Call Us Today: (619) 497-1040
 

California

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

No Comments
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.

Tagged , , , , ,

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

No Comments
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

California

Federal Common Law

ABC Test

X

X

Behavioral Control

X

X

Financial Control

X

X

Relationship of Parties

X

X

Exclusion of B-B contracting; favored/repeat reference

X

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

X

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?

No Comments
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!

No Comments
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.