It's almost time to send out 1099s....What every business owner needs to know.


The 1099 rules are confusing and each year we get a number of questions about them.  This Q&A provides you the basic rules you need to know for your business.

Q: Do I really need to issue 1099s to my vendors?  I don't have subcontractors. My vendors are people who clean my windows or fix my computer.

A: Yes, you probably have to issue these vendors a 1099-MISC.  The basic rules are, if they provided a service to you, they are not corporations and you paid them more than $600, you will need to issue a 1099 by February 1, 2016. (There are some exceptions for attorneys and rents paid to real estate agents).


Q: I need to get my vendor's name, address and social security number?  That seems a bit intrusive,  no?

A: Most business owners know about the 1099 requirement and should be prepared to provide you this information.  To make it more official, you can ask your vendors to complete a Form W9 which has all the required information for the 1099.  If, as a vendor, you do not want to provide your Social Security Number (SSN), then we recommend you apply for an EIN (Employer Identification Number) number from the IRS.


Q: One of my vendors refuses to give me his EIN or his Social Security Number.  How do I avoid this problem in the future?

A: We recommend that you trade a vendor's first payment of the year for a completed W9 form.  This way, you have the information in your system if you go over the $600 threshold and you don't have to be chasing down people at the end of the year.  (I promise you that they want to get paid, so they'll gladly complete the W9 for you).


Q: What's the big deal about issuing a 1099.  I have a copy of the check so I can still deduct that expense, can't I?

A: Per California Revenue and Taxation Code (17299.8), the Franchise Tax Board can disallow a deduction if the 1099 was not filed.  The IRS does not have the same codified statute, but they do ask on the tax return if you filed all 1099s and if you did not, you could get a call from the auditor. (If you do get contacted by an auditor, be sure to call an Enrolled Agent to properly represent you).  Even if the auditor does not disallow the expense, you could get a penalty for not filing the 1099s.


Q:  What happens if I file the 1099s late?

A:  There are penalties that range from $50-$100 depending how late you are.  If you intentionally disregard the requirement the minimum penalty is $500.


Q: Ugh.  This seems complicated.  Can I hire you to do my 1099s?

A: Yes!  Cromwell Tax & Bookkeeping can help you with all your information reporting needs including 1099-MISC, 1099-INT, 1099-DIV, 1098, and W2s.

Are you single and own an expensive house?  You may want to stay that way!

Last week, the US Circuit of Appeals changed the way we treat the mortgage interest deduction for co-borrowers of expensive houses.

The mortgage interest deduction is a key tax deduction for Americans.  The rules around the mortgage interest deduction are:

• You can deduct interest on up to $1.1million of loans
• The home has to be a qualified residence (i.e. your home)

In 2012, the US Tax Court had ruled that the $1.1million limit was per residence.  Meaning, if you had two unmarried people go in together on a really expensive house, you could only deduct interest on the first $1.1million of loans and the rest was non-deductible.  (Even at low interest rates, that could equate to $50k or more of deductions that just get thrown away!)

But last week, the 9th Circuit of Appeals reversed* the Tax Court decision and has ruled that the $1.1mm limit is per taxpayer and not per residence.  Thus for a house owned by two unmarried people, each person could take an interest deduction for $1.1mm of loans (so, combined, they could deduct the interest on a home that had $2.2 million of mortgages on it).  Note: People filing Married Filing Jointly are considered one taxpayer and thus the $1.1million limit still applies to those returns.

Who does this help?

• Unmarried co-borrowers of expensive homes who had previously lost a large tax deduction

Who does this hurt?

• The coffers of the U.S. Treasury
• Possibly wedding planners for the rich?!

As always, before you ditch those wedding plans, please speak to your Enrolled Agent to see how this decision specifically impacts you.

* BRUCE VOSS V. CIR, 12-73257

New Filing Deadlines starting for Tax Year 2016 - Congress did something right!

Do you have to file an Extension each year because your K1 doesn't come until May?  Do you get confused because you have to file your Foreign Account Form in June but your Extension is good until October?

It is rare that this blog applauds Congress, but last week they passed HR 3236 which makes some sensible changes to return filing deadlines and information returns.

Key Filing Date Changes*

• Partnership Returns due on March 15th - this due date is moved up by a month, so hopefully the K1s will be in the mail no later than March 16th (if the Partnership files on time) which means YOU can file on time!
• C Corporation Returns due on April 15th - you get an extra month to file these returns because there isn't much generated from a C Corp return that is going to impact another's income tax return.
• S Corporation Returns due on March 15th - no change here because the S Corp generates a K1 that the individual needs to file their tax return.
• FBAR (Form 114) - now due on April 15th AND you are now allowed a six-month extension (so if your personal return is extended until October 15th you can file your FBAR at that time too).

Note: California does not automatically conform to these dates, so they will have to pass separate legislation to conform.

Key Form Changes

• Your Mortgage Interest statement (Form 1098) will now show the amount of outstanding principal, the  loan origination date, and the property address. (The individual taxpayer may not see much value in these figures, but your tax preparer is going to be thrilled to have this additional information!)

These changes don't start until 2017 (for Tax Year 2016) but this is good news for taxpayers and hopefully a harbinger of more good tax news to come from Congress!

* Note: these dates are for calendar year filers only.  Fiscal year filers have different filing dates and there is a special rule for C-Corps with a June 30th fiscal year end who have to continue to file within 3.5 months of their year end until 2025 (that is not a typo).

Everyone in California Gets Sick Leave

If you get sick after July 1st, you will likely be eligible for paid sick leave.  Thanks to the Healthy Families Act of 2014, virtually every employer in California must provide paid sick leave to their employees. 
Many non-benefited employees are excited that getting the flu won't impact their wallet. But many employers, especially small employers, are concerned about the cost of the new law because employers have to pay employees to not be at work, and there is a lot of administrative overhead around this new (and confusing) law.

WHO is Eligible to Receive Paid Sick Leave?

• Any employee who works for 30 days or more after 1/1/15 is eligible for paid sick leave.  This includes full-time, part-time and seasonal employees.

HOW Much Paid Sick Leave can an Employee get?

• Employees will accrue 1 hour of paid sick leave for every 30 hours worked.  If sick leave is accrued, then it must carry over year-to-year, but the employer can cap it at 48 hours.
• Alternatively, the employer can award 24 hours of paid sick leave at the beginning of each year.  In this case, sick leave does not have to accrue or be carried over.

 How do employees USE it?

• Once your employee has worked for 90 days or more, they can use their accrued paid sick leave.
• The employer can limit the use of paid sick leave to 24 hours per year.
• The employee can use the paid sick leave for their own health condition or for the health condition of a family member.

What do EMPLOYERS have to do?

• Display a Sick Leave Poster at their place of work
• Provide an Individualized Notice to each employee by 7/8/15 or earlier
• Show the amount of paid sick leave available to the employee on their paystub (or other written form) on each payday
• Keep records of sick leave for 3 years
• Employers do NOT have to pay out accrued sick leave when their employee terminates their employment
• If the employer operates in a location that already has a sick leave policy then they have to follow the more generous plan

What can Cromwell Tax & Bookkeeping do to help Employers with this?

• Payroll is very complicated and the penalties associated with mistakes are very high.  Payroll is one job that you do not want to do yourself.  Cromwell Tax & Bookkeeping offers full service payroll support that is affordable for small companies.

For more information go to the California DIR FAQ

 

Add "Tax Talk" to your Wedding Checklist

Congratulations.. you are getting married!  You and your fiancé were wise to take a few years to get to know each other better.  You know their sleeping habits, their favorite food, and their friends.  But do you know about their tax habits?

Here are the things you should know before getting married:

1. If you are married on the last day of the year, you are considered married for the entire year and you must file a return as Married (either Married Filing Jointly or Married Filing Separately).

2.  For some couples, marriage means paying more in taxes and for some it means paying less.  Your Enrolled Agent can help you estimate your tax liability as a married couple so you are not surprised next April 15th.

3. Don't change your W4 withholding to Married just because you said "I do".  Be sure you understand your joint tax liability before making changes. (This applies to self-employed folks and their quarterly payments, too).

4. Does your betrothed have an outstanding tax liability you don't know about?  While you may not be liable for that tax debt, it will impact your lifestyle if your beloved has to make large payments to the IRS for the next 5 years.

5. Look at optimizing your benefits at work.  If your beloved has a fabulous medical plan, it may be worth getting on her benefits.   Is life more affordable with two incomes?  Then it may be worth maxing out your 401(k) plan.  Many of these work related benefits are tax friendly.

As always, each individual's experience is different.  So, please be sure to contact your Enrolled Agent to understand how marriage will impact you.

Get Paid to Save Water

My neighbors in Northern California have done an excellent job of being drought-aware and reducing water consumption -- we have buckets in our showers, our plants are on a drip system, and the lawns are brown.   But, when I walk through my neighborhood, I have mixed emotions about all the brown lawns.  While I am pleased to see them saving water, I am disappointed that they have lost some curb appeal.  But that can change!  Many cities now have incentive programs and rebates and they will pay YOU to replace your lawn with attractive but drought resistant landscaping.

This morning I attended an excellent presentation by Elise Howard and Deb Lane of the City of Santa Rosa and learned of the plethora of ways they will pay me to save water!

As a Residential Customer in Santa Rosa, you can receive a rebate for:

• Removing turf or improving the efficiency of your irrigation system
• Implementing a graywater system
• Implementing a rainwater harvesting system
• Implementing a recirculating hot water pump
• Installing a High-efficiency clothes washer
• Proving you have a sustained reduction of water

As a Business Customer in Santa Rosa, you can receive a rebate for many of the same items above as well as:

• Rebate for high-efficiency toilet or urinal
• Rebate for a dedicated irrigation account or a separate meter for irrigation
• Reduced sewer fees when implement available technologies

Don't get surprised at tax time

• Unfortunately your rebates are taxable to the Feds and water agencies may issue you a 1099 if your rebate was more than $600. Ugh!
• The GOOD NEWS is that California does NOT tax the turf-removal rebate.  Hooray!  Thanks to AB 2434, your turf-removal rebate is tax-free to CA from 2014 through 2018.

Let the IRS pay your Moving Costs


One of my dear friends just moved from San Francisco to New York.  While I was sad to see her go, I am excited that she has a fabulous deduction for 2015 -- the Moving Expense deduction!

The moving expense deduction is one of my favorites because it is easy to qualify and it is deducted in a better place than most deductions so everyone can take it (i.e. you don't have to itemize).

To qualify:

• You have to start your new job within a year of moving (easy!)
• You have to work in the new location for at least 39 weeks (easy!)
• Your new job location must be 50 miles farther from your old home than your old job location was (well, okay.. that rule isn't so clear but that is why you have an EA do your taxes)

What expenses are deductible:

• Boxes, crates and packing tape
• Cost of your movers
• Transportation to your new location (flights, vehicle expense, lodging)
• Cost of moving your pets to your new location
• Storage costs for 30 days before your stuff is moved to your new home
• Cost of connecting/disconnecting utilities

What you cannot deduct:

• More than one trip per person
• Food along the way
• Pre-move house-hunting trips
• Cost of selling your old home/breaking your lease
• Cost of moving furniture you buy on the way to your new home (this one amused me)

So, go get that job you always wanted and let your EA get you a big deduction at tax time!

Think Twice.. or Maybe Three Times Before Taking Money Out Of Your IRA


Are you thinking about taking money out of your IRA to pay off those bills that keep mounting up? If so, please call your Enrolled Agent first and be sure you understand how it is going to impact your taxes.

Each tax season, I end up sitting across from a client who hands me a 1099-R showing that they took an early distribution from their IRA.  They start fidgeting as they wait to hear what their tax liability is going to be..... hoping beyond hope that they do not have a big tax bill this year.

An early distribution is when you take money out of your IRA before you have turned 59-1/2 years old.  The impact of taking money out early is (1) you have to pay taxes on the distribution (2) you have to pay a 10% federal penalty and a 2.5% California penalty on top of the taxes (3) the distribution raises your adjusted gross income so that may push you into a higher tax bracket and you may phase out of deductions & credits you usually get, and (4) you no longer have retirement savings. (Wow... the government really doesn't want you to take an early distribution, do they!)

There are a handful (and we do mean just a few) circumstances where you can take money out of your IRA without paying the penalty. These circumstances include high medical bills, buying your first home or paying for college.

So, if you are thinking of taking money out of your IRA, call your Enrolled Agent first.  We want to be sure you are fully informed and prepared for the tax impact of that distribution.

This week's Tax Myths

This week's post focuses on common tax beliefs and what the real answer is.

Q: I worked for my neighbor and was paid cash under the table.  Do I have to report that income?
A: All income is taxable unless Congress says it's not. So, even if you did not receive a W2 or 1099 or any other reporting document, that income is still reportable and taxable.

Q: I own some stocks and the dividends are automatically reinvested. I never received the cash so that is not income, right?
A: If those dividends are received in a taxable account (i.e. not an IRA or 401k) then you had "constructive receipt" of the income when it was reinvested thus it is taxable to you and must be reported on your tax return. Look for a form called 1099-DIV from your broker.

Q: I plan to file an extension this year.  Does that mean I have until October 15th to save up for my tax bill?
A: An extension is just more time to FILE, it is not more time to pay.  Thus you should make the most accurate estimate possible of your tax liability and get that paid by April 15th.

Q: We started a business. So, the next step is to become an LLC, right?
A: Your Enrolled Agent can walk you through all the tax implications of becoming an LLC, but you should also consult with an attorney to understand what legal protections you need and speak to an insurance agent to see if an insurance policy will give you the coverage you need (and the premiums may be less than the annual $800 LLC fee). 

Q: Why should I pay an Enrolled Agent (professional tax preparer) to do my return?  With online software, I just follow the wizard and I get my tax return completed for a fraction of the price.
A:While the commercials do a great job of making tax preparation look easy (and the Turbo Tax commercials are entertaining), there is so much more to it.  Enrolled Agents help you identify deductions and credits you did not know about, they help you make tax-wise decisions for the future, and they help you avoid audit flags.  Enrolled agents help you achieve the lowest legal tax liability possible so you spend your money on you and not on taxes.

Don't fall for the Scam

Have you received a call from "the IRS" telling you that you owe money and if you do not pay now, you will be arrested?  If yes, you are not alone.  The calls appear legitimate because the caller I.D. says IRS, and they know a lot of personal information about you.  They are frightening because the callers are incredibly aggressive, will claim to put liens on your house, or will threaten to have you arrested if you do not pay immediately.

If you get a call like this:

1. Immediately hang up.  Do not engage with the caller.  It is a scam. 
2. Next, report it:

• Call the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484 or at www.tigta.gov 
• Contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.

Unfortunately, these callers are having success with the elderly and new immigrants and have stolen millions from people.  So, if you know someone who may be vulnerable to this scam, please talk to them today and advise them to hang up on these con men.

What if the IRS legitimately needs to contact me?
If you do owe money, the IRS will send you letters and will give you a plethora of options for coming current.  The IRS will never:

• Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
• Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
• Require you to use a specific payment method for your taxes, such as a prepaid debit card.
• Ask for credit or debit card numbers over the phone.
• Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

For more information go to: http://www.youtube.com/irsvideos