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When Should I Use a CPA to File My Taxes?

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June 19  |  Uncategorized  |   admin

Filing taxes can be a hassle.

If you’re an individual and only need to fill out a W-2, you can likely handle that yourself. But when your return is more complex, you might find it’s worth hiring a professional — someone who can save you not only time and stress but also money.  A CPA can help you build a successful tax strategy and can also represent you should you get audited by the IRS.

Many tax preparers at “pop up” tax return shops are trained on tax software to help taxpayers file their returns. They aren’t required to have a degree or understand tax law like a CPA.  Below are some reasons to consider using a CPA to assist you with your tax returns.

1. You have a small business or side hustle

If you own your own business, there are many possible tax write-offs, and a professional has the expertise to help you navigate them.

Likewise, if you’re doing significant work in the gig economy, driving Uber, selling products on sites like Etsy, or racing horses, for example, you might need help with your 1099s.

2. The IRS contacts you

Even if the IRS reaches out asking for something as simple as substantiation of expenses related to a car you bought, you should contact a professional. It could be a simple request from the IRS, but, if you handle it incorrectly, it can turn into a big deal very quickly.

You don’t want to give the IRS the wrong or irrelevant information. A good CPA or tax professional understands the language of the IRS.

3. You’re planning for your kids to go to college

If you have a child heading to college and you’re planning on filling out the Free Application for Federal Student Aid (FAFSA), assistance could be helpful.

You want to make sure you don’t have unwanted assets or income in your child’s name, for example. There are financial issues that can actually hurt your student in terms of collecting financial aid, although these same issues might actually be good for tax planning.  A CPA can help you balance the pros and cons of your decisions.

So if your child has a 529 plan or Coverdell ESA, or even if they’re a part-owner of your business, it could benefit you to hear from someone who speaks the language of FAFSA.

4. You own a rental property

A return on a real estate investment can get tricky, and a professional can help you figure out what kinds of deductions you may be entitled to.

5. You’re self-directing your retirement

Your Roth IRA or 401(k) is not limited to traditional investments in stocks, bonds and mutual funds. You can also use retirement vehicles to invest in alternatives such as bitcoin and real estate. That’s self-directing.

Filing your return on these investments can get tricky and it might be useful to seek help.

There is so much a good CPA can do to increase your refund or have a more strategic tax return.

If you need advice on a solid tax strategy, please call Anthony W. Imbimbo for a complimentary consultation.  Anthony W. Imbimbo, CPA is a tax expert with over 35 years’ experience.  Call him today at 619-497-1040.

Swimming With Sharks: Having Your Tax Return Flagged For Audit

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June 1  |  IRS News  |   admin

Here are some hot areas that may put your tax return in the IRS audit pool

Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? The IRS audits only slightly more than 1% of all individual tax returns annually. The agency doesn’t have enough personnel and resources to examine each and every tax return filed during a year. And its resources are shrinking…the number of enforcement staff dropped nearly 6% last year, partly due to budget cuts. So the odds are pretty low that your return will be picked for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.

However, the chances of being audited or otherwise hearing from the IRS increase depending upon various factors, including your income level, whether you omitted income, the types of deductions or losses you claimed, the business in which you’re engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they’ll rarely lead to a full-blown exam. Although there’s no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chances of drawing unwanted attention from the IRS.

1. Making too much money

Although the overall individual audit rate is about 1.03%, the odds increase dramatically for higher-income filers. 2017 IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 3.70%, or one out of every 27 returns. Report $1 million or more of income? There’s a one-in-eight chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Less than 1% (0.94%) of such returns was audited during 2017, and the vast majority of these exams were conducted by mail. We’re not saying you should try to make less money — everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you’ll be hearing from the IRS.

2. Failing to report all taxable income

The IRS gets copies of the 1099s and W-2s you receive, so make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn’t yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3. Taking large charitable deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag. That’s because IRS computers know what the average charitable donation is for folks at your income level. Also, if you don’t get an appraisal for donations of valuable property, or if you fail to file Form 8283 for donations over $500, the chances of audit increase. And if you’ve donated a conservation easement to a charity, chances are good that you’ll hear from the IRS. Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules. Always attach Form 8283 if required.

4. Claiming the home office deduction

Like Willie Sutton robbing banks (because that’s where the money is), the IRS is drawn to returns that claim home office write-offs because it has found great success knocking down the deduction and driving up the amount of tax collected for the government. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That’s a great deal. For 2014, you have a simplified option for claiming this deduction. The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500. To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children’s playroom as a home office, even if you also use the space to do your work. “Exclusive use” means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night. Don’t be afraid to take the home office deduction if you’re entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.

5. Claiming rental losses

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. But this $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and 750 or more hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation. But the IRS is scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. The agency will check to see whether they worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business.

6. Deducting business meals, travel, and entertainment

Schedule C is a treasure trove of tax deductions for self-employeds. But it’s also a gold mine for IRS agents, who know from experience that self-employeds sometimes claim excessive deductions. History shows that most under-reporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both high-grossing sole proprietorships as well as smaller ones.

Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too high for the business. Agents are on the lookout for personal meals or claims that don’t satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.

7. Claiming 100% business use of a vehicle

Another area ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it’s extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will scrutinize your records. Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy record keeping makes it easy for the revenue agent to disallow your deduction. As a reminder, if you use the IRS’ standard mileage rate, you can’t also claim actual expenses for maintenance, insurance and other out-of-pocket costs. The IRS has seen such shenanigans and is on the lookout for more.

8. Writing off a loss for a hobby activity

Your chances of “winning” the audit lottery increase if you have wage income and file a Schedule C with large losses. And if the loss-generating activity sounds like a hobby — horse breeding, car racing and such — the IRS pays even more attention. Agents are specially trained to sniff out those who improperly deduct hobby losses. Large Schedule C losses are always audit bait, but reporting losses from activities in which it looks like you’re having a good time all but guarantees IRS scrutiny.

You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. For you to claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you’re in business to make a profit, unless IRS establishes otherwise. If you’re audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So make sure you run your activity in a businesslike manner and can provide supporting documents for all expenses.

9. Running a cash business

Small business owners, especially those in cash-intensive businesses — think taxis, car washes, bars, hair salons, restaurants and the like — are a tempting target for IRS auditors. Experience shows that those who receive primarily cash are less likely to accurately report all of their taxable income. The IRS has a guide for agents to use when auditing cash-intensive businesses, telling how to interview owners and noting various indicators of unreported income.

10. Failing to report a foreign bank account

The IRS is intensely interested in people with offshore accounts, especially those in tax havens, and tax authorities have had success getting foreign banks to disclose account information. The IRS has also used voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean — in exchange for reduced penalties. The IRS has learned a lot from these programs and has collected a boatload of money (we’re talking billions of dollars).

Failure to report a foreign bank account can lead to severe penalties, and the IRS has made this issue a top priority. Make sure that if you have any such accounts, you properly report them. This means filing Treasury Department Form 90-22.1 by June 30 to report foreign accounts that total over $10,000 at any time during the prior year. And those with lots more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns.

11. Engaging in currency transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. A report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agrees, and it will make greater use of these forms in its audit process. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 in cash one day and an additional $9,500 in cash two days later).

12. Taking higher-than-average deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe.

The bottom line is, if you get audited, hire a professional to represent you. Never, never, never, represent yourself before the IRS. It’s like swimming with sharks while wearing a swim suit made from fresh meat.

If you have any questions, comments or concerns please call Anthony Imbimbo CPA  at (619) 497-1040

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Should I Itemize or Take the Standard Deduction? Limitations on Schedule A

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May 20  |  California  |   admin

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 had significant changes to itemized deductions and standardized deductions.  There is now a $10,000 limit on state and local taxes.  Types of state and local taxes include: real estate taxes, state income tax withheld from a W-2, SDI withheld on a W-2 and state estimated income tax payments.

If you pay more than $10,000 a year in state and local taxes, any deductions over this amount are now lost.  You may no longer take this as a deduction.

Unsure whether or not you can itemize?  Traditionally, when preparing your taxes you have a choice whether to itemize or take the standard deduction.  Normally we take the larger of the two.  Now with the tax law changes in 2017 it has changed itemized deductions and the standard deduction dramatically.  The standard deduction has doubled and personal exemptions have been taken away.

This may sound like terrible news but in some cases it can benefit taxpayers who have very little in itemized deductions.  The other change was to itemized deductions.  Now this has severely impacted many taxpayers.  Especially those with unreimbursed employee expenses and other itemized deductions; but more importantly those taxpayers who paid a lot of withholding and real estate taxes will now have a cap on how much they can deduct.

Prior to 2018 state and local tax deductions were virtually unlimited.  With the new tax law changes state and local tax deductions are now capped at $10,000!  This means that if you have real estate taxes and state income tax withheld that is more than $10,000, you cannot take a deduction for anything over the $10,000 – it’s lost!!!

If this scenario applies to you, give Anthony W. Imbimbo a call and he will develop a strategy so that you can plan accordingly without any surprises.

Anthony W. Imbimbo, CPA is a tax expert with over 35 years’ experience.  Call him today at 619-497-1040.

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New Federal Mileage Rates

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May 3  |  IRS News  |   admin

For 2020, the IRS has reduced the deductible mileage rates by 1/2 cent per mile for Business and Medical purposes.

Federal Mileage Rate in 2019 was 58 cents per mile for business miles driven, up from 54.5 cents in 2018. 20 cents per mile driven for medical or moving purposes, up from 18 cents in 2018. It is also 14 cents per mile driven in service of charitable organizations.

For IRS purposes, the deductible medical mileage rate in 2020 has been adjusted to to 17 cents per mile driven for medical or moving purposes, this is a decrease from 2019 by ½ cents per mile.  The deductible mileage rate for charitable deductions remained unchanged from 2019 at 14 cents per mile .




57.5 cents per mile

58.0 cents per mile


17 cents per mile

20 cents per mile


14 cents per mile

14 cents per mile

For 2019 Tax Returns, you can deduct expenses that relate to your work as an employee if any of the following apply to you:

  • Qualified performing artist

  • Fee-basis state or local government official

  • Armed forces reservist

  • Impairment-related work expenses

  • Your employer entered code “L” for box 12 of your W-2

Deductible business use of your car does not cover normal commuting to your usual place of work. Qualified deductible business use includes:

  • Driving to a business meeting away from your usual workplace

  • Meeting clients or customers

  • Getting from your home to a temporary workplace

  • Getting from your regular workplace to a second workplace, for the same job or business

Expenses for primary transportation to medical care facilities that qualify as medical expenses are:

  • Actual fees or fares for a taxi, bus, train, or ambulance

  • Out-of-pocket expenses for using your own car, or the standard mileage rate

  • Fees for tolls and parking

Qualified performing artist – An artist that meets the following requirements:

  • Performed in the performing arts as an employee for at least two employers during the last tax year.

  • Received at least $200 in wages from each of the two employers.

Fee-basis – An agreed amount for a single job regardless of the time required to complete the job.

Impairment related work expenses – Expenses incurred from the purchase or payment related to special equipment, training, or anything else related to your ability to perform work with your impairment.

W-2 Box 12

W-2 Box 12 Codes:

  • A — Uncollected Social Security or RRTA tax on tips. Include this tax on Form 1040 Schedule 4 line 58.

  • B — Uncollected Medicare tax on tips. Include this tax on Form 1040 Schedule 4 line 58.

  • C — Taxable cost of group-term life insurance over $50,000 (included in W-2 boxes 1,3 (up to the Social Security wage base), and box 5.

  • D — Elective deferral under a 401(k) cash or arrangement plan. This includes a SIMPLE 401(k) arrangement.

  • E — Elective deferrals under Section 403(b) salary reduction agreement.

  • F — Elective deferrals under Section 408(k)(6) salary reduction SEP.

  • G — Elective deferrals and employer contributions (including non-elective deferrals) to a Section 457(b) deferred compensation plan.

  • H — Elective deferrals to a Section 501(c)(18)(D) tax-exempt organization plan.

  • J — Nontaxable sick pay (information only, not included in W-2 boxes 1, 3, or 5).

  • K — 20% excise tax on excess golden parachute payments.

  • L — Substantiated employee business expense reimbursements (nontaxable).

  • M — Uncollected Social Security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only).

  • N — Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only).

  • P — Excludable moving expense reimbursements paid directly to a member of the U.S. Armed Forces. (not included in Boxes 1, 3, or 5)

  • Q — Nontaxable combat pay. See the instructions for Form 1040 or Form 1040A for details on reporting this amount.

  • R — Employer contributions to your Archer medical savings account (MSA). Report on Form 8853:, Archer MSAs and Long-Term Care Insurance Contracts.

  • S — Employee salary reduction contributions under Section 408(p) SIMPLE. (Not included in Box 1).

  • T — Adoption benefits (not included in Box 1). Complete Form 8839:, Qualified Adoption Expenses, to compute any taxable and nontaxable amounts.

  • V — Income from exercise of nonstatutory stock option(s) (included in Boxes 1, 3 (up to the Social Security wage base), and 5). See Publication 525, Taxable and Nontaxable Income, for reporting requirements.

  • W — Employer contributions (including amounts the employee elected to contribute using a Section 125 cafeteria plan) to your health savings account (HSA).

  • Y — Deferrals under a Section 409A nonqualified deferred compensation plan.

  • Z — Income under a nonqualified deferred compensation plan that fails to satisfy Section 409A. This amount is also included in Box 1 and is subject to an additional 20% tax plus interest. See Form 1040 instructions for more information.

  • AA — Designated Roth contribution under a 401(k) plan.

  • BB — Designated Roth contributions under a 403(b) plan.

  • CC — For employer use only.

  • DD — Cost of employer-sponsored health coverage.

  • EE — Designated Roth contributions under a governmental 457(b) plan. This amount doesn’t apply to contributions under a tax-exempt organization Section 457(b) plan.

  • FF — Permitted benefits under a qualified small employer health reimbursement arrangement.

  • GG — Income from qualified equity grants under section 83(i).

  • HH — Aggregate deferrals under section 83(i) elections as of the close of the calendar year.

Using Tax Software, Think Again

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April 19  |  Uncategorized  |   admin

If you’re taking advantage of the July 15 tax extension this year, you may still be deciding on which software to use.

The media has bombarded you with the ease of tax preparation and using tax preparation software to get you that refund quickly. Some tax software outfits are offering free on-line consultation to get your taxes filed.

For the typical W-2 filer with no deductions, tax prep software is a good way to get your taxes filed at a relatively inexpensive cost. If you have anything more than a W-2, you should seriously consider hiring a tax professional to assist you.

Tax Professionals are Expert in their Field

Tax professionals know the tax laws in and out, have studied at universities, have experience for many scenarios and are licensed professionals.

Tax software is… tax software…. It doesn’t interact with you, it can’t advise you on the law, it has a shelf life, but most importantly, it can’t represent you before the tax authorities in the event of an audit or inquiry.

Like the seasonal tax shops on the corner, they are there for the quick buck and have no skin in the game. Come the day after filing deadlines, the shops are closed, the hot-lines have been disconnected and there is no one there to help you. These so-called help hot-lines can’t offer adequate tax advice to you. They can tell you how to input information into their software but they generally do not have the experience or knowledge to give you tax advice. There are numerous disclaimers.

What the tax software companies don’t tell you is the quality of their hot-line staff. What’s their training? What’s their experience? Are they still a ”tax professional” when filing season is finished? Or are they driving for a ride-share company.

A good tax professional stands by their client, strives to understand the client’s needs, works with the client to help them legally pay the lowest tax possible. They offer tax advice, have resources to answer specific questions; a tax professional will keep you out of hot water and guide you on the proper path of success.

Your Time is Valuable

From the commercials you see a bright, smiling, millennial-something talking about how fast and easy their software is and how you can get a quick refund. What they don’t tell you is the time it will take you to prepare your return on your own.

Preparing your taxes with on-line software will take you HOURS to prepare. Then the second guessing happens: Did I get it right? What have I missed? What did I do wrong? Why can’t I get the refund I expected? You pay about $150 to E-file your taxes (for a small business). To top it off if you add the hotline, it’ll cost you an additional $200.

So it took you 8 hours to prepare, how much is your time worth? A hardworking plumber charges $125-$200 per hour for their work. Is it worth $1,000-$1,600 of your billable time to be uncertain about your taxes?

A tax professional will often save you money. Isn’t it worth hiring someone to be in your corner that will be there for you, to save your time and money to prepare your tax returns properly? NO tax software can commit to that!

Foreseeing the Unseen

Tax software will not help you from a tax planning standpoint or have the ability to run multiple scenarios. Tax software not only can’t advise you on how to improve your tax outlook, it can’t evaluate what works best for you, the taxpayer.

Sure, tax software packages have a Q&A section, but they’re canned script. A seasoned tax professional works with you, asks you the important questions, and can help you by advising you the best course of action; from evaluating your current tax situation, and solving current tax problems when they exist to creating new tax planning solutions for the future.

Sharing Your Personal Information Online

Here’s the big question, do you really want to share your social security number, your bank account information, your income numbers and details online? How often do we hear about identity theft and scammers? The tax software firms tout how safe their websites are to input this sensitive information but….. can you be sure that your computer hasn’t been hacked or your internet connection?

Working directly with a tax professional you’ll have the assurance of confidentiality, and the security and safety of your personal information.

Call Anthony W. Imbimbo, CPA for a complimentary consultation. Anthony is a tax expert with over 35 years’ experience. Call him today at 619-497-1040

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More on AB5: Common Law Rules versus California regarding Independent Contractors

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April 3  |  California  |   admin

Small businesses are threatened by AB5, the new Independent Contractor law, and as a result of the sweeping changes some may end up going out of business. The following will help you figure out what you need to know and do to survive AB5.

The chart below depicts the differences between California and Federal Law on Independent Contractors, as well as an in-depth analysis on what each of their rules are.

This is a continuation on AB5. Read the previous post here


Federal Common Law

ABC Test



Behavioral Control



Financial Control



Relationship of Parties



Exclusion of B-B contracting; favored/repeat reference


Certain jobs can’t be considered as independent contractors for CA purposes


IRS rules on Independent Contracting

Under common-law rules, anyone who performs services for you is your employee if you control what they do and how they do it. This applies even when you give the employee freedom of action. What matters is that you have the ability to control the details of how the services are performed. Common law is a body of unwritten laws based on legal precedents established by the courts.

For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. Consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Relationship of the Parties.

Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

  • The extent to which the worker has unreimbursed business expenses

  • The extent of the worker’s investment in the facilities or tools used in performing services

  • The extent to which the worker makes his or her services available to the relevant market

  • How the business pays the worker

  • The extent to which the worker can realize a profit or incur a loss

Relationship of the Parties covers facts that show the type of relationship the parties have. This includes:

  • Written contracts describing the relationship the parties intended to create

  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay

  • The permanency of the relationship

  • The extent to which services performed by the worker are a key aspect of the regular business of the company

New State of California rules on Independent Contracting

One of the exemptions in AB 5 is for bona fide “business-to-business” contracting relationships. The statute describes these as relationships in which a “business service provider” provides services to a “contracting business.” But even an independent contractor agreement may not be enough to defend you. For the “business-to-business” exemption to apply, all of the following conditions must be met:

  • The “business service provider” (i.e., contractor) must be free from the control and direction of the “contracting business entity” in connection with the performance of the work, both under the contract for the performance of the work.

It should be noted that California has a very strict stance on the ABC test that all elements must be met on the test. False designation of employees as independent contractors are in violation of state wage orders. AB5 broadens the horizons of the ABC test, which is done to stop state wage violations,  so that it applies to more businesses, which were able to avoid punishment for misclassification. To help enforce this law, city attorneys are authorized to sue employers that violate the law.

These occupations that were treated as independent contractors in the past will be covered under AB 5: health care professionals, ride share services, delivery service workers, truck drivers, janitors and housekeepers, health aides, performers and other entertainment professionals, land surveyors, architects, and geologists, campaign workers, language interpreters, exotic dancers, rabbis and other clergy.

Among the exceptions are licensed physicians, lawyers, engineers, tutors (that teach their own curriculum, and that are not public school tutors), commercial fishermen, AAA-affiliated tow truck drivers, real estate agents, accountants, and private investigators; certain marketing and human resources professionals; and licensed manicurists and barbers who can meet certain conditions, including setting their own rates.

Are miscellaneous itemized deductions allowable?

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March 5  |  California, IRS News  |   admin

Miscellaneous itemized deduction rules recently changed and are not allowable for Federal Tax purposes but they are still allowable for California Tax purposes.

Miscellaneous itemized deductions are certain business and non-business expenses that individuals as taxpayers who otherwise itemize deductions may take against their taxable income. Such miscellaneous expenses are allowed only to the extent that they exceed 2-percent of a taxpayer’s adjusted gross income. Miscellaneous itemized deductions may also be limited by the overall itemized deduction phase-out.

These expenses include employee business expenses, expenses of producing income, expenses related to filing tax returns and certain hobby expenses. Specifically, the miscellaneous itemized deductions available to a taxpayer are:

  • Professional society dues;

  • Employment-related educational expenses;

  • Home office expenses;

  • Professional books, magazines and journals;

  • Work clothes and uniforms;

  • Union dues and fees

  • A portion of unreimbursed business-related meal and entertainment expenses;

  • Other unreimbursed employee business expenses;

  • Employee expenses for which reimbursements are included in income;

  • Rental of a safe-deposit box;

  • Expenses incurred for tax counsel and assistance;

  • Costs of work-related small tools and supplies;

  • Investment expenses;

  • Fees paid to an IRA custodian; and

  • Certain expenses of a partnership, grantor trust or S corporation that are incurred for the production of income.

Additionally, there are some miscellaneous expenses that are not subject to the 2-percent of adjusted gross income limitation. These include:

  • Bond premium amortization for taxable bonds;

  • Gambling losses for the year up to the extent of gambling winnings;

  • Casualty and theft losses associated with income-producing assets; and

  • Federal estate tax on income in respect of a decedent.

Federal Tax Reform

The Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, made changes to the Internal Revenue Code (IRC). In general, California Revenue and Taxation Code (R&TC) does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015, with modifications. For Schedule CA (540), California Adjustments – Residents, adjustments due to the TCJA, see the specific line instructions for the following items:

  • Combat zone extended to Egypt’s Sinai Peninsula

  • Moving expenses and reimbursements

  • Limitation on deduction of business interest

  • Limitation on employer’s deduction for fringe benefit expenses

  • Limitation on wagering losses

  • Sexual harassment settlements

  • IRC Section 965 deferred foreign income

  • Global intangible low-taxed income (GILTI) under IRC Section 951A

  • Excess business loss

  • Student loan discharged on account of death or disability

  • Qualified equity grants

  • Expanded use of 529 account funds

  • California Achieving a Better Life Experience (ABLE) Program

  • Living expenses for members of Congress

  • Limitation on state and local tax deduction

  • Mortgage & home equity indebtedness interest deduction

  • Limitation on charitable contribution deduction

  • College athletic seating rights

  • Casualty or theft loss(es)

  • Miscellaneous itemized deductions

In general, for taxable years beginning on or after January 1, 2015, California law conforms to the IRC as of January 1, 2015. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level.

The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the instructions. Taxpayers should not consider the instructions as authoritative law.

Small Businesses Beware! AB 5 WILL affect businesses that hire workers with the intent of treating them as independent contractors!

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February 3  |  California  |   admin

AB 5 is a new law effective 1/1/20. It will enforce California independent contractor rules, punishing businesses that misclassify workers hired as independent contractors that should have been employees. They are targeting both small and large businesses. However, large businesses are in luck, as they are able to rally support & have the resources to sue against the bill, such as Uber and Lyft.

Consumers will be directly affected; ride-share services will increase their fees to fund the cost for classifying their workers as employees, and consequently paying their benefits as well. This also applies to small businesses that rely on independent contractors, resulting in price increases to accommodate the new pay and benefits. It will also put many independent contractors out of a job due to the reclassification.

Some small businesses that rely on independent contractors will be crippled as a result of this bill. Employers that do not comply with the new law, which took effect January 1st, 2020, will be sued by city attorneys, which are empowered by law to go after companies for noncompliance. Other government entities are also being given enforcement powers. The Employment Development Department and Department of Industrial Relations have already mailed letters to more than 1 million California employers. Businesses suspected of non-compliance may be selected for payroll tax audits or inspections. Cities expect to see this bring in revenue that was previously avoided such as payroll taxes and premiums for workers’ compensation, social security, unemployment, and disability insurance.

The ABC test as distilled in AB5 prohibits an employer from classifying a worker as an independent contractor unless the employer can establish that:

(A) The employer does not control or direct the worker in performing the work in fact or under the terms of a contract; and

(B) The work performed is outside the “usual course” of the hiring entity’s business; and

(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Scroll down to see a detailed view of AB5

AB5 simultaneously narrowed the ABC test by excluding numerous types of work from its reach. The exceptions comprise most of the statute’s text.

Among the exceptions are licensed physicians, lawyers, engineers, tutors (that teach their own curriculum, and that are not public school tutors), commercial fishermen, AAA-affiliated tow truck drivers, real estate agents, accountants, and private investigators; certain marketing and human resources professionals; and licensed manicurists and barbers who can meet certain conditions, including setting their own rates.

These occupations that were treated as independent contractors in the past will be covered under AB 5: health care professionals, ride share services, delivery service workers, truck drivers, janitors and housekeepers, health aides, performers and other entertainment professionals, land surveyors, architects, geologists, campaign workers, language interpreters, exotic dancers, rabbis and other clergy.

AB5 also excludes any “bona fide business-to-business contracting relationship,” that is, a relationship under which a sole proprietor, partnership, or other form of business provides services to another business. The contracting business to which services are provided must satisfy 12 criteria to avoid application of the ABC test, including showing that the business service provider provides services directly to the contracting business and not to customers of the contracting business; the business service provider “actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;” and the business service provider can set or negotiate its own rates, and set its own hours and location.

Contractors aren’t entitled to the protections that many laws provide to employees. These include:

  • Coverage by workplace discrimination laws

  • Eligibility for overtime pay

  • Coverage by workers’ compensation statutes

  • Collection of post-termination unemployment

  • Eligibility for health insurance and other employee benefits

Independent Contractor Reporting

Businesses and government entities (defined as a “service-recipient”) are required to report specified information to the Employment Development Department (EDD) on independent contractors (defined as a “service-provider”).

You are required to report independent contractor information if you hire an independent contractor and the following statements all apply:

  • You are required to file a Form 1099-MISC for the services performed by the independent contractor.

  • You pay the independent contractor $600 or more or enter into a contract for $600 or more.

  • The independent contractor is an individual or sole proprietorship.

You must report independent contractor information to the EDD within 20 days of either making payments totaling $600 or more or entering into a contract for $600 or more or entering with an independent contractor in any calendar year, whichever is earlier. Businesses that transmit electronically must submit 2 monthly reports that are not less than 12 days and not more than 16 days apart. Submit reports only for new independent contractors.

You are required to provide the following information:

Service-recipient (business or government entity):

  • Federal Employer Identification Number (FEIN)

  • California employer payroll tax account number (if applicable)

  • Social Security number (SSN)

  • Service-recipient name/business name, address, and phone number

Service-provider (independent contractor):

  • First name, middle initial, and last name

  • Social Security number

  • Address

  • Start date of contract (if no contract, date payments equal $600 or more)

  • Amount of contract, including cents (if applicable)

  • Contract expiration date (if applicable)

  • Ongoing contract (if applicable)

A service-recipient may be charged a penalty of $24 for each failure to report within the required time frames, unless the failure is due to good cause. If the failure to report is intentional or if the report is falsified, a penalty of $490 may be charged.

Questions to Determine whether a worker is an Employee or an Independent Contractor

Do you instruct or supervise the person while he or she is working? Independent contractors are free to do jobs in their own way, using specific methods they choose. A person or firm engages an independent contractor for the job’s end result. When a worker is required to follow company procedure manuals and/or is given specific instructions on how to perform the work, the worker is normally an employee.

Can the worker quit or be discharged (fired) at any time? If you have the right to fire the worker at will and without cause, it indicates that you have the right to control the worker, indicating that the worker is an employee. Independent contractors are engaged to do specific jobs and cannot be fired before the job is complete unless they violate the terms of the contract. They are not free to quit and walk away until the job is complete. For example, if a shoe store owner hires a licensed painter to paint the store, and the work had started, the store owner would not be able to just terminate the painter without there being a good reason or just cause for doing so.

Is the work being performed part of your regular business? Work which is a necessary part of the regular trade or business is normally done by employees, making the worker an employee. For example, a sales clerk is selling shoes in a shoe store. A shoe store owner could not operate without sales clerks to sell shoes. On the other hand, a plumber engaged to fix the pipes in the bathroom of the store is performing a service on a onetime or occasional basis that is not an essential part of the purpose of the business enterprise. A certified public accountant engaged to prepare tax returns and financial statements for the business would also be an example of an independent contractor

Does the worker have a separately established business? When individuals hold themselves out to the general public as available to perform services similar to those performed for you, it is evidence that the individuals are operating separately established businesses and would normally be independent contractors. Independent contractors are free to hire employees and assign the work to others in any way they choose. Independent contractors have the authority to fire their employees without your knowledge or consent. Independent contractors can normally advertise their services in newspapers and/or publications, the Internet, yellow page listings, radio, television, and/or seek new customers through the use of business cards.

Is the worker free to make business decisions which affect his or her ability to profit from the work? An individual is normally an independent contractor when he or she is free to make business decisions which impact his or her ability to profit or suffer a loss. This involves real economic risk, not just the risk of not getting paid. These decisions would normally involve the acquisition, use, and/or disposition of equipment, facilities, and stock in trade which are under his or her control. Further examples of the ability to make economic business decisions include the amount and type of advertising for the business, the priority in which assignments are worked, and selection of the types and amounts of insurance coverage for the business.

Does the individual have a substantial investment in their job which would subject him or her to a financial risk of loss? Independent contractors furnish the tools, equipment, and supplies needed to perform the work. Independent contractors normally have an investment in the items needed to complete their tasks. To the extent necessary for the specific type of business, independent contractors provide their own business facility.

Do you have employees who do the same type of work? If the work being done is basically the same as work that is normally done by your employees, it indicates that the worker is an employee. This applies even if the work is being done on a one-time basis. For instance, to handle an extra workload or replace an employee who is on vacation, a worker is hired to fill in on a temporary basis. This worker is a temporary employee, not an independent contractor.

Do you furnish the tools, equipment, or supplies used to perform the work? Independent contractors furnish the tools, equipment, and supplies needed to perform the work. Independent contractors normally have an investment in the items needed to complete their tasks.

Is the work considered unskilled or semi-skilled labor? The courts and the California Unemployment Insurance Appeals Board have held that workers who are considered unskilled or semi-skilled are the type of workers the law is meant to protect and are generally employees.

Do you provide training for the worker? In skilled or semi-skilled work, independent contractors usually do not need training. If training is required to do the task, it is an indication that the worker is an employee.

Is the worker paid a fixed salary, an hourly wage, or based on a piece rate basis? Independent contractors agree to do a job and bill for the service performed. Typically, payments to independent contractors for labor or services are made upon the completion of the project or completion of the performance of specific portions of the project. If the worker is paid a fixed salary, they are an employee.

Did the worker previously perform the same or similar services for you as an employee? If the worker previously performed the same or similar services for you as an employee, it is an indication that the individual is still an employee.

Click here to read more on AB 5 and how it will impact you.

2019 Tax Law Changes

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January 3  |  IRS News  |   admin

There are some significant changes to the tax law for 2019.

Medical Deductions

Starting in 2019, medical expenses (health insurance and out of pocket medical expenses) must exceed 10% of Adjusted Gross Income (AGI) to be deductible. This is up from 7.5% from 2018. Please note that California has not adopted this change.

Affordable Care Act Tax Penalty

Beginning in 2019, you will no longer be penalized for not being covered for health insurance. Please note that the Premium Tax Credit is still available for those seeking health insurance with lower income.

Alimony Eliminated

Beginning January 1, 2019, Alimony payments are no longer deductible. Alimony payments received beginning in 2019 will no longer be taxable as income. This change does not effect prior year returns. Please note that California has not adopted this change.

Child and Dependent Care Credits

Beginning in 2018 and carrying on to 2019, the IRS grants a tax credit for dependent children of $2,000. This is up from $1,000. Also, for other dependents, a tax credit of $500 is available.

Early Distributions from Retirement Plans

The IRS has liberalized early distributions from retirement plans. In most cases (taking a distribution before age 59 1/2) these are subject to a 10% penalty. Beginning in 2019 the IRS has added exceptions to the 10% penalty for hardship including: medical expenses, preventing eviction or foreclosure, tuition for higher education expenses, purchasing a home, paying the funeral expenses for a family member, or losses due to federally declared disasters. California has not conformed to this Federal tax law change.

If you need advice on a solid tax strategy, please call Anthony W. Imbimbo for a complimentary consultation.  Anthony W. Imbimbo, CPA is a tax expert with over 35 years’ experience.  Call him today at 619-497-1040.

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No Deductions for Legal Medical Marijuana Dispensary

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November 2  |  Medical Marijuana  |   admin

Here’s a very interesting article by Attorney James McDonough

August 20, 2015

Last week, the Ninth U.S. Circuit Court of Appeals ruled that medical marijuana dispensaries cannot claim business expenses to the IRS as other commercial enterprises.

According to Forbes, the decision is considered a financial setback for medical marijuana dispensaries because, with business deductions being disallowed, they must pay taxes on 100 percent of their gross income. The decision is a blow to dispensaries across the country that have flourished in states that voted to legalize the use of medicinal marijuana.

The decision

In the case of Olive V. Comm., the Ninth Circuit upheld the federal tax law to disallow tax deductions despite the legal status of dispensaries in California. According to Judge Susan Graber, the Court affirmed Sec. 280E of the federal tax code that denies deductions for the expenses of “trafficking in controlled substances.” The ruling stated that a medical marijuana dispensary cannot deduct expenses from taxable income because their only commercial product is a controlled substance prohibited by federal law. Despite the various services offered by the taxpayer in the case, the Court ruled that since marijuana sales were the only activity in which the taxpayer engaged in with the “intent of realizing a profit”, it was therefore a “trade or business” involved in trafficking a controlled substance, and thus not eligible for expense deduction.

The case

The case involved Martin Olive, owner and operator of the Vapor Room in San Francisco, who appealed a Tax Court ruling to deny his business expense deductions. In the appeal, Olive argued that Sec. 280E’s use of the phrase “consists of” applied to the Vapor Room because it offered other services in addition to marijuana sales, thereby entitling the enterprise to expense deductions.

However, since these services were free, the Court ruled that all of the  $655,000 in business expenses from the Vapor Room between 2004 and 2005 were disallowed. The Court also rejected Olive’s argument that the Vapor Room was entitled to deductions under Californians Helping to Alleviate Medical Problems, Inc. v. Comm, which allowed expense deductions related to sales of counseling and caregiving services. In that earlier case, the court held  that section 280E does not preclude petitioner from deducting expenses attributable to a trade or business other than that of illegal trafficking in controlled substances simply because petitioner also is involved in the trafficking in a controlled substance.  Judge Graber stated that the Vapor Room could not deduct any such expenses because the business did not charge for those services, and marijuana sales are not considered counseling and caregiving services.

Room for optimism

Although the ruling bans tax deductions for enterprises with marijuana sales as their sole source of revenue, dispensaries are eligible for standard business expense deductions for additional products for sale. In an interview with the SF Gate, Olive’s lawyer Henry Wykowski noted that medical marijuana dispensaries can claim expenses from sales of other commercial products, including food and services. The difficulty will be apportioning business expenses between the permissible activities and the impermissible activity

“The decision will benefit dispensaries that sell a variety of products including those that are not cannabis,” explained Wykowski. “I don’t think it’s a blow to the industry at all.”  However, the decision was not a “win.”

A recent ABA Journal article reported on the application by a marijuana trade group for a Colorado state credit union charter because banks were unwilling to accept cash deposits from dispensaries.  It will be interesting to learn if that application is granted.

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