Archive for the ‘California’ Category

You Mean My Checking Account Became a Savings Account?

Thursday, May 31st, 2018

In what is definitely an “Oops” moment, two tax software products from Intuit (Lacerte and Intuit ProConnect Online) incorrectly transmitted information for 2018 California estimated payments. Checking accounts became savings accounts in the transmittal and the payments were rejected:

As a result, electronically transmitted estimated tax payments (Form 540-ES) for tax year 2018 transmitted to us between January 23, 2018, and April 25, 2018, could have been rejected by your client’s financial institution. Future scheduled payments transmitted during this timeframe could be impacted as well.

We are collaborating with Intuit to identify impacted taxpayers and assist with resolution. Intuit sent letters directly to affected tax practitioners. We will waive FTB-imposed dishonored check fees on impacted taxpayers’ accounts and will give taxpayers an opportunity to submit first quarter estimated tax payment that will be considered timely.

We are not impacted by this, but if you’re a tax professional using either software package and are impacted by this you should have been contacted directly by Intuit (on or about May 9th). If you’re a taxpayer and your first quarter 2018 California estimated payment was not debited by the Franchise Tax Board and should have been, contact your tax professional immediately.

Kudos to the FTB in working with Intuit and giving impacted taxpayers time to get this resolved.

Back to the Old Drawing Board

Wednesday, May 23rd, 2018

I’ve written before about certain states’ efforts to get around the new $10,000 cap on state and local taxes that can be deducted on federal tax returns. The IRS announced today they will be proposing regulations later this year on this issue. Here’s an excerpt:

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

This is anything but promising for the efforts of California and New York. Words like “circumvent,” “despite,” and “mindful” pretty much tell us how this is going to turn out. If the IRS were going to allow this, the notice would not have such negative words. Instead, it’s all but a certainty that the doctrine of “Substance Over Form” will dictate that these so-called charitable donations are anything but charitable donations and, instead, will be treated as state tax payments on federal tax returns.

The California and New York legislatures would be far better off looking for things to cut in their states’ budgets. I know of a certain railroad in California that could save the state at least $77 billion….

Bozo Tax Tip #9: Nevada Corporations

Tuesday, April 3rd, 2018

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

The Price Tag on California’s Train to Nowhere Jumps Another 17%

Friday, March 9th, 2018

What is the cost to fly from Los Angeles to San Francisco? I decided to check Southwest Airlines for a date one month out (April 11th); the cost is $50 each way or $100 for the round trip. I think you’d agree that’s not particularly expensive.

On the other hand, the cost for California’s “Train to Nowhere”–the planned high-speed rail line that will run from Los Angeles to San Francisco–is now estimated at $77 Billion. That’s up another $11 Billion from the $66 Billion I had heard last year. And the project is now estimated to start in 2029, with full service only in 2033. This is all buried in the Draft 2018 Business Plan of the California High-Speed Rail Authority.

There are also estimated revenue numbers and cash flow numbers that are, frankly, hysterical…unless you’re a California taxpayer. The project will magically have positive cash flow from operations the moment it begins running in 2029. Yet less than 3% of all high-speed rails systems make money. And this high-speed rail line will initially run from the booming metropolis of Shafter to the slightly more booming metropolis of Madera.

The breakeven analysis in the report states,

There is a 78 percent probability that the Silicon Valley to Central Valley Line farebox revenue covers its operations and maintenance costs in 2029; by the opening year of Phase 1, the breakeven probability rises to 96 percent, and is >99 percent by 2040. The breakeven analysis only considers farebox revenue; the probability of breaking even increases further when considering bus and ancillary revenue.

The reality is that there is almost no chance of that happening…if the project is ever completed. Frankly, the best bet for California is to end this boondoggle. Unfortunately, the unions love it (lots of union labor working on it); the project is giving new meaning to the self-perpetuating organization. As I wrote the last time I looked at this,

Meanwhile, Quentin Kopp, the man who introduced the rail line, now calls the line foolish. In an interview with reason.com he said,

It is foolish, and it is almost a crime to sell bonds and encumber the taxpayers of California at a time when this is no longer high-speed rail. And the litigation, which is pending, will result, I am confident, in the termination of the High-Speed Rail Authority’s deceiving plan…

[The selling of bonds is] deceit. That’s not a milestone, it’s desperation, because High-Speed Rail Authority is out of money.

The only good news is I get to use one of my favorite images again:

via GIPHY

Have I Committed Malpractice?

Friday, February 2nd, 2018

Let’s say John Smith is a consultant in Syracuse, New York. His business is conducted fully in Syracuse. He never travels outside of Syracuse. He writes reports on a niche area for businesses. Mr. Smith files and pay New York state income tax (as he’s a resident of New York) in addition to his federal income tax. Has he satisfied his income tax filing requirements? (There are no local income taxes in Syracuse.)

In my view, almost certainly. His activity is conducted solely within Syracuse, New York. He’s filed his tax returns every year. Yet in the view of the State of California he may owe tax to the Bronze Golden State. How, you might ask, might this be the case?

The State of California, in its unending wisdom, enacted legislation for “economic nexus.” If you have sales to California, a portion of your income is, in the view of California, subject to California tax. Here’s an excerpt from the FTB’s website:

Jill, a nonresident of California, owns a web design business that she holds as a sole proprietorship. She works from her home out of state but has customers in various states including California. For the 2013 taxable year, Jill’s sales receipts from California customers are $300,000 out of the total sales receipts everywhere of $1,000,000. Does Jill have a filing requirement in California?

Yes, nonresident individuals are taxed on all California source income. Jill’s sole proprietorship is carrying on a business in and out of California and will be required to apportion its income to California using UDITPA rules. Under market assignment, sales of services are assigned to California if the purchaser of the service received the benefit of the service in California. Accordingly, $300,000 will be assigned to the California sales factor numerator for Jill’s sole proprietorship and Jill would apportion 30% ($300,000 CA sales/$1,000,000 total sales) of its business income from her sole proprietorship to California. [emphasis in original]

In a tax professional’s forum I noted that while the California legislature enacted this law, there is a good chance that it’s unenforceable except for businesses with nexus to California. Consider a partnership with one of the partners a California resident and the other a New York resident. Here, there’s clearly nexus to California and California tax is owed.

However, in the example I give (above) Mr. Smith clearly has no nexus to California and while California thinks he has a filing requirement, he probably doesn’t because of court cases. I noted the following on that forum:

While I understand that’s the Franchise Tax Board’s position, the ability for a state to to force collection of taxes to a nonresident who resides in another state is governed also by Quill Corp. vs. North Dakota, the famous case on states having the ability to force collection of sales tax on nonresident companies. The background for this case is the “dormant commerce clause.” (Interestingly, the Supreme Court recently accepted another case on this same issue: South Dakota vs. Wayfair, so it’s possible Quill will be overturned.)

The principal of this is that California has the absolute right to tax individuals with nexus to the state. But does California have the right to tax me–a resident of Nevada with no nexus to California–on the (say) 10% of income I receive from California residents whose tax returns I prepare? Can California legally go after Jill who never sets foot in California? My suspicion is courts in Nevada and Jill’s home state would today look askance at such requests.

One tax professional said my response bordered on malpractice: advising clients to disobey laws. I don’t think that’s the case at all. What I am advising clients is that the California law is of dubious legality, and it is difficult for California to enforce on businesses without nexus to California (such as the hypothetical Mr. Smith). I am not ignoring what California is stating (and I’m informing clients who may be impacted by this). That said, based on current precedent federal courts would, in my opinion, rule for Mr. Smith. (Since Mr. Smith has no nexus to California, a court case would almost certainly be in federal court in New York–the only place he has nexus to.)

It’s important to realize that the law could change based on the decision in South Dakota vs. Wayfair. (South Dakota enacted a law regarding sales tax that allows for economic nexus to the state. South Dakota courts held the law was unconstitutional based on the Quill decision.) Today, though, the federal supremacy clause (the federal supremacy clause means that state constitutions and laws are subordinate to federal law) governs; current federal law holds that California cannot tax companies without nexus to the state–and today nexus means physical nexus.

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

Monday, 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.

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

Monday, 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.

The 2017 Tax Offender of the Year

Sunday, 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!

Reason Magazine on Gilbert Hyatt vs. California’s Franchise Tax Board

Thursday, October 26th, 2017

Reason magazine has a superb presentation on Gilbert Hyatt’s battle with California’s Franchise Tax Board. I cannot recommend it highly enough:

California Fire Victims Have Extension Until January 31, 2018

Friday, October 13th, 2017

The IRS announced today that California wildfire victims have until January 31, 2018 to file various tax returns (including tax returns on extension due this coming Monday, October 16th). California’s Franchise Tax Board (the state income tax agency) immediately followed suit. (California automatically allows extended time for victims of any presidentially declared disasters, including the recent hurricanes.)