Form 1099-K

Information reporting for payment card and third party network transactions on Form 1099-K, Payment Card and Third Party Network Transactions is due to the IRS on the last day of February of the year following the transactions. If filing electronically, Form 1099-K is due the first day of April of the year following the transactions.

Every payment settlement entity required to file a Form 1099-K must also furnish to each participating payee a written statement with the same information reported to the IRS. The statements must be furnished to the payee by January 31 of the year following the transactions. Payee statements may be furnished to participating payees electronically with the payee’s prior consent.

California—Corporate Income Tax: Timely Filed by Suspended

Corporation that filed notices of appeal while its corporate powers were suspended for nonpayment of its California corporation franchise taxes could proceed with the appeals after those powers were revived, even if the revival occurred after the time to appeal had expired. Filing a timely notice of appeal is a jurisdictional requirement.

All 2012 tax returns can now be filed with IRS

The IRS on Monday announced that it finished updating its processing systems and is now accepting all returns that include the 29 forms that were delayed by the late passage of the American Taxpayer Relief Act of 2012, P.L. 112-240.

On Sunday, the IRS began accepting from e-file transmitters returns with delayed forms that the transmitters had been holding. The IRS’s Modernized e-File team reviewed reject trends as returns were transmitted during the day on Sunday, and, based on the results, the IRS is now ready to accept all 2012 returns.

 

Nevada Corporate Income Tax

A California superior court has issued a temporary and proposed statement of decision holding that a Nevada corporation was entitled to a refund of California corporation franchise taxes paid for the tax years in question because the corporation met its burden of proof in establishing that it was commercially domiciled in Nevada during those years. The corporation, which was incorporated in Nevada, did not rely upon any presumption that its commercial domicile was its place of incorporation. The corporation submitted evidence that it maintained its corporate office in Nevada, its bank accounts were held at a branch in Las Vegas, its brokerage accounts were maintained with an office in Las Vegas, its board of directors’ meetings were held at its office in Nevada, and its original books and records were maintained in Nevada. Also, its only corporate officer resided in Nevada and handled all of its expenditures and business affairs from Nevada. The Franchise Tax Board (FTB) contended that a California resident, the corporation’s sole shareholder and a member of its board of directors, in fact managed and directed the corporation from California, and that therefore the corporation was commercially domiciled in California. However, the FTB submitted no direct evidence to support its contention. Furthermore, both the corporate officer and the sole shareholder testified that decisions on corporate matters were made by the officer and that the shareholder relied on the officer to manage the corporation. The court found the testimony of both witnesses to be credible. In contrast, the FTB’s evidence consisted entirely of circumstantial evidence from which it had asked the court to infer that the sole shareholder was directing or managing the affairs of the corporation from California. The tentative decision will become the final Statement of Decision unless either party requests a Statement of Decision, specifying the principal controverted issues to be addressed, within 10 days.

California—Personal Income Tax: Supplemental Documentation Did Not Substantiate Claimed Deduction Amounts.

Supplemental documentation provided by taxpayers regarding their claimed California personal income tax deductions for ordinary and necessary expenses paid or incurred in carrying on a trade or business was not sufficient to overcome the presumption that the Franchise Tax Board’s determinations, based on a federal audit report, were correct.

With regard to their claimed vehicle expenses, the taxpayers did not identify the source of the document they provided that showed a schedule of vehicle payments, and the document was not accompanied with underlying documentation verifying the information on it. With regard to their claimed office expenses, although a tenant ledger was provided that indicated payments for rent and utilities, nothing in that document showed that those amounts were not included in the office expenses already allowed as a deduction. With regard to their claimed education expenses, an unofficial university transcript, which did not contain the taxpayer-husband’s name or other identifying information, and did not include any information regarding amounts paid for the course work described on the transcript, was not sufficient documentation to substantiate the deduction. Finally, with regard to their claimed travel expenses and meals or entertainment expenses, the taxpayers did not provide any additional documentation or legal argument to support those claimed deductions, so they did not establish that they were entitled to those deductions.

Please contact www.sonnycpa.com if you need additional information.

Corporate Income Tax: Nexus Established Due to Employee’s In-State Activities

The FTB advises a taxpayer that its corporate subsidiary, which had a single employee located in California, was doing business in the state during pre-2011 tax years and therefore was subject to corporation franchise and income taxes during those years because the employee’s transactions were conducted for the purpose of the subsidiary’s financial or pecuniary gain or profit and went beyond the P.L. 86-272 protections. The subsidiary and its parent manufacture and sell various products for consumer and professional use. The subsidiary sold its products to distributors in California, including the parent corporation, which then sold the subsidiary’s products to various retailers throughout California.

Please contact www.sonnycpa.com if you need additional information.

California—Personal Income Tax: FTB Contacting Nonfilers

The California Franchise Tax Board (FTB) is contacting more than 1 million people who did not file a 2011 state income tax return. The deadline to file was October 15, 2012. The FTB compares its records of filed tax returns with the more than 400 million income records it receives each year from the Internal Revenue Service, banks, employers, state departments, and other sources. The FTB also uses occupational licenses and mortgage interest payment information to detect others who may have a requirement to file a state tax return. Contacted individuals have 30 days to file a state tax return or show why one is not due. If a required return is not filed, the FTB will issue a tax assessment using income records to estimate the amount of state tax due. The assessment will include interest, fees, and penalties.

Rental real estate offers tremendous tax advantages

Rental real estate offers tremendous tax advantages and opportunity for tax planning. Taxpayers, such as you, can depreciate property far exceeding your actual investment, deduct interest on borrowed capital, exchange rather than sell properties to defer tax on gains, use installment sales to defer tax on sales, and profit from preferential rates on long-term capital gains. Most importantly, you can generate “positive cash flow,” or monthly income, with depreciation deductions that effectively turn the actual income into tax losses.

However, deductions are not unlimited. For example, real estate income and loss is generally considered passive income and loss for tax purposes. Taxpayers generally cannot use passive activity losses (PALs) to offset ordinary income from employment, self-employment, interest and dividends, or pensions and annuities. The rental real estate loss allowance and real estate professional status are two important exceptions to this rule. In addition, the tax consequences of renting out a vacation home depend upon the amount of time the home is rented and the amount of time you use the home for personal purposes.

The second exception allows real estate professionals not to treat their rental activity as a passive activity. Therefore, their losses are not limited to passive income. This exception requires material participation by the taxpayer which is demonstrated by meeting one of seven tests. These tests are complex and include the number of hours of participation and the facts and circumstances of the participation in the activity.

Vacation homes are taxed under one of three sets of rules depending on how long the homeowner rents the property. If you rent your vacation home for fewer than 15 days during the year, no rental income is includible in gross income. If you rent the property for 15 or more days during the tax year and it is used by you for the greater of (a) more than 14 days or (b) more than 10% of the number of days during the year for which the home is rented, the rental deductions are limited. Under this limitation, the amount of the rental activity deductions may not exceed the amount by which the gross income derived from such activity exceeds the deductions otherwise allowable for the property, such as interest and taxes.

If you have any questions as to how the rental real estate rules apply to your particular situation, please do not hesitate to call for an appointment. We can assist you in taking advantage of the available tax benefits and develop an overall tax plan.

Tax-Free IRA Distributions

The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) extends through 2013 the provision which allows individuals who are at least 70½ by the end of the year to exclude from gross income qualified charitable distributions up to $100,000 from a traditional or Roth IRA that would otherwise be included in income. Married individuals filing a joint return are allowed to exclude a maximum of $200,000 for these distributions ($100,000 per individual IRA owner).

A review of your tax return indicates that you may be eligible to take advantage of these opportunities. As you may know, IRA owners must either withdraw the entire balance or start receiving periodic distributions from their traditional IRAs by April 1 of the year following the year in which they reach age 70-1/2. The distribution that is required each year is computed by dividing the IRA account balance as of the close of business on December 31 of the preceding year by the applicable life expectancy. An IRA owner who does not make the required withdrawals may be subject to a 50-percent excise tax on the amount not withdrawn.

 

2012 Resolves Many Uncertainties

2012 Resolves Many Uncertainties, Creates Others; Sets Stage For Future Tax Reform.

Uncertainty during 2012 over what tax laws would govern in 2013 and beyond because of the expiring Bush-era tax cuts clearly was the most significant development of the year. Now that Congress and President Obama — through the American Taxpayer Relief Act of 2012 (ATRA) — have provided a degree of certainty over tax rates into at least the immediate future, taxpayers need to adjust their tax plans accordingly. Individuals and businesses should immediately recalibrate strategies in light of ATRA. 2012 was also a significant year for important tax developments from the Treasury Department, the IRS and the courts. These developments demand the attention of individual and business taxpayers not only to caution what is no longer allowed under the tax laws but also to shape what steps can be taken in 2013 and beyond to maximize tax savings. With that forward-looking perspective, this Tax Briefing reviews key federal tax developments that took place during 2012.