Archive for the ‘California’ Category

IRS Extends Tax Deadlines for Victims of Iowa Derecho & California Wildfires

Tuesday, August 25th, 2020

The IRS announced yesterday that they have extended tax deadlines for victims of both the derecho that hit Iowa and the ongoing California wildfires. The specific counties impacted can be found on the Federal Emergency Management Agency (FEMA) website.

For both disasters, tax deadlines are extended that began on August 10th for the derecho and August 14th for the wildfires until December 15th. This impacts 2019 personal tax returns on extension, business returns on extension, payroll tax filings, and estimated tax payments. California’s Franchise Tax Board automatically extends deadlines for federal disasters, so those impacted have identical extensions for California taxes. I assume the Iowa Department of Revenue will similarly extend Iowa deadlines.

Unfortunately, it looks like we’ll also be looking at victims of Hurricane Laura in Texas and/or Louisiana later this week. The IRS recently posted information on safeguarding records for natural disasters; your insurance company likely has additional information available. The cliche is that an ounce of prevention beats a pound of cure–but it is good advice.

How High Is Too High?

Tuesday, August 4th, 2020

California, like many states, has financial difficulties because of the Covid pandemic. So is the legislature looking at cutting spending? A little. How about raising taxes? Definitely, especially on the rich.

California’s top marginal tax rate today is 13.3% (on those earning $1 million or more). Proposed legislation would increase the tax rate to 14.3% on those earning more than $1 million, to 16.3% on those earning more than $2 million, and to a whopping 16.8% on those earning more than $5 million.

Today, California gets 40% of its revenues from the top 0.5% of taxpayers. But something lost by the California legislature is what happened after the last tax increase (to 13.3%). As Josuha Rauh notes,

The problem is that high earners do not simply sit there and take it when the state goes after their income.

In a detailed study of the 2012 California ballot measure that raised the top state rate to 13.3 percent, Ryan Shyu and I found that just two years later, the state was only collecting 40 cents of every dollar that it had hoped to raise from the tax increase.

The reason?

High income taxpayers affected by the 2012 tax increase suddenly began to flee the state at higher rates, especially to zero tax states like Nevada, Texas, and Florida.

This is an obvious corollary to the Laffer Curve. Economist Arthur Laffer noted that at 0%, no taxes are collected and that at 100%, no taxes would be collected. So there must be a curve that describes tax collection by tax rate.

The unspoken issue for California is, “Will this increase drive the top 0.5% out of the Golden State?” Mr. Rauh, a Senior Fellow at the Hoover Institution and a Professor of Finance at Stanford, clearly believes the answer is yes. When this measure passes (and given the makeup of the legislature, it will pass), the question is not will top-earners leave, but how many will leave. Alan Greenspan famously said, “Whatever you tax, you get less of.” California is conducting an experiment, and we will find out the results in a year or two. I believe that if you’re a realtor specializing in high-end properties in Nevada, Texas, Florida, or Arizona, you’re about to get more business.

Bozo Tax Tip #1: Move Without Moving!

Monday, July 13th, 2020

Nearly nine years ago, we moved from Irvine, California to Las Vegas. The home in Irvine was sold, a home was purchased in Las Vegas, and the belongings went from the Golden State to the Silver State. Cars were re-registered, doctors changed, and no one would say that we didn’t become Las Vegas residents.

But some people like to have it both ways. Nevada’s income tax rate is a very round number (0%), while California’s maximum income tax rate is a ridiculous (in my opinion) 13.3%. That certainly could drive individuals to move in name only. California’s Franchise Tax Board (FTB) realizes that, and they (along with New York State) lead the country in residency audits.

If you really do relocate, a residency audit is a minor annoyance. But let’s say you reside in Silicon Valley, and you buy a home in Reno but keep your home in Los Altos. Did you move? Or did you just move in name?

The Bozo strategy is the latter: moving in name only. I’ll just have that little home in Reno, spend the ski season in Nevada but really continue to live in Los Altos.

In a residency audit, the FTB will look at where you’re actually spending time, where you’re spending money (if eight months of the year you’re patronizing businesses in Silicon Valley, it doesn’t look like you really moved), and a variety of other factors. ( The FTB has an excellent Residency and Sourcing Manual that explains California laws on the subject.)

Given the current pandemic, state revenues are being squeezed. The one government agency where increasing employees increases revenues is the tax agency (especially employees in audit). While I expect to see states cut employees, I’ll be surprised to see anything but minor cuts in tax agencies. We’re also likely to see an increase in audits looking at telecommuting issues. In any case, if you move in name only you’re painting a target on your back for a residency audit.

Bozo Tax Tip #7: Nevada Corporations

Monday, July 6th, 2020

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.

2020 Best States for Business: Bring Me (mostly) the Usual Suspects

Thursday, June 18th, 2020

Chief Executive magazine does a survey every year of the best and worst states for business. This isn’t just a list about taxes, but includes other factors; still, it’s a good survey of what business executives look at. The top ten includes my home:

  1. Texas
  2. Florida
  3. Nevada
  4. Tennessee
  5. Indiana
  6. North Carolina
  7. Arizona
  8. South Carolina
  9. Ohio
  10. Utah

The bottom ten has a couple of surprises (for me):

41. Alaska

42. Hawaii

43. Oregon

44. Washington

45. Massachusetts

46. Connecticut

47. New Jersey

48. Illinois

49. New York

50. California

That Texas is at the top isn’t a surprise. “Employers continue to be attracted by the state’s lack of an individual income tax, low business taxes, friendly regulators, a reasonable cost of living, and diverse and growing labor force.” [emphasis added]. Contrast that with California: ” Business owners—especially companies that make things— continue to abandon the state as fast as they can.”

I was surprised by Alaska and Washington. Neither state has a state income tax. Alaska, of course, is hard to get to, and the cost of living is a big issue. In Washington state, it appears that the cost of living and regulations lower the ranking.

I wanted to emphasize the impact of regulations. Regulations are hidden costs for businesses. It’s not that all regulations are bad (that’s absolutely not the case); rather, over-regulations cost business money. Consider a widget manufacturer in Los Angeles. He’ll face California’s burdensome regulations at the state, county, city, and regional level (the air quality district regulates). Here in Nevada, there are state and local regulations, but they’re integrated without the quadruple level of regulations. I read years ago it took Carl’s Jr. (a fast food chain) over a year to get regulatory approval to build a new location in California; it took less than two months in Texas.

In good times, California has prospered because of the entertainment industry and Silicon Valley. We’re not in good times right now, and the budget hit to the Golden State is severe (they’re projecting a $54 billion deficit). Sure, Covid isn’t the fault of California (or any other state). But the reaction of the legislature demonstrates that they’re not learning anything: Increase taxes and hope for a federal bailout (one that I doubt is coming).

For those who think that state policies don’t matter, this survey tells you otherwise. The states at the top (run by Democrats or Republicans get this). The states at the bottom mostly don’t.

California Extends Filing and Payment Deadlines to July 15th

Friday, March 20th, 2020

California’s Franchise Tax Board announced late Wednesday that they have extended both the filing and payment deadlines until July 15th. This is for all individuals and business entities, and includes 2019 tax return, 2019 tax return payments, 2020 1st and 2nd quarter estimated payments, 2020 LLC taxes and fees, and 2020 non-wage withholding payments.

It would be nice if the IRS were to do the same thing. As of today, the federal filing deadline remains April 15th; however, federal payments due on April 15th are now due on July 15th. More on this in a second post shortly.

California’s Franchise Tax Board Extends Deadlines

Saturday, March 14th, 2020

Yesterday, California’s Franchise Tax Board, the state’s income tax agency, extended the deadlines for taxpayers to both file and pay 2019 California income taxes (and 2020 California estimated taxes) by 60 days. Here is the announcement in full:

Sacramento — The Franchise Tax Board (FTB) today announced special tax relief for California taxpayers affected by the COVID-19 pandemic. Affected taxpayers are granted an extension to file 2019 California tax returns and make certain payments until June 15, 2020, in line with Governor Newsom’s March 12 Executive Order.

“During this public health emergency, every Californian should be free to focus on their health and wellbeing,” said State Controller Betty T. Yee, who serves as chair of FTB. “Having extra time to file their taxes helps allows people to do this, as the experts work to control the spread of coronavirus.”

This relief includes moving the various tax filing and payment deadlines that occur on March 15, 2020, through June 15, 2020, to June 15, 2020. This includes: 

·       Partnerships and LLCs who are taxed as partnerships whose tax returns are due on March 15 now have a 90-day extension to file and pay by June 15.

·       Individual filers whose tax returns are due on April 15 now have a 60-day extension to file and pay by June 15.

·       Quarterly estimated tax payments due on April 15 now have a 60-day extension to pay by June 15.

The FTB’s June 15 extended due date may be pushed back even further if the Internal Revenue Service grants a longer relief period.

Taxpayers claiming the special COVID-19 relief should write the name of the state of emergency (for example, COVID-19) in black ink at the top of the tax return to alert FTB of the special extension period. If taxpayers are e-filing, they should follow the software instructions to enter disaster information.

The FTB will also waive interest and any late filing or late payment penalties that would otherwise apply.  

I expect we will see a similar announcement from the IRS next week. It appears (at least for now) that the March 16th deadline for filing federal S-Corp and partnership returns will hold.

Kudos to the FTB for being proactive during this crisis.

California 7, Arizona 2

Thursday, February 27th, 2020

The state of Arizona (specifically, Arizona Attorney General Mark Brnovich) is not happy with California’s policy of coming after any Arizona business that is even remotely doing business in California (passive or not) to collect the $800 minimum California franchise tax. Arizona tried to do something about it: The Grand Canyon State asked the US Supreme Court for leave to sue California over the policy. On Monday, the Supreme Court said that Arizona couldn’t sue.

That said, I suspect one day someone will get legal assistance from a foundation and try to stop the process in federal court. The Southeastern Legal Foundation and the Cato Institute filed a joint Amicus Curiae brief in favor of Arizona. Sooner or later California’s extraterritorial grabbing of money will be stopped.

Unfortunately, the problem with individual businesses doing anything about it is the cost. California’s tax is $800 per year. The cost of filing a federal court lawsuit is probably in the tens of thousands of dollars. This case isn’t “sexy”; it’s about routine commerce. Now, if it could be a class action case (I’m not an attorney so I can’t speak to whether that’s possible or not) then there would be a good shot of that happening. Until then, I suspect California will successfully extort millions of dollars, $800 at a time.

As to the title of the post, the reason it’s seven to two is because two Supreme Court justices thought the case should be heard and dissented. It takes four justices for a case to be heard, so Arizona lost.

An Update on Arizona v. California

Monday, December 23rd, 2019

There’s been some news on Arizona’s attempt to stop California from requiring indirect passive owners of LLCs who happen to own other LLCs that invest in California from having to pay California’s $800 minimum franchise tax.

When we last looked at this, the Supreme Court asked the Solicitor General (of the U.S.) to file a brief commenting on the case. That brief has been filed.  The Solicitor General believes that the motion to file a bill of complaint should be denied because, “…this is not an appropriate case for the exercise of this Court’s original jurisdiction.”  The Solicitor General believes that Arizona entities can file their own lawsuits and that the case is not one appropriate for the Supreme Court.

Not surprisingly, Arizona didn’t like the Solicitor General’s brief and filed a reply brief of its own.  Arizona believes that the Solicitor General got it wrong, and that leave should be granted.

It’s probable that the Supreme Court will decide whether or not to grant leave within the next two months.

Out With the Fed Mandate; In With State Mandates

Wednesday, November 13th, 2019

Once upon a time there was the federal mandate to have health insurance; per the US Supreme Court, a “tax.” Well, beginning with 2019 tax returns (filed in 2020) the federal mandate is no more. Unfortunately, tax professionals and taxpayers aren’t done with insurance mandates: Several states have implemented their own mandates.

Massachusetts, New Jersey, and the District of Columbia have their own mandates for the 2019 tax year (tax returns filed in 2020); Massachusetts’ mandate began in 2007. California, Rhode Island, and Vermont have implemented mandates for the 2020 tax year (tax returns filed in 2021).

If you are a resident of one of these states, we’ll be asking you about health insurance when we prepare your 2019 returns. Additionally, if you do receive insurance through the Exchange (e.g. healthcare.gov) and receive a Form 1095-A, you must provide a copy of the form to your tax professional.

There’s no reason for tax professionals to be in the health insurance field. But thanks to Obamacare, we are…and will be for the foreseeable future.