Taxable Talk

The IRS announced today a "clarification" of the rules for self-employed health insurance deductions for S Corporations. This is bad news overall, and especially bad news for California S Corporations.

The self-employed health insurance deduction allows sole proprietorships, partnerships, LLCs (those treated as partnerships or as disregarded entities) to deduct their health insurance premiums "above the line;" that is, an adjustment to AGI rather than as an itemized deduction subject to a 7.5% limitation on AGI. This is a large tax savings for the self-employed.

The IRS announcement indicates that for S Corporations to be eligible for this deduction, the policy must be in the name of the corporation. But if you do this, the health insurance premiums will be included as compensation on your W-2 (although they are exempt from FICA and medicare).

Additionally, many states, including California, do not allow single-employee corporations of any kind to obtain health insurance. This ruling means that California single-member S Corporations (a single individual is the employee and owner) are generally ineligible for this deduction.

For example, my health insurance premiums run about $5,000 annually. If I were impacted by this ruling and were in the 25% tax bracket, my federal tax bill just went up $1,250.

If you're impacted by this ruling I urge you to write your Representatives and Senators. I'm certain this is not what Congress intended when they enacted this deduction.

Proposition 82, the Mandatory Preschool/Tax Increase/Help Las Vegas, Phoenix, and Denver Initiative, still leads in the polls. However, the last statewide poll was released over a month ago.

Unfortunately for all Californians, the primary election on June 6th is dominated by the Democratic primary for Governor. With no major draw for Republicans, it's very likely that this initiative, which would likely continue California's downward march among states to do business, will pass.

Interestingly enough Dan Weintraub (of the Sacramento Bee) noted that a measure buried in the Governator's budget would provide preschool to the most needy at a fraction of the cost of Proposition 82. Now, excuse my sarcasm, but do Democrats support a lean program, targeted to those who need it, or a new bureaucracy, with a program to match?

Dan Weintraub's Column (registration required)
Text of Proposition 82

California's sales tax rules, enforced by the Board of Equalization are far too complicated. Then throw in political shenanigans and you get...a lawsuit.

San Francisco International Airport is located just south of the City by the Bay in San Mateo County. United Airlines has a major hub at SFO. This sounds like a sales tax boon for San Mateo County.

Except for a law that relocates the sale from the airport to an office building in Oakland, in Alameda County. The Governator signed a bill that will eliminate this "quirk" in 2008. San Mateo County decided they couldn't wait that long.

Did I mention that Oakland gives a kickback of $0.65 to United for every dollar of sales tax collected? But as Aero-News notes, the Legislature believes the deal is currently legal.

Given the backlog in California's courts, the case will likely not be decided for a couple of years.

News Stories: Aero-News Net, San Francisco Business Journal

Perhaps the Governator reads Taxable Talk (though I doubt it). In any case, Governor Schwarzenegger will propose tomorrow to:

1. Use $1.6 billion of the new revenues to retire debt;
   
2. Use $1.6 billion for the reserve account;
   
3. Use $2 billion to compensate schools for money "taken" over the past two years; and
   
4. Spend $400 million on disaster preparedness.
   

Of course, who know what the Democratically controlled legislature will do, and how active the Governator's red pencil (line item veto) will have to be. Don't be shocked if he needs multiple red pencils this year.

Meanwhile, speculation is that Google is the major cause of the extra revenue. Not through taxes on Google itself; rather, through taxes on the sale of stock by Google insiders. cnet believes that it could amount to 10% of the tax revenue, $450 million.

News Stories: Governor's Budget Plans (Scripps-Howard); Google/cnet

In April, Californians sent $11.3 billion in personal income tax payments to the state, $4 billion more than predicted in January, according to the Department of Finance. So, what should be done with this money?

The California Constitution requires a balanced budget, so there's no such thing as deficits or surpluses—at least on paper. The reality is a bit different, of course. For the last few years, the state has borrowed funds from a variety of sources in order to balance the books. Funds tapped included payments to local governments, funds for education, and emergency funds.

H.D. Palmer, a spokesman for the Department of Finance, notes what happened the last time California had an unexpected surplus. "When the dot-com boom went spectacularly bust and those one-time revenues disappeared, that increased the structural deficit that we are still working to close."

It even appears that Democrats in the state legislature know that California has fiscal issues. "We as Democrats need to be careful and focus on getting ourselves out of this hole so we don't have a permanent structural deficit," said Wes Chesbro (D-Arcata).

So will the money go to reducing the structural deficit and paying back the debt/borrowed funds, or will the Democrats in the legislature attempt to spend the money? The budget is supposed to be approved by June 30th (a deadline that's rarely met), so we should have some idea on this soon.

News Story: Contra Costa Times