Archive for the ‘California’ Category

IRS Extends California (and Alabama and Georgia) Disaster Areas to October 16th from May 15th

Friday, February 24th, 2023

The IRS announced today that most California taxpayers (most of the state is in a disaster zone from flooding in January) now have until October 16th to file any tax returns.  This also means that impacted taxpayers have until October 16th to make 2022 contributions for IRAs and HSAs.  Additionally, 4th quarter 2022 and 1st and 2nd quarter 2023 estimated payments are now due on October 16th.  California’s Franchise Tax Board normally conforms to all federal disaster extensions; I expect to see confirmation from the FTB by Monday.

Meanwhile, California–especially Southern California–is bracing for more miserable weather.  There are blizzard warnings (!) for the Southern California mountains, and my old homestead of Irvine (and most of Los Angeles-Orange Counties) is under a Flood Watch:

Here is the beginning of the IRS announcement:

Disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments, the Internal Revenue Service announced today. Previously, the deadline had been postponed to May 15 for these areas. 

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA) in these three states. There are four different eligible FEMA declarations, and the start dates and other details vary for each of these disasters. The current list of eligible localities and other details for each disaster are always available on the disaster relief page on IRS.gov.

The additional relief postpones until Oct. 16, various tax filing and payment deadlines, including those for most calendar-year 2022 individual and business returns. This includes: Individual income tax returns, originally due on April 18; Various business returns, normally due on March 15 and April 18; and returns of tax-exempt organizations, normally due on May 15.

Among other things, this means that eligible taxpayers will also have until Oct. 16 to make 2022 contributions to their IRAs and health savings accounts.

In addition, farmers who choose to forgo making estimated tax payments and normally file their returns by March 1 will now have until Oct. 16, 2023, to file their 2022 return and pay any tax due.

The Oct. 16 deadline also applies to the estimated tax payment for the fourth quarter of 2022, originally due on Jan. 17, 2023. This means that taxpayers can skip making this payment and instead include it with the 2022 return they file, on or before Oct. 16.

The Oct. 16 deadline also applies to 2023 estimated tax payments, normally due on April 18, June 15 and Sept. 15. It also applies to the quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time. Taxpayers in the affected areas do not need to file any extension paperwork, and they do not need to call the IRS to qualify for the extended time.

California Storm Victims’ Tax Deadline Pushed Back to May 15th

Tuesday, January 10th, 2023

The IRS announced today that California storm victims have until May 15th to file any tax returns and make any payments that are due between now and May 14th, including the fourth quarter federal estimated tax payment due January 17th, partnership and S-Corporation tax returns due on March 15th, and individual and C-Corporation tax returns due April 18th.

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). This means that individuals and households that reside or have a business in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo and Yuba counties qualify for tax relief. Other areas added later to the disaster area will also qualify for the same relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

Given continued storm damage, it would not surprise me to see additional counties (especially in Northern California) added to this list.  Friends of mine living in the San Francisco Bay Area told me of some incredible damage (local to them).

These extensions are automatic.  California’s Franchise Tax Board (the state’s income tax agency) automatically conforms to FEMA-related disaster extensions.

New York, California, and Illinois Lose AGI & Population Per IRS Data

Sunday, December 25th, 2022

The Tax Foundation produced a report showing the overall gain (and loss) of population and taxpayers’ Adjusted Gross Income (AGI) during the second half of 2019 through the first half of 2020.  For the most part, high tax states were the biggest losers while low tax states were the biggest winners.  While the data includes a portion of the pandemic, “These data, therefore, capture many of the interstate moves made early in the pandemic—between mid-March and mid-July 2020—but do not necessarily capture the bulk of pandemic-related moves, many of which occurred later in 2020 and even into 2021. As such, when interpreting these data, it is important to keep in mind that many of these moves happened before the even more pronounced shift away from large cities and high cost-of-living areas that occurred during the pandemic. [emphasis in original]”

Some of these losses are eye-popping.  New York (which is dead last on this list) lost $19.5 billion in AGI and 248,305 taxpayers.  California (ranking 46th) lost more in population (263,344) but “only” $17.8 billion in AGI.  Meanwhile, Florida gained $23.7 billion in AGI and 166,707 in taxpayers (ranking 4th).  Idaho topped the list with a gain of $2.1 billion in AGI and 36,655 in taxpayers.

This is one area where it’s a zero-sum game.  Every taxpayer who moves between states ends up somewhere else.  If a state loses enough population, the state is forced to make changes.  Indeed, that time is likely coming soon for New York and Illinois–their current trends are just not sustainable.  Meanwhile, the legislature in New York proposed tax increases.  (To her credit, Governor Hochul vetoed the legislation.)

For those who say it’s related to weather, sure, that’s a factor.  Yet Maine–not exactly the warmest state in the Union–ranks seventh.  Indeed, combine sound fiscal practices and great weather and you get Florida.  I’d advise politicians in California, New York, and Illinois to carefully read the study (but I doubt they will).

Here’s an image from the Tax Foundation:

The Tax Foundation’s 2023 State Business Tax Climate Index: Bring Me the Usual Suspects (Again)!

Tuesday, October 25th, 2022

It seems like it was only yesterday when I wrote about the 2022 State Business Tax Climate Index, but it’s been a year!  This morning, the 2023 Index was released and it’s more of the same.  Let’s look at the top ten states:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Montana
6. New Hampshire
7. Nevada
8. Utah
9. Indiana
10. North Carolina

As the Tax Foundation notes,

The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Nevada, South Dakota, and Wyoming have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.

Of course, there’s a bottom ten, too.  And there are few surprises for tax professionals:

41. Alabama
42. Rhode Island
43. Hawaii
44. Vermont
45. Minnesota
46. Maryland
47. Connecticut
48. California
49. New York
50. New Jersey

Again, let me quote the Tax Foundation:

The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the highest-rate corporate income taxes in the county, and has one of the highest-rate individual income taxes. Additionally, the state has a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

While California bureaucrats would argue that the high and complex tax and regulatory system in the Golden State doesn’t matter, reality is what it is: It truly does matter.  Businesses are relocating out of California, seeking better business environments.  Yes, California has a large population and there will always be business there.

I interacted with numerous small business owners when I lived in Irvine, California (I moved to Las Vegas in December 2011).  None of these business owners plan on retiring in California.  All of them would move their businesses to another state if they could.  That’s a tremendous indictment of the business climate in California.  Sure, it’s a small sample size (around 70), but it ought to scare politicians in California.  Instead, there are propositions on the November ballot that would increase taxes!  Well, I guess some in California want to try for the top spot!

In any case, for those thinking about opening a business I recommend reviewing this important study from the Tax Foundation.  Taxes matter, and they absolutely impact where you conduct business.

Bozo Tax Tip #8: Nevada Corporations (or LLCs)

Wednesday, April 6th, 2022

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

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.

Bozo Tax Tip #9: Move Without Moving!

Tuesday, April 5th, 2022

Over ten 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 pandemic and a possible recession later this year, state revenues may be 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.

2022 State Business Tax Climate Index: Bring Me the Usual Suspects!

Friday, December 17th, 2021

Yesterday, the Tax Foundation released its list of the business tax climate in the 50 states.  Not much has changed, and for those in New York, New Jersey, and California wondering why businesses are moving to Florida and Nevada, you just need to look in the mirror.  The top 10 states are:

  1. Wyoming
  2. South Dakota
  3. Alaska
  4. Florida
  5. Montana
  6. New Hampshire
  7. Nevada
  8. Tennessee
  9. Indiana
  10. Utah

There’s also a bottom 10:

41. Hawaii
42. Louisiana
43. Vermont
44. Arkansas
45. Minnesota
46. Maryland
47. Connecticut
48. California
49. New York
50. New Jersey

The best states either lack a major tax or levy all the major tax types with low rates on broad bases.  Meanwhile, the worst states share, “complex, nonneutral taxes with comparatively high rates.”  My state, Nevada, ranks 7th with low individual and property taxes but high sales and unemployment insurance taxes (corporate tax is ranked in the middle, 25th).  My former state, California, ranks in the bottom four in corporate taxes, individual taxes, and sales tax, in the middle for unemployment insurance, and above average for property tax.  The worst state, New Jersey, ranks in the bottom ten in all taxes except unemployment insurance (where it ranks below average, 32nd).

Yes, taxes aren’t everything but they’re a huge reason why my business left the Golden State and moved to the Silver State.

Bozo Tax Tip #3: Move Without Moving!

Wednesday, May 12th, 2021
Nearly ten 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 #9: Nevada Corporations

Tuesday, May 4th, 2021

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.

Are California $600 Stimulus Payments Taxable?

Thursday, February 25th, 2021

The state of California will soon be issuing $600 stimulus payments to an estimated 5.7 million residents.  These payments will go to:

  • Households receiving the California Earned Income Tax Credit for 2020 (typically making $30,000 or less)
  • Taxpayers with Individual Tax Identification Numbers (ITINs) who didn’t receive federal stimulus checks
  • Households with Individual Tax Identification Numbers and income below $75,000

ITIN taxpayers who also qualify for the California Earned Income Tax Credit will receive a total of $1,200.

The payments will be going out after taxpayers file their 2020 tax returns.  One client asked me, “Is that payment going to be taxable income on my federal tax return?”  The answer is clearly yes.

Any accession to wealth is taxable unless exempted by Congress.  State grants are taxable income.  That $600 payments will be taxable income on taxpayers’ 2021 federal tax returns, and impacted taxpayers should receive Form 1099-MISC forms from the state of California.  However, these payments will not be taxable income on taxpayers’ California tax returns–California has said these are nontaxable grants, and a state has the right to exclude that income from its taxation system.