Form 56- Notice Concerning Fiduciary Relationship
Form 1040-Final Individual Income Tax Return and the State Tax Return
Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return
TAX FILINGS FOR ESTATES AND TRUSTS
FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP
This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address. By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.
FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN
The decedent’s final individual tax returns, Form 1040 and state return. The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.
FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN
This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time. It does not report income and it is not an income tax return.
The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.
There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:
- real estate
- a closely held business
- partnership interests
- jewelry
- art, antiques, and collectibles
The return is required if the net value is in excess of $5.43 million in 2015. This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.
The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE). In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.
The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months. The extension is for filing, not paying. The estate tax is due by the original filing date.
FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN
Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31. It is important to keep track of income and deductions during these two periods of time.
FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN
- Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
- Gifts are never taxable to the recipient.
- Gifts may be taxable to the giver.
- You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
- All gifts and the net estate value are totaled on the Form 706.
- Annually, any gifts in excess of $14,000 are reported on the Form 709.
- The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.
What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values
FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE
What is Proposition 60?
Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).
What is Proposition 90?
Proposition 90 has the same provisions and qualifications as Proposition 60. The difference is that it allows base year transfers from one county to another county in California. The only counties that have adopted an ordinance to allow values from other counties are:
o Alameda
o El Dorado
o Los Angeles
o Orange
o Riverside
o San Bernardino
o San Diego
o San Mateo
o Santa Clara
o Ventura
This list can change at any time. Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.
How do I qualify for these property tax benefits?
- Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
- Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
- As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
- The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
- The replacement dwelling must be of equal or lesser value than the original property.
- The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
- Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
- The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
- Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.
Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?
Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.
Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?
No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.
What is meant by "equal or lesser value" than the original dwelling?
In general, "equal or lesser value" means:
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.
105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.
110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.
Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?
No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.
If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?
No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.
May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?
No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify. See the FAQ’s below re Propositions 58 and 193.
Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?
Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified. You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling. In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.
You and your spouse, as the claimants, will use your "one time only" benefit. An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.
Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?
No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.
May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?
No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.
What if I am the co-owner of a property with more than one residential unit?
A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).
Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?
Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.
Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?
No. Both properties must be within Orange County.
Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?
You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.
If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?
Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.
However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.
May parents transfer the family home to their children without a property tax reassessment?
YES. Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence. The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.
May parents transfer other property to their children without a property tax assessment?
Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment.
May grandparents transfer property to their grandchildren without a property tax assessment?
Proposition 193 expanded the benefits of family transfers of real property to grandparents. They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.
How do the transferor and transferee obtain the relief of Propositions 58 and 193?
In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by both the property owner or deceased owner’s estate and by the person to whom title is being transferred. The Claim must be filed within three years of the date of the transfer of the real property. It is filed with the county Assessor.
International estates, an increasing concern.
Situation: One of our clients referred a challenging fiduciary issue to our firm. A U.S. citizen had died and left his assets to relatives in India. The benficiaries of the estate were not U.S. citizens. The trustee had to travel to the U.S. to settle the estate, creating a compressed timeline. The trustee was facing a large tax bill as the rule for income paid to a non-U.S. citizen is that tax must be withheld at a rate of 30%, and the trustee is liable for the withholding.
Action: The fiduciary accounting team at Green Zahn & Associates determined that the tax convention with The Republic of India provided for relief from double taxation and that the fiduciary was not required to withhold tax.
Results: GZA saved the taxpayer tens of thousands of dollars in tax withholdings, and the cost of a second year's tax return preparation, by being proactive in researching and understanding international tax laws.
We need to prepare a burden calculation, what?!
Situation: Our client needed to submit burden calculations, in a proposal, to a major customer.
Action: We helped our client determine what costs should be included in the burden pool to enable the client to accurately calculate the burden.
Results: Our client received acceptance of their proposal to produce parts for the customer.
We need to expand to another state...
Situation: A construction company client wanted to be qualified to do business in another state. The state required audited financial statements to be submitted in the qualification process.
Action: Our client included reviewed financial statements prepared by Green Zahn & Associates in the qualifications package submitted to the state.
Results: The state accepted the reviewed financial statements and the company received its license to operate in the state.
As a firm, we believe in giving back to our community. This year we have achieved this through cash and time donations. We regularly support the Long Beach Symphony, the Long Beach Rescue Mission, the Orange County School of the Arts, and (of course!) UCLA. Allison dedicates quite a bit of time to the National Association of Women Business Owners' Mentoring Committee where she helps new business owners receive invaluable coaching from seasoned professionals. Several staff members participated in the Run Seal Beach 5k & 10k this year and Rachel went on to participate in the Long Beach Half Marathon, the rest of the staff was happy to cheer for her!
In July the entire staff headed over to the Ronald McDonald House in Long Beach to prepare lunch for the families staying there. We toured the facility, learned about the charity and its services, and prepared a fresh Chinese chicken salad luncheon. It was very gratifying to help an organization with such a noble cause. We highly reccomend adding this charity to the list you support, there are many ways to get involved, from preparing meals, to helping out with odd jobs, or donating household supplies. Cash donations are always useful as well. Did you know that you can rent their beautiful, high tech boardroom for your company's off-sites? Find out more at their website:
http://www.longbeachrmh.org/about_us.php
In November we headed over to Working Wardrobes in Costa Mesa to help prepare for a workshop they hold at Camp Pendleton in suport of our returning troops. Working Wardrobes is a smart organization that not only helps individuals put together a professional wardrobe, but offers workshops, mentoring and training on subjects such as networking the art of management, marketing, and change management. Check out their offerings at:
http://www.workingwardrobes.org/
We are always looking for opportunities to get involved, so let us know if you have a favorite not-for-profit that could use the likes of us for a day's worth of labor. You can email your ideas to: greenzahn@greenzahn.com
Help! Are we growing too fast?
Situation: A manufacturing client was experiencing extremely rapid growth and their accounting needs were not being met by their in-house team, creating hazards on their path to success.
Action: GZA stepped in to provide additional support to their existing accounting department as well as assisting with creating a policies and procedures manual to provide a basis for future growth.
Results: The client was able to maintain stability and meet the demands of their clients while sustaining the rapid growth.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.
The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11 was issued concurrently to provide further guidance on the definition of wages. Also, a proposed revenue procedure, Notice 2019-7, was issued concurrently to provide a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.
Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.
Wolters Kluwer: What is your general overview of the revised, final regulations for the Section 199A Qualified Business Income (QBI) or "pass-through" deduction?
Tom West: I think it is admirable that Treasury and IRS were able to publish these final regulations so quickly and address so many of the comments and questions that the proposed regulations generated. I think they realized how important this particular package was to so many taxpayers for the 2018 filing season and, while questions obviously remain, having these rules out in time to inform decisions for this year’s tax returns is helpful. In particular, the liberalized aggregation rules and the additional examples regarding certain specified service trades or businesses (SSTBs) are the most consequential in my mind.
Wolters Kluwer: What should taxpayers and practitioners keep in mind in consideration of relying on either the proposed or final regulations for the 2018 tax year?
Tom West: I have to imagine that when choosing between the two, for most taxpayers the final regulations will ultimately provide the better result. The ability to aggregate at the entity level, which was only provided in the final regulations, may be a key consideration for those taxpayers with more complicated or tiered structures. That said, I do think taxpayers need to be careful in their aggregation modeling because you are going to be stuck with your aggregation once you’ve filed. It may be that some taxpayers wait on getting locked into a particular aggregation and continue to study the new rules—and even wait on additional guidance that may be coming. However, it may be important to note that the final regulations provide that if an individual fails to aggregate, the individual may not aggregate trades or businesses on an amended return—other than for the 2018 tax year.
Wolters Kluwer: How is the removal of the proposed 80 percent rule regarding specified service trades or businesses (SSTBs) from the final regulations likely to impact certain taxpayers?
Tom West: First of all, I think the removal of this rule is a demonstration of two important dynamics. One, the critical importance of the engagement of taxpayers in the comment process, and, two, the government’s willingness to listen and adapt in their rule-making. I don’t know if there are particular industries or taxpayers who will be impacted, but I do know that the change is a very logical and appropriate one, and logic doesn’t always prevail in these processes, so I’m happy to give the regulators credit when it does.
Wolters Kluwer: Which industries may have been helped or hindered by the final regulations with respect to SSTB rules?
Tom West: I’m not sure specific industries were helped, but the biggest positive in terms of the SSTB final rules is the carryover from the proposed regulations of the treatment of the skill or reputation provision. Had Treasury and the IRS gone in a different direction, there was a risk of that provision swallowing the rest of the 199A regime—not to mention how much more subjective the already sometimes difficult SSTB determinations would have become.
Wolters Kluwer: Are there any lingering, unanswered questions among taxpayers or practitioners that particularly stand out when determining what constitutes SSTB income?
Tom West: I think many taxpayers who have both SSTB and non-SSTB activities were hoping for more clarity, either in rules or examples, on how to acceptably segregate business lines or on when (or if) certain activities are inextricably tied together. There are also still lingering questions regarding when a trade or business is an SSTB—particularly in the field of health.
Wolters Kluwer: Were there any surprises in the final regulations?
Tom West: I don’t know if I’m surprised, knowing the concerns that led them to the decisions they made, but the fact that Treasury and IRS held the line on some of the SSTB-related rules is notable. I’m thinking specifically of the so-called "cliff" effect of the de minimis rule and the fact that owners of certain kinds of SSTB businesses, e.g., sports teams, are not allowed to benefit from the Section 199A deduction.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.
The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11, I.R.B. 2019-9, 742, was issued concurrently to provide further guidance on the definition of wages. Also, a proposed Revenue Procedure, Notice 2019-7, I.R.B. 2019-9, 740, was issued, concurrently providing a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.
Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.
Wolters Kluwer: Neither the proposed nor final regulations for Section 199A give guidance as to when rental real estate activity constitutes a Section 162 trade or business. How might the application of the safe harbor provided for in IRS Notice 2019-7 offer taxpayers clarity? And how might failure to qualify for the safe harbor impact the determination of whether the rental activity is a trade or business under Section 199A?
Tom West: The safe harbor is helpful but it appears to be intended for relatively smaller taxpayers who may have had questions about their activities rising to the level of a trade or business. I don’t think falling outside of the safe harbor is dispositive—especially in light of the recent policy statement from Treasury regarding sub-regulatory guidance.
Wolters Kluwer: Can you speak to the some of the complexity that may be involved in tax planning with respect to achieving the right balance between adequate W-2 wages and QBI?
Tom West: Other than for small taxpayers, there is only a benefit under Section 199A if the limitations are met. It does not do any good to have QBI but then have insufficient W-2 wages and qualified property to meet the limitations. So when taxpayers are evaluating what constitutes a qualified trade or business (or whether to aggregate qualified trades or businesses) they will need to determine the amount of W-2 wages with respect to each QTB. Aligning the W-2 wages with the QTB will be important—but the salary expense will also result in a reduction in the amount of QBI and therefore the amount of any Section 199A benefit—so modeling becomes critical. Consideration should also be given to any collateral consequences—for instance the impact of the alignment on allocation and apportionment for state taxes.
Wolters Kluwer: According to a March 18, 2019, Treasury Inspector General for Tax Administration (TIGTA) report, Reference Number: 2019-44-022, IRS management indicated that the timeline related to the issuance of Section 199A guidance did not provide enough time for the IRS to develop a QBI deduction tax form. Although the IRS did create a worksheet, do you have a prediction on what key elements may be included on the new form once released?
Tom West: I do think that worksheets could be developed that would facilitate the reporting of Section 199A information—particularly through tiered structures—so as to ease the reporting burden and enhance compliance.
Wolters Kluwer: The IRS has estimated that nearly 23.7 million taxpayers may be eligible to claim the Section 199A deduction and that more than 22.2 million (94 percent) of those eligible taxpayers will not require a complex calculation for the deduction. What notable differences do you expect there are between "complex" and the majority of calculations?
Tom West: For taxpayers under the Section 199A income thresholds ($157.5K single, $315K joint), the deduction is very easy to calculate and claim. Those taxpayers don’t need to worry about being in an SSTB, how much wages they paid, or the basis of their property. Once those taxpayers hit those income thresholds though, even in the phase-out range, things very quickly get complex—and that’s as a consequence of the statute; it is not something that the regulators can change.
Wolters Kluwer: Do you anticipate the IRS will issue further guidance on the Section 199A deduction?
Tom West: I do. As I said at the top, I think part of the government’s motivation in finalizing these regulations so quickly was providing guidance to taxpayers ahead of the tax-filing season. And while for the majority of taxpayers who are below the 199A cap there is probably now sufficient guidance, I think there are still a lot of questions for those with more complex situations. Given the number of taxpayers who are eligible for this deduction, and the importance of Section 199A as the big benefit to non-corporate businesses in what the Administration views as a signature legislative achievement, I have to believe that the government will be responsive to taxpayers’ requests for additional help on this provision. However, given that the provision is due to sunset, it will be important that any guidance is forthcoming in fairly short order to be of any usefulness to taxpayers.
Wolters Kluwer: At this time, do you have any recommendations for taxpayers and practitioners moving forward?
Tom West: As people are going through their tax filings this year, I’d keep a list of issues, questions, and areas where additional guidance would be helpful. It often happens that problems with new legislation or regulations don’t reveal themselves until taxpayers have to put pencil to paper and track their real-world numbers through returns. We’ll all have that experience this year and, with those lists of issues and questions in hand, there may be an opportunity to approach the IRS and Treasury in the hopes of getting resolution going forward. Keeping that list could also help identify areas for tax planning and perhaps ease the complexity of filing for 2019.
A bipartisan House bill has been introduced that would fix a GOP tax law drafting error known as the "retail glitch." The House bill, having over a dozen co-sponsors, is a companion measure to a bipartisan Senate bill introduced in March.
A bipartisan House bill has been introduced that would fix a GOP tax law drafting error known as the "retail glitch." The House bill, having over a dozen co-sponsors, is a companion measure to a bipartisan Senate bill introduced in March.
Immediate Expensing
The Restoring Investment in Improvements Act (HR 1869), sponsored by House tax writers Reps. Jimmy Panetta, D-Calif., and Jackie Walorski, R-Ind., would allow restaurants, retailers, and other leaseholders to immediately write off the cost of certain improvements. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, inadvertently excludes qualified improvement property (QIP) from the new 100 percent bonus depreciation provision.
The measure is a "small but critical fix for our job creators, and technical corrections like this are a normal part of the process when Congress enacts major reforms," Walorski said in a recent press release. "This bipartisan, commonsense bill will allow restaurants, retailers, and other small businesses to unlock the full benefits of tax reform and continue driving our nation’s economic growth."
Similarly, Panetta highlighted the negative impact that the loss of immediate expensing has caused many small businesses. "Our bill will allow restaurants, retailers, and other businesses to make the improvements they need to keep their stores competitive and safe and plan for the future," he said.
Although the "retail glitch" measure has solid bipartisan support, Democrats in general have seemed hesitant to fix any errors in the GOP tax law. To that end, House Ways and Means Committee Chairman Richard Neal, D-Mass., has said he would like to hold a hearing on technical corrections for the TCJA. The committee’s March 27 hearing on the TCJA did not specifically address technical corrections.
The House on April 9 approved by voice vote a bipartisan, bicameral IRS reform bill. The IRS bill, which now heads to the Senate, would redesign the IRS for the first time in over 20 years.
The House on April 9 approved by voice vote a bipartisan, bicameral IRS reform bill. The IRS bill, which now heads to the Senate, would redesign the IRS for the first time in over 20 years.
IRS Reform
The Taxpayer First Act of 2019 (HR 1957), as amended, cleared the House Ways and Means Committee by voice on April 2. The House and Senate both introduced the bicameral, bipartisan measure on March 28. If enacted, the bill would make numerous reforms to the IRS, some of which include modernizing antiquated information technology systems and enhancing taxpayer services and identity protections.
"With a new tax code, it is time for a new tax administrator," House Ways and Means Committee ranking member Kevin Brady, R-Tex., said in an April 9 statement. "I applaud the House for passing the Taxpayer First Act—a bold step to redesign the IRS to be an agency with one singular mission: putting taxpayers first."
The IRS Reform bill has been "years in the making," Brady said on April 9, echoing a joint statement that he and Ways and Means Chairman Richard Neal, D-Mass., along with other bipartisan tax writers recently issued. "The House Ways and Means Committee and the Senate Finance Committee have carefully and thoughtfully developed this legislation over several years, after numerous hearings and roundtables, in a bipartisan, bicameral manner," the lawmakers said.
AICPA Applauds Taxpayer First Act
The American Institute of CPAs (AICPA) issued an April 9 statement commending the House for passing HR 1957. "The AICPA appreciates the bipartisan recognition by members of the U.S. House of Representatives for bringing the Internal Revenue Service into the 21st Century," Edward S. Karl, vice president of taxation, said in a statement on behalf of the AICPA. "The AICPA has long been interested in and active in working to find ways to modernize the IRS so that it can better serve the needs of taxpayers and tax practitioners."
Free File Alliance
However, the bipartisan, bicameral bill has not advanced without its share of criticism. Several Democratic lawmakers have criticized a provision within the bill that would codify the Free File Alliance, which is an agreement between the IRS and certain tax preparation companies that includes the IRS being unable to directly assist in tax return preparation.
"Again and again in my service in the Senate I have battled the tax-preparation software industry to simplify filing taxes for the typical American," Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., said in an April 9 statement. "During the debate on the tax administration bill, my staff pushed back on a prohibition on the agency competing with private tax preparation services, and I will continue to push for my proposal for the pre-filed ‘simple’ return and the principle that a taxpayer should not have to use a private company to pay their taxes online," he added.
Looking Ahead
It remains unclear when the Senate will take up the Taxpayer First Act bill. However, the bill is presently expected on Capitol Hill to easily be approved in the Senate.
Proposed regulations address gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF). Taxpayers may generally rely on these new proposed regulations. The IRS has also requested comments.
Proposed regulations address gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF). Taxpayers may generally rely on these new proposed regulations. The IRS has also requested comments.
The proposed regulations also withdraw and replace placeholder provisions in an earlier set of proposed regulations ( REG-115420-18). These concern:
- the definition of "substantially all"regulations
- transactions that can trigger includible gain;
- the timing and amount of deferred gain that is included;
- treatment of leased property used in the qualified opportunity zone (QOZ) business;
- use of QOZ business property in the QOZ;
- sourcing of income to the QOZ business; and
- the reasonable period for a QOF to reinvest proceeds from the sale of qualifying assets.
In addition, within a few months the IRS expects to address administrative rules for a QOF that fails to maintain the required 90-percent investment standard, as well as information reporting requirements.
Finally, the IRS expects to revise Form 8996, Qualified Opportunity Fund, for 2019 and subsequent tax years. These revisions may require additional information, including the employer identification number (EIN) for the QOF business, and the amounts invested by QOFs and QOZ businesses located in particular QOZs.
"Substantially All" for QOZ Business
The 2018 regulations provided that a trade or business satisfies the "substantially all" test for a QOZ business if at least 70 percent of its tangible property is qualified opportunity zone business property. The new proposed regulations generally extend this 70-percent threshold to the "substantially all" tests for use. However, in the holding period context, the "substantially all" threshold is 90 percent.
Original Use of Purchased Tangible Property
The proposed regulations generally provide that the "original use" of tangible property acquired by purchase by any person starts on the date when that person or a prior person:
- first places the property in service in the qualified opportunity zone for purposes of depreciation or amortization; or
- first uses the property in the qualified opportunity zone in a manner that would allow depreciation or amortization if that person were the property’s owner.
Used tangible property will satisfy the original use requirement with respect to a QOZ so long as the property has not been previously used (that is, has not previously been used within that QOZ in a manner that would have allowed it to depreciated or amortized) by any taxpayer
In addition, a building or other structure that has been vacant for at least five years before being purchased by a QOF or QOZ business satisfies the original use requirement. Improvements made by a lessee to leased property satisfy the original use requirement and are considered purchased property for the amount of the unadjusted cost basis of the improvements.
Land can be treated as QOZ business property only if it is used in a trade or business of a QOF or QOZ business. The holding of land for investment does not give rise to a trade or business, and the land cannot be QOZ business property. Anti-abuse rules determine whether unimproved land can be qualifying property. However, other purchased real property generally must be substantially improved, determined on an asset-by-asset basis.
Leased Tangible Property in QOZ
Leased tangible property may be QOZ property if:
- the lease is entered into after 2017; and
- substantially all of the property’s use is in a QOZ during substantially all of the lease period.
However, the first-use requirement does not apply to leased tangible property. The leased property can generally also be acquired from a related person, though several conditions apply. The proposed regulations also provide methods for valuing the leased property.
QOZ Businesses
The proposed regulations:
- provide that in determining whether a substantial portion of intangible property of a QOZ is used in the active conduct of a trade or business, a substantial portion is at least 40 percent;
- address real property that straddles a QOZ;
- provide three safe harbors and a facts-and-circumstances test for determining whether a corporation or partnership derives at least 50 percent of its gross income from the active conduct of a qualified business;
- define "trade or business" by reference to Code Sec. 162, except that the ownership and operation (including leasing) of real property used in a trade or business can also be the active conduct of a trade or business; and
- provide a safe harbor for working capital.
Other Business Rules
The proposed regulations also address:
- Section 1231 gains;
- relief regarding the 90 percent asset test, including relief for newly contributed assets and QOF reinvestments;
- the amount of an investment for purposes of the deferral election;
- inclusion events, the timing on basis adjustments, includible amounts, and special rules for partnerships and S corporations;
- gifts and bequests;
- exceptions for disregarded transfers and some nonrecognition transactions;
- distributions and contributions;
- consolidated return provisions;
- holding periods and tacking rules;
- anti-abuse rules;
- special rules for Indian tribes and tribally leased property.
Comments Requested; Public Hearing Scheduled
A public hearing on the proposed regulations is scheduled for 10 am on July 9, 2019, at the New Carrollton Federal Building in Latnham, MD. Public comments may be mailed or hand-delivered to the IRS, or submitted via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-120186-18).
The IRS has provided a safe harbor for professional sports teams to avoid the recognition of gain or loss when trading players and/or draft picks. Under the safe harbor provision, the traded player’s contract or the traded draft pick would have a zero basis.
The IRS has provided a safe harbor for professional sports teams to avoid the recognition of gain or loss when trading players and/or draft picks. Under the safe harbor provision, the traded player’s contract or the traded draft pick would have a zero basis.
Value of Professional Sports Contracts
Professional sports teams enter into contracts with their personnel (e.g., managers, coaches, players, etc.). Typical personnel contracts provide an agreed-upon amount of compensation for a certain duration of service. The value of such a contract may fluctuate based on a variety of factors, including:
- player performance;
- the changing needs of the team and of other teams;
- a player’s effect on fan attendance; and
- the number of years until a player becomes a free agent and is able to sign a contract to play for any team in a league.
Other considerations affecting the value of a player contract include:
- the size of the team’s market (i.e., whether a smaller city or a major urban population);
- the cost of player development; and
- the impact of injuries and slumps on player performance.
In most cases, teams do not trade personnel contracts or draft picks unless the team thinks that it is receiving contracts of an equal or greater value. Because each party believes that they are receiving personnel contracts or draft picks of an equal or greater value, it is difficult to assign a monetary value to them. Accordingly, the IRS developed a safe harbor whereby each team is able to treat the traded contracts or draft picks as having a basis of zero, thus avoiding the recognition of gain or loss on the trade.
Safe Harbor Requirements
In order to use the safe harbor, professional sports teams must meet the following requirements:
- all teams involved in the trade must use the safe harbor;
- teams may only trade personnel contracts, draft picks, and/or cash;
- personnel contracts and/or draft picks cannot be Code Sec. 197 intangibles; and
- the financial statements of all teams involved in the trade must not reflect assets or liabilities resulting from the trade other than cash.
Application
Sports teams using the safe harbor will not recognize any gain or loss if they only trade personnel contracts or draft picks. However, teams that receive cash in a trade will recognize the amount of cash received as gain. In addition, the team providing cash to another team in the trade will receive basis in the personnel contract or draft pick equal to the amount of cash that it provided. A team providing cash to another team in a trade for two or more draft picks or personnel contracts must allocate its basis to each personnel contract or draft pick received from the other team by dividing the basis by the number of personnel contracts or draft picks received.
In certain cases, a team may have unrecovered basis in a draft pick or personnel contract under Code Sec. 167(c). In those instances, the team may recognize gain or loss based on the difference between the unrecovered basis and any cash received.
Effective Date
Teams may use the safe harbor for any trades involving personnel contracts or draft picks entered into after April 10, 2019. However, teams may choose to apply these rules in any open tax year.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
Taxes and spending
Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff. Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect. Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012. The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation. Also, the employee-side payroll tax cut is scheduled to expire after 2012.
Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012. The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended. Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000.
President Obama has talked about trimming $4 trillion from the federal budget deficit. Approximately $1.6 trillion would come from increased taxes on higher income individuals. To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals. Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.
The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff. House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals. Revenue could also be raised by limiting or abolishing business tax deductions and credits. Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.
Possible scenarios
Looking ahead, several scenarios may play out before year-end. President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets. President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal. On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled. The spending cuts also would kick-in as scheduled.
Filing season
Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems. Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.
IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT. In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach. The IRS appears to be anticipating that Congress will patch the AMT for 2012. If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.
The IRS also must reprogram its processing systems for the tax extenders. These tax law changes generally do not require the level of reprogramming the AMT patch requires. The IRS has predicted that any year-end extension of the extenders will be manageable.
Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
Additional tax on higher-income earners
There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.
The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).
Passthrough treatment
For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.
Withholding rules
Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.
Planning techniques
One planning device to minimize the tax would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.
Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.
If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Home sale exclusion
Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.
To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.
Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.
Unforeseen circumstances safe harbors
The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.
Facts and circumstances test
If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.
Events deemed as unforeseen circumstances
Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.
If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:
- Who are your taxable workers?
- What payroll taxes apply?
- What compensation is taxable?
- When are your payroll taxes due?
- What payroll and other returns should you file?
Taxable workers
The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.
It's more likely that you hire employees. In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.
There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.
If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.
What taxes apply
Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.
You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.
Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.
Compensation
Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.
There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.
Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.
Deposit schedule
Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.
Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.
Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.
Forms
If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.
The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.
Penalties are costly
Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.
The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.
You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.
Reporting obligations
Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.
Staying out of trouble with the IRS
Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.
