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New Partnership Audit Rules for 2018 Tax Filing Year

For the 2018 tax filing year, there are new Internal Revenue Service (IRS) partnership audit rules [also adopted by the California Franchise Tax Board (FTB)] in which the partnership, not its members, will now be responsible for tax adjustments under audit.

There is a very narrowly defined opt-out provision that many partnerships do not qualify for.  Please consider amending the partnership operating agreement to designate a “partnership representative” to represent the company in disputes with the IRS or the FTB.  Also, you should consider including language regarding the responsibility of tax audit adjustments pursuant to the three allowable methods: “amend”, “pull in”, and “push out.”

Below is a chart which discusses the advantages and disadvantages of each method.

MethodProsCons
Election OutPartnership out of CPARLimited to small partnerships with limited kinds of partners
Must elect on annual basis
AmendSimple to implementPartnership can’t compel partners to amend

Partnership can’t monitor who amends and who doesn’t

Pull InSimple to implement

Partnership can act as clearing house for convenience of partners (allows partnership to monitor which partners have pulled in)

Partnership can’t compel partners to pull in
Push OutPartnership can compel reviewed-year partners to pay tax on their share of imputed underpaymentShort time frame to elect and comply

Large administrative burdern on partnership

Partners pay additional 2% penalty

To discuss your situation under the new partnership audit rules, please contact a WFY tax expert at (949) 910-2727 or info@cpa-wfy.com

© Copyright 2019. All rights reserved.

Estates & Trusts Departments Welcomes Three New Hires

As tax season starts, WFY welcomes three new hires to our Estates & Trusts department: Lisa Marking, Heena Shah, and Ann Doan.  We are pleased to welcome these new hires to the WFY team.

Lisa Marking

Lisa Marking joined Wright Ford Young & Co.’s Estates and Trusts department as an Estates & Trusts manager.  She went to Pepperdine University to receive her undergraduate degree as well as her law degree.  Lisa also attended University of Southern California to receive her Master’s degree in Taxation.  During her free time, Lisa likes to travel and attending music concerts.

Heena Shah

This month, Wright Ford Young & Co. team had the pleasure of Heena Shah joining the Estates & Trusts Department as an Estates & Trusts supervisor.  She comes from a background of 14 years of tax experience specifically in tax compliance and tax planning for high net worth individuals, trusts, and small businesses.  Heena earned her bachelor’s degree in Business Administration from California State University, Dominguez Hills, and is an enrolled agent and a certified financial planner.  On her time off, she enjoys working out, cooking, and traveling.

Ann Doan

At the end of January, Wright Ford Young & Co. welcomed Ann Doan to the Estates and Trusts Department as Estates & Trusts staff.  Ann has a Juris Doctorate degree from Whittier Law School and a Masters of Law in Taxation from Chapman University.  Her experience with taxation includes representing taxpayers in matters before the IRS and California Board of Equalization as well as working in bankruptcy and creditors’ rights litigation. Out of the office, Ann loves to travel internationally and go to vegan food festivals.

If you think you’d be a great addition to WFY, please go to our Careers page and submit your résumé.

Rental Real Estate Owners-Guidance Related to the 20% Pass-through Deduction

On January 18, 2019, the IRS issued a notice providing “safe harbor” conditions under which rental real estate activities will be treated as a trade or business for purposes of the IRC Section 199A deduction.

To qualify for the safe harbor:

  1. Separate Books and records must be maintained for each rental real estate enterprise.
  2. At least 250 hours of rental services must be performed by the taxpayer and/or workers for the taxpayer during the tax year for each rental real estate enterprise.  To clarify, a real estate enterprise may be one rental or multiple rentals.  Commercial and residential rentals cannot be combined in the same real estate enterprise.  Qualifying rental services counting toward the 250 hour requirement include advertising, negotiating and executing leases, verifying tenant applications, collecting rent, daily operation, maintenance and repair of the property, management, purchase of materials for repairs and supervision of employees and independent contractors.  The services can be performed by owners, employees, agents and/or independent contractors working for the owners.  We recommend filing 1099s by January of the following year for any services performed by non-owners.
  3. The taxpayer must maintain contemporaneous records including time reports, logs or similar support to document the hours of services performed, a description of the services performed, dates on which the services were performed and who performed the services.  This will require tracking everything, your personal time and the time of those you employ.  A log book and a file for all invoices from others should be maintained.

Further clarification in the notice:

Triple Net Leases are not eligible for the safe harbor.

Vacation rentals (residences used by the owners) are not eligible for the safe harbor.

A statement is required to be attached to the taxpayer’s tax return and be signed by the taxpayer declaring that all the safe harbor requirements have been met and must include the following language:  “Under penalties of perjury, I declare that I have examined the statement and to the best of my knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure and such facts are true, correct and complete.”

Lastly, an enterprise that fails the safe harbor requirements may still qualify as a trade or business under the regulations for purposes of the 199A deduction.  If you are unsure about your rental real estate enterprise, consult with a WFY tax advisor.

© Copyright 2019. All rights reserved.

WFY Grows Tax Department Before 2018 Tax Season

Wright Ford Young increases their firm with eight new hires: Michael Montgomery, Jennifer Nguyen, Karla Young, Alice Wang, Jeff Hwang, Linh Trinh, Hoornaz Mostofizadeh, and Farheen Kolsy.  All these new hires are joining WFY’s tax department as tax staff or tax interns.  WFY is pleased to welcome these new hires to the WFY team.

Michael Montgomery

Joining the WFY tax staff is Michael Montgomery. Michael graduated from CSU Fullerton in 2015 and has a Bachelor’s degree in Business Administration, with a concentration on Accounting.  With his experience in accounting, he has mainly worked in offices that specialize in small businesses and individuals.  During the off season, Michael and his wife, Katie, enjoy traveling and attending Anaheim Ducks and Anaheim Angels games.

Jennifer Nguyen

Jennifer Nguyen graduated from CSU Fullerton last fall after interning with WFY last year. We welcomed Jennifer back to WFY as an addition to our tax staff. Jennifer plans to start studying for her CPA exams this year, and continues to foster kittens from WAGS Animal Shelter and Animal Services in Westminster.

Karla Young

Our third tax staff addition to WFY is Karla Young. She graduated from University of the Philippines with a degree in Development Studies. Karla is well versed in IT and Marketing, but switched to developing her career in accounting once she moved to Orange County. Other than developing her skills in accounting, she also likes to send out typewritten letters to friends and family.

Alice Wang

Alice Wang joins the WFY team as one of our newest tax staff.  She received her Master’s degree in Accounting from CSU Fullerton, and has worked in accounting for four years.  Outside of the office, Alice loves to read and travel.

Jeff Hwang

For the 2018 tax season, Jeff Hwang joins the WFY team as a tax intern. Jeff is currently attending CSU Fullerton and working on his Master’s degree in Taxation.  Other than practicing taxation, Jeff enjoys watching sports games and attending comedy shows.

Linh Trinh

Linh Trinh is starting with WFY as a tax intern in our tax department.  She’s currently attending CSU Fullerton and plans to graduate in the Spring of 2020 with her Bachelor’s degree in Accounting.  Other than working towards her degree, Linh is also an active member of Accounting Society at CSU Fullerton.

Hoornaz Mostofizadeh

Hoornaz Mostofizadeh is another addition to the WFY tax department as a tax intern.  She graduated from CSU Fullerton in Fall of 2018 and majored in Business Administration with a concentration on Accounting.  Hoornaz’s main hobbies include practicing King Fu and drawing portraits.

Farheen Kolsy

Our fourth tax intern to join our WFY tax department is Farheen Kolsy. She’s a senior on the road to graduating from CSU Fullerton in May of 2019 with a degree in Business Administration concentrating in Accounting. On her down time, Farheen likes to hang out with friends and hike.

New IRS Partnership Audit Rules Prompt New Look at Operating Agreement

The IRS introduced a new set of partnership auditing rules which take effect in the financial year 2018 and are meant to make it easier for the agency to uncover and collect underpaid taxes from partnership entities.  The previous audit system was challenging for the IRS because it was difficult to pin down who owed the tax under a complex partnership structure.

Small partnerships with less than 100 members can opt out if no partner is a pass-through entity.

The IRS will begin reviewing tax filings in line with the new procedure in 2019, so audits could start as soon as 2020.

When a partnership underpays its taxes, the leftover bill has to be dealt with by a designated individual. If a partnership fails to make that designation, the IRS will select one on its behalf. Designating a representative to deal with the IRS if and when an audit arises could benefit partnerships from having the IRS select one for them.  The IRS promised that it won’t designate its own employees, agents, or contractors.

A partnership without a designated representative may end up relying on outside legal counsel to contact what could be hundreds of partners to determine the needed tax adjustments. Re-evaluating a partnership agreement that has been working all this time is hard to sort out, but it comes down to the potential cost in legal fees in sorting the issue that could possibly come up down the road.

To discuss your situation under the new audit regime, please contact Wright Ford Young & Co. at (949) 910-2727 or info@cpa-wfy.com

© Copyright 2019. All rights reserved.

Making Large Gifts Now Won’t Harm Estates After 2025

On November 20th, the IRS announced individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to levels before 2018.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

To discuss more about your gift and estate tax situation, contact WFY’s Estates and Trusts Partners, Marisa Alvarado and Kevin Wiest, at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

Tax Saving Moves to Improve Your Tax Situation

Since 2018 is coming to a close now is the time to take action to proactively reduce your tax liability before the new year.  Included are a few strategies that may help with your tax situation:

  1. Harvest stock losses while substantially preserving one’s investment position. This can be accomplished by selling the shares and buying other shares in the same company or another company in the same industry to replace them, or by selling the original shares, then buying back the same securities at least 31 days later.
  2. Apply a bunching strategy to deductible contributions and/or payments of medical expenses. Beginning in 2018 the standard deduction has been increased and the itemized deduction of state and local taxes limited to $10,000 which will cause many taxpayers to lose the benefit of their itemized deductions. By bunching multiple years of charitable contributions and medical expenses into one year a taxpayer may create a taxable benefit that would not otherwise exist.  For example, a taxpayer who expects to itemize deductions in 2018 and usually contributes a total of $10,000 to charities each year, should consider refunding 2019 and 2020 charitable contributions by contributing a total of $30,000 into a donor advised charitable fund and then distribute the funds to the charities over the following two years.
  3. Take required minimum distributions (RMDs). Taxpayers who have reached age 70-½ should be sure to take their 2018 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70-½ in 2018 can delay the first required distribution to 2019, however, this can result in taking a double distribution in 2019 (the required amount for 2018 and 2019).
  4. Use IRAs to make charitable gifts. Taxpayers who have reached age 70-½, own IRAs, and are thinking of making a charitable gift should consider arranging for the gift to be made by way of a qualified charitable contribution, or QCD—a direct transfer from the IRA trustee to the charitable organization. Such a transfer (not to exceed $100,000) will neither be included in gross income nor allowed as a deduction on the taxpayer’s return. A qualified charitable contribution before year end is a particularly good idea for retired taxpayers who don’t need all of their as-yet undistributed RMD for living expenses.
  5. Make year-end gifts. A person can give any other person up to $15,000 for 2018 without incurring any gift tax. The annual exclusion amount increases to $30,000 per donee if the donor’s spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so.

These are broad suggestions that will benefit some but not all taxpayers.  To discuss and create a personalized tax strategy be sure to contact a WFY tax specialist at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

WFY Sponsors Veterans Legal Institute’s American Patriots Ball

On Saturday, September 22nd, some of Wright Ford Young & Co.’s Partners attended Veterans Legal Institute’s The American Patriots Ball, an event honoring and celebrating veteran empowerment.  Veterans Legal Institute is an organization that provides pro bono legal assistance to homeless, at risk, disabled and low income current and former service members.

The Ball included hundreds of community and business leaders that gathered on Saturday which featured dancing, dining, and a live auction.

Not only did WFY sponsor the event, they also commended the following honorees and organizations: Philip V. Brozenick for Veteran of the Year, Rochelle Karr for Veteran Advocate of the Year, OC Women2Women for Community Partner of the Year, and Veterans Legal Institute.

To find out more about The American Patriots Ball and Veterans Legal Institute, go to https://www.vetslegal.com/

Landmark SCOTUS Decision on Sales Tax Collection Requirements

The U.S. Supreme Court recently issued a ruling that could have a dramatic impact on American retailers, and not only those who primarily operate on the Internet.  In what has been called the Wayfair sales tax case, the court on June 21, 2 018 said that states can impose sales taxes on businesses even if they do not have a physical presence in the state.

The ruling effectively overturns Quill Corp. v. North Dakota, which was a Supreme Court decision handed down in 1992.  In that case, the court said that the Commerce Clause in the U.S. Constitution forbids states from imposing sales tax on companies without a physical presence.  The court said that states could only impose sales tax on a company if it had an actual location in the state, or if it had another bright-line physical presence, such as in-state employees, inventory, or sales representative in the state.

South Dakota, in the Wayfair sales tax case, bypassed interstate commerce restrictions in a law that it enacted back in 2016, called S. B. 106. Justice Anthony Kennedy, who wrote the majority decision for the court in this case, said that the South Dakota law was constitutional because of the following reasons:

  • The law allows out-of-state companies to be exempt from sales taxes if they only do limited business in the state. That is, if they have less than $100,000 in sales revenue and less than 200 transactions in a calendar year;
  • The law does not try to collect sales tax retroactively; and
  • South Dakota abides by the Streamlined Sales and Use Tax Agreement, which reduces compliance and administrative costs associated with collecting sales tax.

Essentially, the court allowed South Dakota to collect sales taxes from Internet retailers because its law did not place a significant burden on interstate commerce.  Currently, 31 states have laws that impose sales taxes based on economic, as opposed to physical presence nexus standards. While it is possible that not all these laws pass the standard set by Wayfair, the court has now given them guidance toward making their laws constitutional.  Furthermore, it can be expected that other states will impose similar laws in the future.

On the federal level, there are two bills currently making their way through congress that will let states impose sales taxes on out-of-state entities.  Both the Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA) allow states to collect sales taxes if they keep the process of paying the taxes simple.

Because of the court’s decision, it is important for retailers selling into multiple states to understand in which states it has sales tax obligations, which will require it to both register and file taxes in these states.  Fortunately, if your business operates in multiple states, you do not have to figure all this out by yourself.

If you have questions regarding your sales tax filing requirements, please call 949-910-2727 or email info@cpa-wfy.com.

© Copyright 2018. All rights reserved. 

California Competes Tax Credit

The California Competes Tax Credit is an income tax credit for businesses wanting to stay and grow in California. The purpose is to attract and retain employers in California industries with high economic multipliers and that provide their employees good wages and benefits. Any business can apply.

The credit applies to any type of business expecting to increase headcount and/or make a capital investment in California.  Businesses compete for these tax credits by asking for a percentage return on investment.

California plans to grant $230 Million in Cal Competes tax credits to California businesses over three separate application rounds in 2018.  Typically, a business can get up to 20% ROI.

If you think your company may qualify for this tax credit and would like to learn more about how to take advantage of this cost savings opportunity, please contact us today at srobinson@cpa-wfy.com or call 949-910-2727.

© Copyright 2018. All rights reserved.