Although we are qualified to offer tax advice, the blog or newsletter should not be relied upon as a substitute for accounting, legal, or tax advice. Specific situations require you to seek professional advice. If you need legal advice, please seek counsel from a qualified attorney. Although we have taken care to ensure the accuracy of all information presented, the blog or newsletter is for information only, and is offered as is, without warranty.

Donations and Documentation

published December, 2013

Scurrying to make those donations deductible in 2013?

You’ll need some documentation to deduct charitable donations.

The level of documentation depends on what you’re donating, and the total amount donated. The two categories of donations are “cash” and “non-cash”—cash includes actual folding money, checks, credit card payments, payroll deductions, etc.

For cash, with an individual donation amount under $250, you’ll need to keep a copy of the cancelled check, credit card statement, or a letter from the charity. If you donate $250 or more, you must have a written acknowledgement from the charity – and the IRS has made it clear you need that letter in hand BEFORE we can take the deduction. For a payroll deduction, you need the Pledge Card and W-2 paystubs.

For non-cash with an individual donation of amounts under $250, you’ll need a written acknowledgement or “other record” – if you get a blank receipt FILL IT OUT! If you send me a blank receipt with your other tax documents, the deduction is $0. Maybe take a picture of what you’re donating so you remember? If your non-cash donations total $500 or more, I need to fill out the form with details, so please collect all those receipts.

For a non-cash donation of $250-under $500, you need a written acknowledgement. For a non-cash donation of $500 but under $5,000, you need the written acknowledgement, plus I need to fill out Form 8283 with details about what you donated, when you got it, the value when you acquired it, and the value when donated, etc. For donations of $5,000 or more, call me. For more information, see http://www.irs.gov/pub/irs-pdf/i8283.pdf. Did I mention if your non-cash donations total $500 or more, I need to fill out the form with details, so please collect all those receipts.

Donated cars carry a special form the charity should provide you with.

Payroll for Apartment Managers

published October, 2013

In California, if you have an apartment building with more than 15 units, you are required to have a “responsible person” residing on the premises. If you have an apartment manager who is receiving reduced rent as “compensation” for keeping track of your building, can they file for unemployment or disability?

As we say in our payroll classes, anyone can FILE for unemployment or disability, but not everyone is eligible.

The IRS and California’s EDD say if “lodging” is furnished on the employer’s premises, for the employer’s convenience, and as a condition of employment, it is not subject to income tax nor income tax withholding, not Medicare nor Social Security (IRS Publication 15A, page 15)—which is ALMOST all the taxes. The three that are missing are CA Unemployment Insurance, CA Employment Training Tax and CA State Disability Insurance (DE-44, page 32, and DE-231TP). The value of lodging is not “income wages” but it is “subject wages.”—a fine distinction.The 2013 rate for SDI in California is 1%, but the SDI is normally withheld from the paycheck—and the employer is making this payment in addition to the value of the lodging— SO, to figure out the “wage base” to calculate the SDI tax, we have to add the tax paid to the value of the lodging. Mathematically, we take the lodging value/0.99 to get the wage base for SDI, UI and ETT (calculation found at DE-231Q). UI and ETT are taxes with rates that change per employer, and these two are limited to the first $7,000 of wages for each employee in 2013. SDI tax is limited to the first $100,880 paid to each employee for 2013.

How do you figure out the value of the rent reduction? Ideally the cash value of the rent reduction would be stated in an employment contract. You may have an idea based on the other 15 units in the building. The CA EDD also provides a minimum of $39.90 per week, or a maximum of $1,224 per month as an alternate method of determining value, or 2/3 of ordinary rental value (DE-44, page 11).

There are also minimum wage laws in California, but I’m just not going to get into that here! You might want to have them keep track of their hours and submit a timecard, and you should keep a copy.

The upshot of this complicated system is that it would appear apartment mangers ARE potentially eligible for Unemployment or State Disability, and as the apartment owner, you are responsible to report your employees and pay California employment tax for them, even though they have no “wages.”

DA—Insurance Notice for Employees

published October, 2013

There is NOT currently a penalty if you don’t provide these notices, but they say we’re supposed to provide the notices by October 1, 2013, or whenever you hire a new employee.

The link to the notice if you DO NOT provide health insurance to your employees is here: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/laws/affordable-care-act/for-employers-and-advisers/model-notice-for-employers-who-do-not-offer-a-health-plan.pdf

The line to the notice if you DO provide health insurance to your employees is here: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/laws/affordable-care-act/for-employers-and-advisers/model-notice-for-employers-who-offer-a-health-plan-to-some-or-all-employees.pdf

There is some information you’ll need to fill out on these forms—perhaps download, fill in the info, and copy?

ADA – Another Good Reason to be an S Corp

published September, 2013

Something the “ADA” tax law added was more Medicare Tax—in certain circumstances. Right now, if you have a W-2, you’re paying 1.45% Medicare tax on your wages, and your employer is matching 1.45%. This is a total of 2.9% if you’re both the employer and the employee of your own S Corporation. That’s not new.

There’s now even more Medicare tax if your W-2 earnings are over $200,000 Single or Head of Household, and if your W-2 earnings are over $250,000 Married Filing Joint. There will be an EXTRA 0.9% tax added.

In the past, investment income, as distinguished from W-2 wage income, had NO Medicare tax ever.

Now, starting in 2013, there IS a 3.8% Medicare tax on “investment income” if your “Modified AGI” is above threshold amounts ($250,000 MFJ, $125,000 MFS and $200,000 Single or HOH).

You’ll note all the quotation marks above; that’s because these terms are defined specifically for this rule, and the definitions don’t necessarily mean what you think they do.

Investment income, for THIS purpose, includes interest, dividends, royalties, rents, passive income from a trade or business or gain from selling personal property, including your house.

Investment income for THIS purpose does NOT include income from an S Corporation that you’re actively working in (nor tax exempt interest, nor sale of business properties).

The way the law is written, it would appear the plan is to collect more tax from people with high earnings and/or lots of passive income, i.e. “the rich.” The way my clients are written, we’d like to pay one or both of these “extra” taxes.

Who is Required to Have Health Insurance in 2014?

published August, 2013

Employer with fewer than 50 employees? No.

A Person? Yes.

Try this link: https://www.healthcare.gov/what-do-small-businesses-need-to-know/

Small businesses may get health coverage in the Small Business Health Options Program (SHOP) Marketplace. No employers are required to offer health coverage.

Starting in 2014, businesses with 50 or fewer full-time equivalent (FTE) employees can use SHOP to offer coverage to their employees. This applies to non-profit organizations as well. You control the coverage you offer and how much you pay toward premium costs.

Individuals ARE required to have health insurance, with some exceptions, or face a penalty of $95 per adult in 2014, $325 in 2015 and $695 in 2016 and beyond, with some adjustments and exceptions and general hand waving. Here is a link to a chart: http://kff.org/infographic/the-requirement-to-buy-coverage-under-the-affordable-care-act/

Health coverage through SHOP starts as soon as January 1, 2014. Open enrollment begins October 1, 2013. You can sign up and begin offering coverage any time during the year. If you already have insurance or your employer provides health insurance, you may continue with this.

Thanks to Peggy Hall, EA for her help with this section.

Final Notice: Delinquent Use Tax Return?

published August, 2013

Several of my California business clients have received notices that they were supposed to have filed Use Tax Returns with the California Board of Equalization.

Don’t panic if you got one of these notices. They are, for the most part, looking for sales tax on purchase you made from out of state. When you buy something in California for use in California, you pay sales tax in the location where the “transfer” takes place, like the store. When you buy something from out of state, you don’t pay sales tax to that “foreign” state, like Nevada, but if you are the end user of some tangible product, like a book or a toner cartridge, California wants you to report the purchase, and pay “Use” tax (which equals sales tax) on what you bought.

The CA BOE has gone completely on-line, so if you have the “express login code” and the account number, conveniently provided for you on the letters they’re sending out, you can file this on-line.

To find any purchases, I usually start with things from Amazon.

Itemized Deduction of Medical Expenses for 2013: 10%

published July, 2013

Not everyone who files an individual tax return itemizes deductions on their Form1040. There is a standard deduction set each year ($6,100 Single, $12,200 MFJ for 2013), and you generally take either itemizing or standard deduction, whichever is greater, and you get to decide each year (generally).

The kinds of expenses that get itemized include such things as mortgage interest, property tax, charitable donations, etc. One of the calculated deductions is medical expenses, including health insurance, provided you don’t take the self employed health insurance deduction elsewhere on the return (which is generally a better deal for those who qualify). The medical expenses that are deducted in order to calculate the total itemized deductions is limited—I guess the thinking is that everyone has SOME medical expenses, and it’s only when you’ve got lots of medical expenses that you can start to deduct them from your taxable income. What’s “lots?” it’s defined by a percentage of your adjusted gross income. For many years prior to 2013, we’ve used 7.5% of AGI as the floor. If you have more medical expenses than 7.5% of your AGI, the overage starts to count towards itemized deductions. Well, starting in 2013, the floor is 10% of AGI. That’s what’s new.

For example, if your AGI is $100,000, you have to have more than $10,000 of medical expenses to start counting medical expenses towards an itemized deduction total—to see if your itemized deductions are more than the standard deduction. So you’d need medical expenses of $16,101 to have $1 more than the standard deduction as a single person, if you had no other itemized deductions.

Confused? If you have a lot of medical expenses, let me know. If you’re not sure, let me know how much you’ve spend on medical expenses, and medical insurance (including long term care) separately.

Some medical expenses are NOT deductible. If you have over the counter drugs or homeopathic remedies, they are generally not deductible. If you buy drugs from Canada or Mexico without a prescription (because they’re cheaper), they’re generally not deducible. The massage may make you feel more healthy, but generally is not deductible. Get an MD to write you a prescription, and generally, it IS deductible.

For more information, see http://www.irs.gov/Individuals/2013-changes-to-itemized-deduction-for-medical-expenses.

Patient Protection and Affordable Care Act—does it apply to your company?

published July, 2013

PPACA, also known as “Obamacare” has different rules depending on your company size.

There are two classes: “Large” and “Small.” Large employers have more than fifty full-time employees for Full Time Equivalents (FTEs) on average for the previous year.

Owners, partners, greater than 2% shareholders and their family do not count.

If you are a small employer, there is potentially a tax credit available through the end of this year if you’re voluntarily providing health care insurance for your employees. BUT, the owners don’t count for the credit, family of owners don’t count, and average annual wage has to be less than $50,000 per FTE. I ran some calculations for a couple of my clients last year, and no one qualified, and it just made me cranky to have spent several hours calculating for no benefit. (I suppose the benefit is that we know for sure there is no credit available.) I hold little hope for most of my clients. (The cost of living is generally too high in the Bay Area, or my clients just pay too much in payroll!) Oh, and if you were eligible for the credit, the amount of the credit is also reduced by 8.7% due to sequestration.

This Act is also the one that put in the extra 0.9 Medicare Tax on wage and self-employment income for individuals with income higher than $200,000 or married filing jointly couples with incomes higher than $250,000. If you’re paying someone more than $200k, your payroll service or software should do this calculation correctly. If both spouses make $199k, they’ll have an extra tax to pay on the joint return (MFS is $125k each—so no magic relief is available by filing separately).

For more information, try http://www.irs.gov/taxtopics/tc763.html

Foreign Bank Account? You May Need to Report It

published June, 2013

If you’ve got a “financial interest” or signature authority over one or more financial accounts outside the US, AND if the value of these accounts totals over $10,000 at ANY TIME during the year, you need to report them by 6/30/13.

The penalty for failing to file can be up to $10,000.

No extensions.

The Form is Form TD F 90-22.1 Report of Foreign Bank and Financial Account (FBAR). The IRS has a help phone line and email: 866-270-0733 or FBARquestions@irs.gov

S Corp Medical Insurance

published May, 2013

The most common issue I’ve run into this season was the S Corporation medical insurance issue for a greater than 2% shareholder.

I did write about this in October 2012’s newsletter (see this here: http://taxbuddha.com/newsletter/newsletter_2012_10.html)

If you’re the owner of an S corp and you want to deduct your medical insurance in the “most beneficial” way, the medical insurance payments need to appear on your W-2.

For more detailed information, see IRS Notice 2008-1 or

QuickBooks does a good job of recording and reporting this, if you’re using QuickBooks for you payroll. The setup is a two-part process, first setting up the payroll item in the payroll item list, then adding the item to the payroll records of the owners who are receiving wages from the corp. Once set up, you’ll need to include the item in the paycheck (which will happen automatically). This will then show up on the year end W-2 form properly.

If I’m preparing your payroll, make sure I know how much medical insurance the corp is paying for each quarter.