Tag Archive for: culture

Buying an electric vehicle? What is the tax credit available

Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.

The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.

The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.

Here are some additional points about the plug-in electric vehicle tax credit:

  • It’s allowed in the year you place the vehicle in service.
  • The vehicle must be new.
  • An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

Electric motorcycles

There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.

These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.

The IRS mileage rate decreases again for 2021

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-and-one-half cents, to 56 cents per mile. As a result, you might claim a lower deduction for vehicle-related expenses for 2021 than you could for 2020 or 2019. This is the second year in a row that the cents-per-mile rate has decreased.

Deducting actual expenses vs. cents-per-mile

In general, businesses can deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is useful if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under current law, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The 2021 rate 

Beginning on January 1, 2021, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 56 cents per mile. It was 57.5 cents for 2020 and 58 cents for 2019.

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. The rate partly reflects the current price of gas, which is down from a year ago. According to AAA Gas Prices, the average nationwide price of a gallon of unleaded regular gas was $2.42 recently, compared with $2.49 a year ago. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

When this method can’t be used

There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2021 — or claiming them on your 2020 income tax return.

IRS Announces 2021 tax filing season begins on Feb. 12

The Internal Revenue Service announced that the nation’s tax season will start on Friday, February 12, 2021, when the tax agency begins accepting and processing 2020 individual tax returns.

There are so many changes to federal and state taxes and many more. We are working through those updates and changes and how they will apply on the tax forms, disclosures, and reconciliations while navigating different rules to process 2020 tax returns.

More information is available on the IRS webpage at https://www.irs.gov/newsroom/2021-tax-filing-season-begins-feb-12-irs-outlines-steps-to-speed-refunds-during-pandemic.

Reach out to us with any questions.

Happy 2021 Tax Filing!

Be aware of revised tax benefits for higher education

Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher learning, you may be eligible for tax breaks to help foot the bill.

The Consolidated Appropriations Act, which was enacted recently, made some changes to the tax breaks. Here’s a rundown of what has changed.

Deductions vs. credits

Before the new law, there were tax breaks available for qualified education expenses including the Tuition and Fees Deduction, the Lifetime Learning Credit, and the American Opportunity Tax Credit.

Tax credits are generally better than tax deductions. The difference? A tax deduction reduces your taxable income while a tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis.

First, let’s look at the deduction

For 2020, the Tuition and Fees Deduction could be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 modified adjusted gross income (MAGI) allows you to be eligible, you can claim the deduction whether you itemize or not. Here are the income thresholds:

  • For 2020, a taxpayer with a MAGI of up to $65,000 ($130,000 for married filing jointly) could deduct qualified expenses up to $4,000.
  • For 2020, a taxpayer with a MAGI between $65,001 and $80,000 ($130,001 and $160,000 for married filing jointly) could deduct up to $2,000.
  • For 2020, the allowable 2020 deduction was phased out and was zero if your MAGI was more than $80,000 ($160,000 for married filing jointly).

As you’ll see below, the Tuition and Fees Deduction is not available after the 2020 tax year.

Two credits aligned

Before the new law, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 per tax return annually. For 2021 and beyond, the new law aligns the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Tax Credit, which can be worth up to $2,500 per student each year. The CAA also repeals the Tuition and Fees Deduction for 2021 and later years. Basically, the law trades the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule.

Under the CAA, both the Lifetime Learning Credit and the American Opportunity Tax Credit are phased out for 2021 and beyond between a MAGI of $80,001 and $90,000 for unmarried individuals ($160,001 and $180,000 for married couples filing jointly). Before the new law, the Lifetime Learning Credit was phased out for 2020 between a MAGI of $59,001 and $69,000 for unmarried individuals ($118,001 and $138,000 married couples filing jointly).

Best for you

Talk with us about which of the two remaining education tax credits is the most beneficial in your situation. Each of them has its own requirements. There are also other education tax opportunities you may be able to take advantage of, including a Section 529 tuition plan and a Coverdell Education Savings Account.

The next estimated tax deadline is January 15

If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The fourth 2020 estimated tax payment deadline for individuals is Friday, January 15, 2021. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends.

Pay-as-you-go system

You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest.

In general, you must make estimated tax payments for 2020 if both of these statements apply:

  1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and
  2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2020 or 100% of the tax on your 2019 return — 110% if your 2019 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately).

If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

Quarterly due dates

Estimated tax payments are spread out through the year. The due dates are April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day.

Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

Seasonal businesses

Most individuals make estimated tax payments in four installments. In other words, you can determine the required annual payment, divide the number by four and make four equal payments by the due dates. But you may be able to make smaller payments under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.

Determining the correct amount

Contact us if you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have any other questions about how the estimated tax rules apply to you.

Favorable PPP loan changes and doubled business meal deductions

The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it.

PPP loans

The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:

  1. Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
  2. Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration).

Business meal deduction increased 

The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

Therefore, to be deductible:

  • The food and beverages can’t be lavish or extravagant under the circumstances, and
  • You or one of your employees must be present when the food or beverages are served.

If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

Much more

These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation.

Tips to Get Ready and Plan for 2020 Tax Returns

Dear Client,

We hope that you and your family are staying safe and healthy.

We can’t believe 2020 is almost over but can’t wait to put the year 2020 behind us, either!

While we are getting ready to send our 2020 tax organizer in early January, we would like to list here the important tax updates that may impact you.

Here are some of the changes and issues you may need to know about.

Unemployment compensation: 

Expanded unemployment insurance benefits were available to many taxpayers due to the COVID-19 pandemic. California does not tax unemployment compensation, but the federal government does. If you received unemployment compensation, even if you elected to have federal income taxes withheld, it’s likely that the withholding was insufficient to cover your tax liability. Be sure to contact us early so we can determine whether you have additional tax liabilities before the April 15 payment deadline.

Stimulus payments: 

The CARES Act, which was passed into law to help stimulate the economy during the COVID-19 pandemic, authorized stimulus payments (also referred to as economic impact payments) that were issued to many taxpayers. People who received economic impact payments should have received IRS Notice 1444, Your Economic Impact Payment, notifying them of the amount of the payment they should have received. The economic impact payments are treated as advance tax credits against your 2020 income taxes. As such, you will need to include a copy of Notice 1444 when you provide us with your other tax documents.

Property transactions: 

Did you sell any real estate this year? Be sure to provide copies of escrow statements, as well as the Loan Estimate form, the Closing Disclosure form, and California Form 593, Real Estate Withholding Tax Statement. We need these documents to properly prepare your return. If you can get them to us as early as possible, we can make sure that we have everything we need and that any state withholding documentation is correct.

California introduced penalties for failure to carry health insurance:

The federal government repealed the penalty for failure to maintain health insurance (referred to as the “individual mandate”) starting with the 2019 tax year. In response to the federal government’s repeal, the state of California will charge an individual who fails to secure coverage an annual penalty of $695 or more when they file their 2020 California tax return. The minimum penalty for families of four or more individuals is $2,085. The penalty can rise as high as 2.5% of household income, which can be many thousands of dollars. Be sure to maintain your health insurance coverage to avoid this costly California tax penalty.

1099s and K-1s:

 If you received 1099s or K-1s from investments in 2020, we may extend your return in case these documents are corrected after the original filing deadline. We are seeing increasing numbers of corrected information returns, which require taxpayers to amend their original tax returns to reflect the corrected amounts. In some cases, the amounts are vastly different and can create additional costs in amending the tax returns and potential penalty problems.

Foreign accounts: 

We must report overseas assets owned by businesses as well as individuals. So, the reporting requirements are increasing and the penalties for failure to report continue to be harsh. Not all foreign holdings must be reported. If, for example, you hold stock in a foreign company through a U.S. broker, those holdings do not have to be separately reported. However, if you hold any other types of foreign assets, including bank accounts and securities accounts, please let us know. If you have any doubt as to whether any of your assets are foreign, please discuss those assets with us. Again, this year we will need information on a business’ foreign holdings as well.

Please take extra care in preparing your organizer and tax documentation so we can do the best possible job to find new tax benefits that are hidden in the law and protect you from more aggressive audit programs and larger penalties.

Call, email, or text us – our team is ready and able year-round for all your tax questions and concerns.

Cheers to 2021!

Considering moving out of California? 10 Tips to survive a CA residency audit

We hear many of corporations who are moving out of California and many of our clients are seriously thinking about it. Before you make the decision, here are 10 items (in no particular order) that you need to be aware of if you want to survive a residency audit.

1. You must break meaningful ties with California.

It is not enough to build new ties with another state if your ties with California do not decrease — significantly. If you are a California resident/domiciliary, it will be presumed you continue to be a California resident/domiciliary, and you need to overcome that presumption. For example, keeping the family home in California, the business office in California, and/or continuing to use long-time professionals in California, even if you are acquiring a new home, new office, and new professionals in the “new” state, can cause significant problems in an audit and should be carefully thought out.

2. You must build solid new ties with another state that are, at a bare minimum, comparable to the ties you had in California.

It is not enough to break California ties if you do not reestablish yourself permanently somewhere else. The analysis in an audit by the FTB is going to be California ties versus ties to a single new state where residence/domicile is claimed. For example, if you spend 40% of your time in California, 30% in the new state, and 30% traveling and in miscellaneous other states, that is not a strong factual scenario, even though you spend less time in California than elsewhere in total.

3. The times you do return to California after the move need a solid case for being for a temporary or transitory purpose.

You can become a resident/domiciliary of another state and still spend time in California as long as that time in California is for a “temporary or transitory purpose.” Returning back to California to visit family, for vacations, for business trips, for a course of medical treatment, etc., should all be fine as a nonresident as long as they are carefully managed and fall within that standard.

4. Watch the timing of the change.

It is one thing to move out of California and successfully change your residency/domicile to another state, but precisely when did that change take place? For example, buying a home in Nevada on July 1 and having a large income realization event on September 1 will accomplish nothing in terms of changing your California tax situation if the FTB on audit agrees that you moved from California to Nevada, but that the date of the move is October 1 when all factors are taken into consideration. Although one is perfectly free under the law to change their residence/domicile to achieve tax savings, remember that auditors often take a dim view of changes that are claimed to occur very soon before a large income event, often resulting in a tougher burden to show a genuine move took place. Pick your move date carefully.

5. Watch out for California–source income issues.

Carefully consider and understand if there is income that has a California source, a change of residency will not keep that income from being taxed by the FTB. For instance, stock options that vested while a California resident, rent from a California real property, and income from passthrough entities that have a California source are all taxable to a nonresident of California. It is very common for the FTB to take alternative positions in residency audits, i.e., the individual is still a California resident, but even if they became a nonresident, some/all of the income is still taxable because it has a California source. Nonresident sourcing was a major issue on appeal in the infamous Hyatt residency case, even though the FTB did not even rely upon that argument at audit. (Appeal of Hyatt (January 14, 2019) Op. on Pet. For Rehearing)

6. Watch your conduct — for several years — after the move.

California has a four-year period to audit after the filing of the return (R&TC §19057). For example, assume you move in Year 1, but in Years 2 and 3 you begin to spend significantly more time back in California. If you are audited during Year 3 (or 4) for the change of residency/domicile in Year 1, it is extremely likely that your conduct in Years 2 and 3 (or 4) are going to be examined as part of that audit, even if the audit is technically only for Year 1. (It is also likely those later years will be added to the audit.) That is because the FTB may see subsequent conduct reflecting on prior conduct, i.e., maybe you really did not move in Year 1 after all, if you increased your ties back to California in the immediate subsequent years.

7. Watch for different treatment of spouses.

It is possible, although not frequent, that spouses may have different residences/domiciles, either as filed or as a result of audit. If this is the case, keep in mind that community property must be divided between them (Appeal of Misskelley (May 8, 1984) 84-SBE-077).

8. Be prepared for an audit.

Then be pleasantly surprised if it does not happen. The larger the potential tax effect from a change on audit, the more likely the audit because of the way the FTB allocates audit resources. Much of the audit selection process is done by computer programs. A California resident who moves and then stops filing returns (i.e., not filing nonresident returns to report California-source income) might generate audit interest, especially involving a high wealth individual. A part-year return that shows a move during a calendar year might generate audit interest. A subsequent nonresident return that shows large amounts of income but with little of it reported to California is very likely to generate audit interest. Remember also that for tax years in which no return is filed, the FTB has an open, unlimited, period in which to audit and assess a deficiency.

9. Do your best to document your case contemporaneously with the move.

The FTB’s strong preference is for “contemporaneous” documentation, as opposed to documentation created at a later time, e.g., at audit. So try to give the FTB what it wants. However, there is no legal limitation that documentation in a residency case must be “contemporary,” and, for instance, it is common practice to obtain affidavits/declarations from the taxpayer, his or her friends, employers, or business associates in responses to issues raised by the FTB at audit (18 Cal. Code Regs. §17014(d)(1)).

10. Live your life.

Life is short and one should not live it constantly looking over their shoulders and worrying about the threat of an FTB audit or assessment. Taxes are simply an expense that is a part of life, so maintain perspective. For example, do you really want to give up your family doctor (or specialist) in California whom you have seen for 20-plus years to start a new relationship with a new doctor elsewhere, simply because it might incrementally strengthen to some degree your argument that you moved out of California? Choosing the best tax-driven decision may not be the same as the best life-driven decision.

Call us with any questions if you are considering moving out of California.

Immediate tax relief for some California small businesses

In connection with COVID-19, the CA Dept. of Tax and Fee Administration (CDTFA) is offering tax relief for eligible businesses impacted by the virus restrictions. Business owners who file CDTFA returns for less than $1 million will be granted automatic 3-month extensions on payments and returns originally due between Dec. 1, 2020, and April 30, 2021. Small businesses having under $5 million in taxable annual sales or larger businesses in sectors hit by operational restrictions of the virus can apply for a 12-month, interest free payment plan to defer payment of up to $50,000 of sales and use tax liability.

Happy Thanksgiving from Encore Partners!

With Thanksgiving upon us, we have so much to be thankful for this year, most of all YOU! – your support, your trust, your friendship, and for staying strong and resilient throughout this crazy ride we’ve experienced together.

Thank you for being a part of our journey in 2020 and we will push through this challenging time with faith and grace together.

Our best wishes to you and your family for a happy and safe Thanksgiving!

Cheers to a better and stronger year ahead!