Employee Business Expense Audits

For several years now, the IRS has been conducting audits on deductions taken for unreimbursed employee expenses.  This past year the California Franchise Tax Board contacted over 72,000 tax payers regarding the requirements for claiming unreimbursed employee deductions.  Let’s discuss what their audits are focusing on:

 

1.       Substantiation – do you have records to support deduction

2.       Reimbursement Policy – does your employer have a policy?  This is important whether you submitted for reimbursement or not.  They will want to see a copy of the policy or letter from employer stating they do or do not reimburse.  The IRS and FTB will follow up with the employer to verify the content of the letter, so do not submit falsified facts. 

a.       If your employer does reimburse for a particular expense and you do not submit for reimbursement, the deduction you take will be denied. 

3.       Mileage – did you claim nonductile commuting mileage?

4.       Documentation – do you have your records for past years?  The IRS requires you maintain records for 3 year, while the California Statue of Limitation is 4 years.  Receipts must be clear as to the purpose of the expense!

Remember, good documentation is the key to surviving an audit!

A New Alternative in Estate Planning - Transfer-on-Death (Beneficiary) Deed

For many, their home is their most valuable asset.  This is why it is important when doing your estate planning to keep it out of probate.  You have options, including transferring title into a revocable living trust, taking title either as community property or joint tenancy with right of survivorship.  Recently, California, along with many other states, have adopted an alternative called transfer-on-death (TOD) deed or beneficiary deed.   Here is a summary of how it works:

·         Similar to opening a bank account with a payable-on-death (POD) designation, with a TOD you simply name one or more beneficiaries

·         Your beneficiary will only inherit the property at your death

·         Your beneficiaries will avoid probate proceedings when transferring title

·         Beneficiaries have no legal rights until your death or if you own with a spouse or someone else, until they die. 

·         Beneficiaries do not have to sign, acknowledge or even be told about the deed

·         You maintain your legal title and right to sell, give away or mortgage the property

·         It is not considered a gift, so there is no federal gift tax consequence

·         You can revoke the TOD deed or record another whenever you please

This is a great estate planning alternative.  To discuss which option might be right for you, feel free to contact us.

How long should I keep tax records?

 

We often our asked, how long should I keep my tax receipts and records?  Do you keep copies?  Our policy is to scan and return all original tax documents to our clients and maintain electronic copies, including our work papers for 7+ years.  We suggest you follow the guidelines of IRS, outlined below directly from IRS website.

 

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

Period of Limitations that apply to income tax returns

  1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
  2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.
  7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?

Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

What should I do with my records for nontax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

Determining Tax Residency in the United States

Many of our clients are foreign citizens working in the US.  Whether its a band touring the US, an actor/director shooting in the US, or an entrepreneur starting or expanding your business in the US, we have the experience to guide, plan and ensure you are compliant with US tax law.  The first step is to determine your "tax status" in the US.  Here is a short summary of who is considered a US Tax Resident.  

The U.S. casts a wide net to capture tax on income earned in foreign countries by any “U.S. tax resident.”  Because residents and nonresident aliens are taxed differently, it is important to determine your tax status. 

You are considered a nonresident alien for any period that you are neither a U.S. citizen nor a resident alien for tax purposes.  You are considered a resident alien if during a calendar year you either meet the “Green Card Test” or the “Substantial Presence Test.” 

  1. Green Card Test: You are considered to have met the green card test if at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, and this status has not been revoked or administratively or judicially determined to have been abandoned.  If you receive your green card abroad, then the residency starting date is your first day of physical presence in the United States after you receive your green card. If you meet the green card test at any time during the calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day on which you are present in the United States as a Lawful Permanent Resident.  However, an alien who has been present in the United States at any time during a calendar year as a Lawful Permanent Resident may choose to be treated as a resident alien for the entire calendar year.

  2. Substantial Presence Test – You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:

    • 31 days during the current year, and

    • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

      • All the days you were present in the current year, and

      • 1/3 of the days you were present in the first year before the current year, and

      • 1/6 of the days you were present in the second year before the current year.

For more information, feel free to contact us.

Important Tax Deadlines - 2016

February 1, 2016  

Deadline to issue W2 to your employees and 1099s to your independent contractors.  Below is some information on 1099s, but as always, should you have any questions, please do not hesitate to contact us.  (The normal deadline for corporate returns is January 31st, but this falls on a Saturday, so the deadline is pushed to the next business day, which is Monday, February 2nd .)

February 16, 2016

Deadline for employees who claim exemption from withholding to file a new Form W-4 with their employers. Financial institutions must mail out 1099-B, 1099-S and 1099-MISC forms by this date. 1099-B forms detail sales of stock, bonds or mutual funds through a brokerage account. 1099-S forms relate to real estate transactions. 1099-MISC forms show other income such as rent and royalty payments or prizes and awards from TV or radio shows.

February 29, 2016

Deadline to renew your LA Business Tax Certificate.  If your business operates out of the city of Los Angeles, it is likely that you have (or should have applied for) a Business Tax Certificate and the renewal for this certificate MUST BE renewed by February 28 in order to be considered timely.  This renewal is important as your business may be subject to exemptions that will reduce or eliminate any tax due to the City of Los Angeles.  You can renew electronically at: https://latax.lacity.org/laweb/F-logon.jsp.   You can also contact us or find any info you need on the requirements for this license at: http://finance.lacity.org.  

March 2, 2016

Deadline for businesses to mail Forms 1099 and 1096 with the IRS if filing on paper. (If filing these forms electronically, the deadline is March 31.)

March 15, 2016

Deadline for corporate tax returns (Forms 1120, 1120A, and 1120S) for the year 2015, or to request automatic 6-month extension of time to file (Form 7004) for corporations who use the calendar year as their tax year.

Final deadline to file an amended corporate tax return (Form 1120X) for tax year 2012 and still claim a tax refund. (Refunds expire three years from the original due date of the return.)

     April 18, 2016

Deadline to file individual tax returns (Form 1040, 1040A, or 1040EZ) for the year 2015 or to request an Automatic Extension (Form 4868).   An extension provides an extra six months to file your return. Payment of the tax is still due by April 15th.  You can submit payment for tax along with the extension form.

Last day to make a contribution to traditional IRA, Roth IRA, Health Savings Account, SEP-IRA or solo 401(k) for the 2015 tax year. (However, if you get an extension, you will have until October 15th to fund a SEP-IRA or solo 401(k).)

1st quarter estimated tax payments due for the 2016 tax year.

Final deadline to file an original tax return (Form 1040) for tax year 2012 and still claim a tax refund, as refunds expire three years from the original due date of the tax return.

Final deadline to file amended tax return (Form 1040X) for tax year 2012 and still claim a tax refund. (Be sure to mail the amended return well before April 15th to make sure your tax refund will be processed in a timely manner. And be sure to obtain proof of mailing, such as a certified mail with return receipt.)

Deadline to file estate income tax or trust income tax returns (Form 1041) or to request an automatic 5-month extension of time to file (Form 7004).

Deadline to file partnership tax returns (Form 1065) or to request an automatic 5-month extension of time to file (Form 7004).

Final deadline for estates, trusts, or partnerships to file an amended tax return and still claim a tax refund for the year 2011, as refunds expire three years from the original due date of the tax return.

June 15, 2016

·         2nd quarter estimated tax payments due for the 2016 tax year.

·         Deadline for US citizens living abroad to file individual tax returns and to pay any tax due. You can request an additional 4-month extension (Form 4868).

June 30, 2016

·         Deadline to file Foreign Bank Account Report for the year 2015. This report is required if you have over $10,000 (in aggregate) held in foreign bank accounts. Foreign Bank Account Reports (FinCEN Form 114) must be filed electronically. Extensions of time to file are not available this year (but they will be available starting in 2017).

September 15, 2016

·         3rd quarter estimated tax payments due for the 2016 tax year.

·         Final deadline to file corporate tax returns for the year 2015 if an extension was requested. (Forms 1120, 1120A, 1120S).

·         Final deadline to file trust income tax returns (Form 1041) for the year 2015 if an extension was requested.

·         Final deadline to file partnership tax returns (Form 1065) for the year 2015 if an extension was requested.

October 1, 2016

·         Deadline for self-employed persons or small employers to establish a SIMPLE-IRA for the year 2016.

October 17, 2016

·         Final deadline to file individual tax returns for the year 2015. (Forms 1040, 1040A, 1040EZ.)

·         Last day the IRS will accept an electronically filed tax return for the year 2015. If filing after October 15th, you'll need to mail in your tax return for processing.

·         Final deadline to fund a SEP-IRA or solo 401(k) for tax year 2015 if you requested an automatic extension of time to file.

IRS again delays estate basis reporting (03-25-16)

In Notice 2016-27, the IRS has again delayed the initial due date for providing statements to the IRS and to beneficiaries reporting basis for estate and income tax purposes. This time, the delay is until June 30, 2016.

The IRS had previously delayed the reporting requirement until February 29, 2016, in Notice 2015-57 and then until March 31, 2016, in Notice 2016-19.

2015-2016 extenders and new tax laws (12-17-15)

Congress is expected to pass a tax bill this week that contains a host of extensions and changes to expiring provisions. Here is a list of the key provisions.

Made permanent:

  • Enhanced Child Tax Credit
  • Enhanced American Opportunity Tax Credit
  • Enhanced Earned Income Tax Credit
  • Above-the-line educator deduction
  • Sales tax deduction
  • Enhanced mass transit and parking pass benefits
  • IRA-to-charity — California automatically conforms
  • R&D credit
  • IRC §179 — enhanced
  • Enhanced exclusion of gain on sale of small business stock
  • Built-in gains holding period

Extended through 2016:

  • Qualified tuition deduction
  • Nonbusiness Energy Property Credit
  • COD principal residence exclusion
  • Mortgage insurance premium deductible as interest

Extended through 2019:

  • Bonus depreciation — phases out
  • First year bonus depreciation on automobiles — enhanced
  • Work Opportunity Tax Credi

The wrong 1095-A forms went out to about 800,000.

This form is used to adjust cost assistance on taxes. The wrong forms had correct subsidy amounts, but the wrong calculations.

Here is What you Need to Know if you got the Wrong 1095-A Form from the Marketplace

You can use the Second Lowest Cost Silver Plan tax tool to help you calculate amounts for a 1095, but you should follow the instructions below before filing your 8962 Premium Tax Credit form using an inaccurate 1095. Reporting the incorrect amounts on your 1095 could lead to you being off on your calculations and getting or owing more Tax Credits then appropriate.

If you end up owing more money back, because you already filed your 1040 and 8962 form using an incorrect 1095, the IRS will simply withhold (or refund) the proper amount. You cannot be punished in any other way for filing ObamaCare related taxes incorrectly.

Official Statement from CMS

Your 1095-A form should have arrived in your mailbox in February. Most consumers can also download a copy of their 1095-A through their HealthCare.gov account. We have been urging consumers to check the information on their forms – such as the number of people in your household – for accuracy. People who find errors on their form can contact the Marketplace Call Center at 1-800-318-2596 to find out how to request a corrected form.

 

About 20 percent of the tax filers who had Federally-facilitated Marketplace coverage in 2014 and used tax credits to lower their premium costs – about 800,000 (< 1% of total tax filers) – will soon receive an updated Form 1095-A because the original version were issued listed an incorrect benchmark plan premium amount. Based upon preliminary estimates, we understand that approximately 90-95% of these tax filers haven’t filed their tax return yet. We are advising them to wait until the first week of March when they receive their new form or go online for correct information before filing. For those who have filed their taxes — approximately 50,000 (< 0.05% of total tax filers) – the Treasury Department will provide additional information soon.

It’s important to note that this issue does not affect the majority of Marketplace consumers and only affects people who signed up through one of the 37 states using HealthCare.gov. About 80 percent of Marketplace consumers who received a 1095-A from the federal Marketplace do not have affected forms and should go ahead and file their annual tax return. Additionally, this issue does not mean that consumers received the incorrect amount of tax credit throughout the year. It’s also important to note that this does not affect the vast majority of tax filers who will just need to check a box on their tax return to indicate that they had health coverage in 2014 either through their employer, Medicare, Medicaid, veterans care, or other qualified health coverage programs. – CMS

Marketplace consumers concerned about the status of their 1095-A forms should take the following actions:

Information from CMS

  1. You can find out if you are affected by logging in to your account at HealthCare.gov. You will see a notice message that will let you know if your form was or was not affected.  A majority of tax filers with Marketplace coverage through HealthCare.gov that received a 1095-A– about 80 percent – will find that their form was not affected by this issue and will be able to file their taxes with their current form.
  2. Wait to file if your form was affected. It’s best to wait to file your tax return until you receive your corrected 1095-A Form from the Marketplaces or download the corrected form by logging into your account.  New forms are being sent from the Marketplace beginning in early March. When your corrected form is ready, you’ll also receive a message through your Marketplace account on HealthCare.gov.
  3. If you need to file now, use the Healthcare.gov tool. If you can’t wait, and want to find the correct amount of the second lowest cost Silver plan that applied to your household in 2014, you have 2 options: 1) You can use this tool to find that amount, or 2) You can call the Marketplace Call Center at 1-800-318-2596 (TTY: 1-855-889-4325) and they can help.

Do you need to issue a 1099-Misc?

Below is a brief summary of rules that would be pertinent to our clients regarding issuing 1099-Misc forms to contractors they have worked with during the calendar year.  Keep in mind, if you have to issue a 1099 to a contractor, the deadline is February 2, 2015!

If during the calendar year you hired contractors in the course of running your trade or business you may have to issue them a 1099-Misc in order to remind them to include such payments on their tax returns.  Additionally you would need to furnish the IRS with a copy of the 1099-Misc.  

The current rules are:

• Payments to any one contractor of $600 or more during the tax year in the course of your trade or business.  The contractor must be an individual or partnership; payments to corporations currently do not require a 1099, except for noted below.

• Professional fees to an attorney, doctor or other professional are included, as long as they are made in the course of your trade or business – not PERSONAL expenses.

• Payments to corporations are included only if they are for medical, health care, legal or fishing activities.

• Payment of $600 or more in rent for office space, machines, equipment or land in the course of your trade or business will also require a 1099-Misc if the payment was made to an individual or partnership, not a corporation.

• Payments include commissions, fees, interest, rents, royalties, annuities and any other type of compensation or income to a single recipient. 

Some additional notes to consider:

• The IRS deadline for mailing 1099 forms to your recipients is February 2, 2015 – you should ask them to verify information.  After making any corrections from contractors, submit to IRS by February 28 if paper file and March 31, 2014 if electronically.

• If you inadvertently fail to issue a proper Form 1099, the IRS can assess a $50 penalty. The penalty for each intentional failure can be $100 or more.

• Do not send 1099-MISC personal payments! An independent contractor to whom you have made a personal payment unrelated to your trade or business does not receive a 1099-MISC.

Important Tax Deadlines - 2015

February 2, 2015  

Deadline to issue W2 to your employees and 1099s to your independent contractors.  Below is some information on 1099s, but as always, should you have any questions, please do not hesitate to contact us.  (The normal deadline for corporate returns is January 31st, but this falls on a Saturday, so the deadline is pushed to the next business day, which is Monday, February 2nd .)

February 17, 2015

Deadline for employees who claim exemption from withholding to file a new Form W-4 with their employers.

February 28, 2015

Deadline to renew your LA Business Tax Certificate.  If your business operates out of the city of Los Angeles, it is likely that you have (or should have applied for) a Business Tax Certificate and the renewal for this certificate MUST BE renewed by February 28 in order to be considered timely.  This renewal is important as your business may be subject to exemptions that will reduce or eliminate any tax due to the City of Los Angeles.  You can renew electronically at: https://latax.lacity.org/laweb/F-logon.jsp.   You can also contact us or find any info you need on the requirements for this license at: http://finance.lacity.org.  

March 2, 2015

Deadline for businesses to mail Forms 1099 and 1096 with the IRS if filing on paper. (If filing these forms electronically, the deadline is March 31.)

March 16, 2015

Deadline for corporate tax returns (Forms 1120, 1120A, and 1120S) for the year 2014, or to request automatic 6-month extension of time to file (Form 7004) for corporations who use the calendar year as their tax year. (The normal deadline for corporate returns is March 15th, but this falls on a Sunday, so the deadline is pushed to the next business day, which is Monday, March 16th.)

Final deadline to file an amended corporate tax return (Form 1120X) for tax year 2011 and still claim a tax refund. (Refunds expire three years from the original due date of the return.)

     April 15, 2015

Deadline to file individual tax returns (Form 1040, 1040A, or 1040EZ) for the year 2014 or to request an Automatic Extension (Form 4868).   An extension provides an extra six months to file your return. Payment of the tax is still due by April 15th.  You can submit payment for tax along with the extension form.

Last day to make a contribution to traditional IRA, Roth IRA, Health Savings Account, SEP-IRA or solo 401(k) for the 2014 tax year. (However, if you get an extension, you will have until October 15th to fund a SEP-IRA or solo 401(k).)

1st quarter estimated tax payments due for the 2015 tax year.

Final deadline to file an original tax return (Form 1040) for tax year 2011 and still claim a tax refund, as refunds expire three years from the original due date of the tax return.

Final deadline to file amended tax return (Form 1040X) for tax year 2011 and still claim a tax refund. (Be sure to mail the amended return well before April 15th to make sure your tax refund will be processed in a timely manner. And be sure to obtain proof of mailing, such as a certified mail with return receipt.)

Deadline to file estate income tax or trust income tax returns (Form 1041) or to request an automatic 5-month extension of time to file (Form 7004).

Deadline to file partnership tax returns (Form 1065) or to request an automatic 5-month extension of time to file (Form 7004).

     Final deadline for estates, trusts, or partnerships to file an amended      tax return and still claim a tax refund for the year 2011, as refunds          expire three years from the original due date of the tax return.