IRS & FTB Give Tax Relief to Wildfire and Mudslide Victims in Southern California

January 22nd, 2018

The IRS announced last week that they are giving tax relief to victims of the Southern California wildfires and mudslides. The IRS extended impacted taxpayers’ deadlines that fell (or will fall) between December 4, 2017 and April 29, 2018 to April 30, 2018. This includes the Form 1040 deadline of April 17th (it will be April 30th for impacted taxpayers). This impacts individuals and businesses who are in Los Angeles, San Diego, Santa Barbara, and Ventura Counties who were impacted by the disasters.

California’s Franchise Tax Board automatically follows federal tax disaster relief, so state tax deadlines will also be postponed on the state level for impacted taxpayers.

IRS Releases New 2018 Withholding Tables

January 11th, 2018

The IRS announced today the release of new withholding tables reflecting the new tax law. These will be used for W-2s, and should be used no later than February 15th. The IRS is working on a new W-4 form that will reflect the new law. That will likely be out in February.

It’s 1099 Time

January 9th, 2018

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

Remember, the deadline for submitting 1099-MISCs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS is now at the end of January: Those 1099s must be filed by Wednesday, January 31st.

Here are the deadlines for 2017 information returns:

  • Wednesday, January 31st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Wednesday, January 31st: Deadline for submitting 1099-MISCs for Nonemployee Compensation to IRS;
  • Wednesday, February 28th: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Thursday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Tuesday, April 2nd: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

Why California’s Attempt to Make State Taxes a Charitable Deduction is Doomed

January 8th, 2018

When your budget is out of balance there are two ways of getting it in balance: cutting spending or increasing revenue. For California’s Democratic politicians, the only way they want to balance the budget is to increase the revenue. The new tax law puts a crimp on California (and other “Blue” states) by limiting the deduction of state income taxes and property taxes to $10,000. Kevin de Leon, California Senate President Pro Tempore, came up with the idea of having Californians being able to make a charitable donation to the “California Excellence Fund” instead of paying state taxes; that would allow the deduction to be taken on the taxpayer’s tax return and getting around the $10,000 limitation. Senator de Leon’s measure, though, will not pass IRS scrutiny for four reasons.

First, a charitable donation must be voluntary, not mandatory. That the contribution is used for the “California Excellence Fund”–an that fund is used for the general budget–makes this the equivalent of state tax paid. That makes this a mandatory payment, not a voluntary one, and it is, thus, not a charitable donation.

Second, Senator de Leon cites previous state contributions such as in Arizona, where taxpayers made contributions to parochial schools via a state fund as a charitable contribution. There’s a big difference between that and this California proposal: Mr. de Leon’s proposal would be for the general fund, with the money used in normal state revenues. That’s not going to work.

Third, taxpayers cannot obtain any benefit from the contribution. For example, if you donate $100 to a charity and receive (say) a blanket worth $10, your deductible charitable contribution is $90. Since the whole idea of this is to give taxpayers a charitable contribution in return for taxes paid, the amount that is deductible would be a benefit received and not deductible.

Fourth, there’s a doctrine in tax called “Substance Over Form.” This doctrine basically says that the economic substance of a transaction determines how it is treated for tax purposes, even if its labeled as something else. If you label something as a charitable contribution but it’s really a tax payment, under “Substance Over Form” it will be treated as a tax payment.

Thus, I believe that the efforts by Democrats such as Kevin de Leon are doomed to failure. I expect the IRS to rule–if this measure becomes law–that contributions to the California Excellence Fund are only charitable contributions if they exceed the required amounts to be paid for state income tax.

Start Your 2018 Mileage Log Now

January 4th, 2018

I’m going to start the new year with a few reposts of essential information. Yes, you do need to keep a mileage log:

Tuesday was the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 80,008). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car. It’s also a good idea to take a picture of the odometer;

Here’s the other things you should do:

On the cover of your log, write “2018 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/5 80315-80350 Office-Acme Products (1234 Main St, Las Vegas)-Office,
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.545/mile, the 35 miles in this hypothetical trip would be worth a deduction of $19. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year?
There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

IRS Announces Tax Filing Season Begins January 29th

January 4th, 2018

The IRS today announced that the 2018 Tax Filing Season will begin on Monday, January 29th. This year’s deadline for individual returns is Tuesday, April 17th.

Blogroll Update

January 1st, 2018

It’s been a while, but I’ve finally updated the blogroll. I’ve removed the deadwood and added a few new blogs (and tax agencies). If you have a tax blog that you think should be added, let me know by commenting. I’ll check it out.

The 2017 Tax Offender of the Year

December 31st, 2017

It’s once again time for that most prestigious of prestigious awards, the Tax Offender of the Year. To win this award you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.

President Trump received a nomination. Now, I realize many do not like the President’s politics, and the tax reform bill that was signed into law isn’t tax simplification. However, it is tax reform, and it will lower taxes for most Americans. As for Democrats’ charges that it will kill millions and cause the world to end, please. President Trump may deserve criticism over other political issues, but not on taxes (today).

Finishing in third place was Joseph Cervone, CPA, of White Plains, New York. Mr. Cervone saw the tax credits available for energy and coal and thought, “I can get free money for my clients! Let’s just submit $23 million of phony credits!” Mr. Cervone is enjoying 22 months at ClubFed.

Finishing in second place was the California legislature. The Bronze Golden State had a flirting with single-payer health care; luckily for California taxpayers the projected $400 Billion cost caused even the ultra-liberals to get cold feet. California continues to waste money on the train to nowhere. The project originally had a cost of $33 billion; it’s now up to $68 billion. It’s probable, though, that the project will die as further funding from the federal government is unlikely. It would be nice for Sacramento to stop spending money on it; the $3 billion spent could be used for far better things.


I grew up just outside of Chicago. I’m a fan of Chicago sports teams (save the White Sox), and many of my relatives live in or near Chicago. Yet Illinois in general and Chicago in particular is now known for high and increasing taxes and out-migration. A search on Chicago taxes finds stories like, “Chicago Property Tax Bills Going up 10 Percent This Year,” “Increased taxes, fees on phones, ride-hailing and concert tickets approved in 2018 Chicago budget,” and “Chicago’s soda tax is repealed.” You can read an article about fed-up Illinois homeowners debating moving from Chicago.

The question, though, is why are taxes increasing in Illinois and Chicago? Is it just the politicians, or is there an underlying cause? There is an answer: Public Employee Pension Funds. These funds (generally on the state level) are the cause of the problem in Illinois, and are this year’s Tax Offender of the Year.

The Tax Foundation has a map showing the funding in various states. Here are the top ten (best) funded states as of 2015 (latest year that statistics are available):

1. South Dakota, 107%
2. Oregon, 104%
3. Wisconsin, 103%
4. North Carolina, 99%
4 (tie). Tennessee, 99%
6. New York, 98%
7. Idaho, 95%
8. Nebraska, 93%
9. Delaware, 92%
10. Florida, 91%

And here are the ten worst:

40. Arizona, 64%
40 (tie). Colorado, 64%
42. Hawaii, 61%
42 (tie). Rhode Island, 61%
42 (tie). South Carolina, 61%
45. Alaska, 60%
45 (tie) Pennsylvania, 60%
47. Connecticut, 51%
48. New Jersey, 48%
49. Illinois, 41%
49 (tie) Kentucky, 41%

The Tax Foundation’s closing paragraph explains the problem:

Pension obligations must be fulfilled eventually. Policymakers should consider that reform now may be less costly and less painful than coping with a larger crisis later.

As of 2015, both California and Nevada are about average (at 74% funded). Unfortunately, California is now at 64% and falling. So why has this happened and what can be done about it?

Pew has a report on the 2015 analysis, and the problems began in the early 2000s: Liabilities increased at the same basic rate while assets in pension funds didn’t. In many states the pension fund crisis hasn’t come (yet). In a few, it won’t come (pensions are properly funded). In at least one state, Illinois, the crisis exists today; in another, California, it’s coming very soon. Consider that California pensions aren’t well funded yet we’ve had a huge boon in the stock market over the last two years!

Some cities and counties are in even worse shape. A Hoover Institution report shows that both Chicago and Cook County (the county that Chicago is in) have massively underfunded pensions. So Chicago residents have a triple whammy: underfunded state, county, and city pensions.

As for the reasons why this crisis exists, there are a couple.

1. When rates of return increased in the late 1990s, that increase was built into new public employee contracts. The late 1990s featured the dot-com boom in the stock market. Those rates of returns, in the 7% range, aren’t seen today (they’re about 2% to 3%).

2. Politicians ignoring the issue. It’s always easiest to pass the buck to the next mayor, or the next governor, or the next state legislature. That’s what’s been done in Illinois, and the state is in severe crisis. The Democrats who control the state legislature are beholden to the public employee unions who, shockingly, don’t want to see pensions cut. Last time I looked, Illinois is nearly a year behind in paying its bills–all because of the pension crisis. So Democrats are only proposing tax increases rather. Residents who can move are doing so, and they can escape the pension crisis.

So what’s the answer to this crisis? There are a couple:

1. Pension reform is needed nearly everywhere in the US. Yes, pension benefits are going to decrease. That’s going to happen, either through negotiation or when the systems run out of money. It’s a certainty.

2. Reform for civil service/public employee unions. I am reminded of what President Franklin Roosevelt said:

All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations. The employer is the whole people, who speak by means of laws enacted by their representatives in Congress. Accordingly, administrative officials and employees alike are governed and guided, and in many instances restricted, by laws which establish policies, procedures, or rules in personnel matters.

Meaningful reform means that public employee unions won’t have collective bargaining or massive reform of civil service (or both). Governor Scott Walker of Wisconsin noted this in a speech and implemented reforms. You will note that Wisconsin pensions are fully funded (one of only three such states).

Pain is coming in the world of pensions. Public employee unions can either recognize it, and live with change, or it will be forced upon them. Taxpayers stuck in bad states (e.g. Illinois) and bad cities (e.g. Chicago) will vote with their feet. Chicago politicians can’t tax John and Mary Smith who leave Chicago for places like Florida. Politicians also need to recognize reform is mandatory. Yes, it will be painful but the cost of kicking this can further down the road is even greater.


That’s a wrap on 2017. While I hope that 2018 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect (as usual) that I’ll have plenty of choices.

I wish you and yours a happy, healthy, and prosperous New Year!

Tax Law Signed; New Year Likely to Bring Lots of New S-Corporations

December 22nd, 2017

President Trump signed the tax reform legislation into law. While there are many changes for 2018, one of the biggest is the new Section 199a deduction. This allows a 20% writeoff of net income for sole proprietors, owners of S-Corporations, and members of partnerships/LLCs, limited by wages paid (unless income is less than $157,000 (single)). I suspect tax professionals will see lots of S-Corporations in the future.

First, wages paid to owners counts in calculating the Section 199a deduction. Imagine you’re a consultant with income of $300,000 structured as a sole proprietorship. You’re ineligible for the Section 199a deduction (your income is too high). Now, convert to an S-Corp (or an LLC taxed as an S-Corp), pay yourself a reasonable salary (say $80,000), and:
– You get the Section 199a deduction ($44,000); and
– You avoid self-employment tax on a large part of the net income of your business.

Maybe I’m missing something, but for successful businesses there are now two factors leading toward an S-Corporation as the solution. And given the way the deduction is written, reasonable salary likely won’t be an issue—owners have an incentive to pay themselves!

As a reminder, there is no one right form of business entity. Though S-Corporations appear to be an excellent choice based on Section 199a, the choice of type of business entity should always be discussed with your tax professional and attorney prior to selecting it.

Conference Committee Agrees on Details of Tax Legislation; Measure Likely to Pass Next Week

December 16th, 2017

The House and Senate conferees did indeed agree on tax ‘reform’ legislation. The bill will make great bedtime reading as it’s only 1,097 pages. The Tax Foundation has a great summary of the legislation. Here are some highlights; note that these provisions are in effect for the 2018 tax year:

– Seven tax brackets for individuals, ranging from 10% to 37%. Mostly, this will result in a decrease in taxes. However, the 35% tax bracket will now begin at $200,000 (single/Head of Household (HOH))/$400,000 Married Filing Jointly (MFJ); the 37% tax bracket begins at $500,000 single/HOH and $600,000 MFJ

– The standard deduction increases to $12,000 single/$18,000 HOH/$24,000 MFJ. However, personal exemptions are eliminated.

– Mortgage interest on home purchases remains deductible, but up to a limit of $750,000 of mortgage debt; however, equity debt is no longer deductible.

– State and local taxes, sales tax, and property tax deduction is limited to $10,000.

– The personal AMT is retained, but the AMT exemption is raised significantly.

– A single corporate tax rate of 21%.

– Pass-through income will be taxed at lower rates via a deduction. This is one area where the specific details matter.

– The corporate AMT is repealed.

– Net Operating Losses can only be carried forward, not backward (limited to 80% of taxable income).

– The individual mandate penalty is repealed, but for 2019 (not 2018). There’s still a penalty, but it’s $0.

– The Mayo decision (allowing the deduction of business expenses for professional gamblers who have losing years) is repealed for tax years 2018 – 2025. There are no other provisions that directly impact gambling in this legislation.

After I read the 1,097 pages (503 pages of legislation and about 500 pages of analysis) I will have more on the legislation.