tax to kick in.

The are more details on the Medicare Surcharge and how to plan for it, as well as other tax law changes in the HealthCare and HIRE tax bills, on my web site.

M Bess Kane, CPA
May, 2010

updated May 27

Comments (0)     

Small Employer Health Benefit Tax Credit

To qualify for a 35% credit (that's getting back 35% of what you pay) you must

1. Pay at least 1/2 of the health insurance premiums for employees,

2. Have 10 or fewer full-time equivalent employees, and

3. Pay average wages of $25,000 or less, excluding owners and family.

If the company has 11 - 24 full-time equivalent employees, or if the average wages are $25,000 - $50,000 (excluding owners and family) the amount of the credit is reduced, and beyond that the credit falls to zero.

This credit is in effect now and will be claimed at the end of the year on the company's tax returns.  (This is different than the payroll tax reduction, which is claimed on the quarterly payroll tax returns as the year goes along.)  It's available for all business types:  corporations, LLCs, partnerships, and self-employed.

The are many more details not included above, plus the IRS is still releasing clarifications.  See my web site page on the Small Employer Health Care Tax Credit for more information and updates.

For your entertainment, here is a 1-minute YouTube video from the IRS about the tax credit.

Comments (0)     

Once again, the idea of imposing payroll taxes on S corporation profits has been proposed.  The current version would only apply to service-sector S corporations, not manufacturers.  So far, no legislation has been introduced, just a statement by the House Ways and Means Committee Chairman to reporters that his panel is considering the idea.

This idea has been floated before, most recently in 2005 and 2007. 

Currently, owners of S corporations who actively work in the business must take reasonable salaries.  Any remaining profit flows through to their personal tax returns and is taxed there.  Payroll taxes are paid only on the salary, not on the excess.  Many business owners take advantage of this split as a tax-reduction tool.  I always recommend that all or part of the tax savings go into a retirement account, since less is being paid into Social Security. 

If the business is organized as an LLC, this split between salary and dividends is not available.  Here is a closer look at the differences between S corporations and LLCs.

S corporations whose tax returns show profits but zero officer compensation are currently a target of increased IRS audit attention.  It's the law that officers of the corporation who provide services to the corporation must take a "reasonable" salary.

Comments (0)     

It's official!  Today, the governor signed into law foreclosure tax relief for Californians who lost their homes in 2009.  We now know what the rules were for 2009 and can go ahead and file California tax returns.

The California tax relief has lower limits than the federal law, but should be adequate for most homeowners.

To qualify, the cancellation of debt must be on your primary residence (not a rental property) and it must be acquisition debt, not a loan taken out as an equity withdrawal.  There are of course many other details, so if you have lost a property to foreclosure or a short sale, or if you foresee this happening in 2010, you need to talk to an experienced tax professional as soon as possible.

The legislation signed by the governor today also increased penalties for failing to file tax returns.  So let's get those returns filed!

Comments (0)     

Are you a California business that has never filed a sales or use tax return?  If your annual sales are more than $100,000, your business is required to file use tax returns for 2007 - 2009 by April 15, 2010.  This is true even if your business sells no physical product.

I have previously sent information to my clients about this, and instead of annoying everyone by detailing it again, I have written it out here.  If you would like assistance with this irritating task, contact me soon.

Comments (0)     

When you lose a property to foreclosure, the difference between the unpaid mortgage and the value of the property is "cancellation of debt" and it's generally taxable income.  There is federal tax relief if the property was your primary residence (not a rental) and the mortgage was the original purchase mortgage.  If there have been equity withdrawals, there may still be partial tax relief.  California offered similar tax relief, but it expired at the end of 2008.  So no relief from California tax on home foreclosures in 2009 and 2010.

Last week, the governor vetoed legislation which would have restored some tax relief for California taxpayers who lost their homes after 2008.

If you lost your home in 2009 and are facing a large amount of California tax due, many tax preparers, including myself, are recommending that you file for an extension of time to file your California tax return.  The general opinion is that something will eventually be passed, but not by April 15th  It would be nice if we knew what 2009 tax law was by now, wouldn't it?

There is more information about how foreclosures and short sales are reported for taxes on my web site.

Comments (0)     

Currently, the federal government collects 15.3% social security tax on the first $106,800 each person earns as wages or salary.  Half of that is paid by the company, and half paid by the employee.  For employees hired now through the end of the year, the company's share drops from 7.65% to 1.45% (eliminating the FICA portion & leaving the Medicare portion.)  In addition, if the company keeps the employee for 52 weeks, it receives a $1,000 bonus credit.

Only people who worked fewer than 41 hours during the 60 days before the starting date qualify, and they will need to sign a written statement certifying that.  Also, they must be filling new positions, unless the previous employee left voluntarily or was dismissed for cause.  So no firing your current employees & hiring them back to qualify for the tax credit!  And hiring family of the business owner doesn't count, either.  Or people who earn more than $106,500 per year.

The nice thing about this tax credit is that the company doesn't wait until the end of the year to receive it.  It's claimed on the quarterly payroll tax return.  The credit for new hires now through 6/30/10 will be claimed on the payroll tax return due 7/31/10.  The bonus $1,000 credit is claimed on the business' 2011 tax return, because it will take until 2011 to know if the employee has been retained 52 weeks.

The reason that I'm not excited about this tax credit is that I doubt that it will inspire small businesses to hire.  Taking on even one new employee is a big commitment.  It's the wages, plus payroll taxes, benefits, extra space & equipment, etc.  My clients are generally resisting hiring new people until the need is compelling.  I don't think a reduction in payroll taxes is enough to tip the scales.  But for those who are pushed to hire (yes, some businesses are expanding, even in this economy!) and companies who replace workers who leave voluntarily or who are dismissed for cause, it will be a pleasant bonus.

All forms of businesses qualify:  corporations, LLCs, sole proprietors, and even non-profit organizations which pay payroll taxes

Comments (0)     

Missed filing your 2006 tax return? A few people each year contact me about preparing their past-due tax returns. Things happen: a death in the family, illness, divorce, relocations. Often, people don't feel that there's any hurry because they are owed a refund. They are surprised to discover that there is a time limit. For 2006 personal tax returns, it's almost here: April 15, 2010. After that, the IRS will keep your overpayment. And if you have a 2006 refund but owe tax for 2007, they won't net the two amounts unless you get 2006 filed by the 15th.

If you owe tax for past years, now is an excellent time to deal with it. Because so many people are experiencing financial hardship, the IRS has officially relaxed its collection procedures. Low-interest payment plans, and occasionally even tax forgiveness, are easier to negotiate right now. So if you or someone you know is behind with the government, let's talk soon.

Comments (0)     

Not many businesses employed more people in 2009 than in 2008.  But the CA government may have a gift for that happy minority: the California New Jobs Tax Credit.  For each additional full-time person, the company can claim a $3,000 tax credit.  $3,000!  That's quite a windfall!  And if you can't use it all this year, the rest carries over to future years.  A full-time person who worked only part of the year counts as a fractional person. (A Foster City client of mine hired a new full-time person 10/1/09, so 1/4 of the year.  His business received a $750 tax credit.)  Corporations, LLCs, partnerships, and sole proprietors are all eligible.

The CA government only allocated a certain amount of money for this credit.  When it's used up, that's it.  All businesses which file by the end of the first quarter, March 31st, will receive the tax credit.  But maybe not those who file in the 2nd quarter or later.  So let's get those tax returns filed in the next two weeks!

Comments (0)     

Tax returns for S corporations, LLCs which have chosen to be taxed as corporations, and C corporations with December 31st year-ends are all due on Monday, March 15th.  If the company files an extension for more time, at least 90% of the tax needs to be paid on Monday; 100% of the California $800 minimum tax. 

Comments (0)