Since 2019 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:
- 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. The increased standard deduction and limited itemized deduction of state and local taxes to $10,000 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 2019 and usually contributes a total of $10,000 to charities each year, should consider prefunding 2020 and 2021 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.
- Take required minimum distributions (RMDs). Taxpayers who have reached age 70-½ should be sure to take their 2019 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 Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.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 2019 can delay the first required distribution to 2020, however, this can result in taking a double distribution in 2020 (the required amount for 2019 and 2020).
- 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.
- Make year-end gifts. A person can give any other person up to $15,000 for 2019 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.
- Reinvest capital gains in Opportunity Zones. Capital gains reinvested within 180 days into an qualified opportunity fund allows for federal tax deferral and partial tax exemption and tax free appreciation if held for the required ten year period.
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 email@example.com or (949) 910-2727.
© Copyright 2019. All rights reserved.
Wright Ford Young & Co.’s Audit Partner, Cyndi LeBerthon, has been appointed Chair of the CalCPA Peer Review Committee for the term 2019 through 2021.
This committee of 20 members is responsible for overseeing all peer reviews of CPA firms in California, Arizona and Alaska administered by CalCPA. The peer review committee evaluates the results of the peer reviews, determines the need for follow up remedial or corrective actions, and oversees the performance of AICPA qualified peer reviewers in California, Arizona and Alaska. These measures taken ensure compliance with the AICPA Peer Review Program. Cyndi has served on the peer review committee since 2015 and is honored to be able to give back to the accounting profession through this volunteer, invitation-only role.
If you’d like to learn more about WFY’s Audit Partner, Cyndi LeBerthon, click here.
Wright Ford Young & Co. is seeking qualified candidates to join our tax department team! We are looking for hard-working, dedicated people who are willing to learn and flourish in their careers. Full-time positions are available for the following departments:
- Tax Professional (at least 3 years of experience)
Once the corporate, individual and foundation tax reporting season is complete, there’s always an opportunity to evaluate and reassess the taxpayer’s level of satisfaction with their CPA relationship. Lack of communication, unwanted tax return extensions, incorrectly prepared Schedule K-1’s, and inability to accurately apply the qualified TCJA reform benefits are just a few of the many frustrations that may have been experienced this past tax season.
Situations can arise in a taxpayer-CPA relationship which makes a taxpayer to question whether or not their current accounting firm is the right fit for them. Small to mid sized closely held companies and family business owners may feel as though they have outgrown their small practice CPA or might feel under served by their larger accounting firm. Some of the common situations where Wright Ford Young is referred into a new client relationship have been:
- Delayed responses from their current CPA or lack of follow up communication that caused their tax returns to be unnecessarily extended.
- Excessive turnover of accounting firm staff that caused the need for re-training and more work to be completed by company employees.
- Need for new growth capital, loan or line of credit that requires a company’s financial statements to be audited, reviewed or compiled for the first time.
- When a company’s employee benefit plan exceeds 100 participants for the first time, thus requiring a qualified ERISA auditor to audit the plan (i.e. 401(k)).
- When a business owner considers a liquidity event, yet doesn’t want to fully exit the business, the consideration of structuring a tax-friendly ESOP is warranted.
- The need for a family business owner to take advantage of the new tax strategies relating to personal estate and trust planning.
- Anytime a company financial leader or family business owner no longer sees a true correlation between the accounting fee they pay and the value of service they receive.
If you are a small to mid-sized company or family business owner who is dissatisfied with your current accounting firm, please contact Wright Ford Young to schedule a no-obligation conversation with one of our audit, tax, or estates and trusts planning specialists.
Spend some time getting to know us and you’ll see how you can achieve compliance without feeling like a number in a “check the box” environment.
Learn how a proactive year-round tax strategy can serve as a valuable improvement vehicle to your profitability, not just a tax time expense.
Understand why estate planning is critical to maximizing your wealth preservation while you are still able to fully enjoy life with your family, not after.
See how our partners and staff are hands-on and better equipped to respond to individual requests from all our clients and not shielded with layers of staff, and realize a true correlation between the fee you pay and the value of service you actually receive.
According to a recent SFGate poll, 53% of Bay Area residents interviewed want to leave California.(1) We have been hearing similar comments from seminar attendees across the state, and we know many of you have clients who are attempting to “move out of California.”
Keep in mind, one of the FTB’s longest running, and most active, audit programs is the residency audit program. The FTB looks closely at a taxpayer who moves from California, and often they are high income taxpayers who have large amounts of income after they change their residency to another state. However, lower income taxpayers can also be caught in this trap.
Recently, we heard of two examples of clients who want to leave California — but not completely.
Case study #1: High-income taxpayer who is expecting a large capital gain from the sale of very appreciated stock will move out of state. However, he will keep the California home that has been in his family for generations.
Case study #2: Woman moves to a non-tax state, buys a home there, and keeps her California home to which she returns periodically to oversee care of her mother. She has income from both California and the other state.
Each of these taxpayers is in the danger zone. Let’s look at the rules for residence and domicile and apply them to these case studies, as this is the key to being a nonresident.
Residence and domicile
A “resident” is an individual who is:
- In California for other than a temporary or transitory purpose; or
- Domiciled in California, but who is outside California for a temporary or transitory
A domicile is the place where an individual has his or her true, fixed, permanent home and principal establishment, and to which place he or she has, whenever absent,the intention of returning. It is the place in which an individual has voluntarily fixed the habitation of self and family, not for a mere special or limited purpose, but with the present intention of making a permanent home, until some unexpected event shall occur to induce an adoption of some other permanent home.(2)
If a person has not changed their domicile, they continue to be California residents for income tax purposes, even if they are outside of California for most or all of the year.
Don’t keep the house
The key to these case studies is domicile. In order to be a nonresident of California for tax purposes, the taxpayer must show that their domicile is in another state. The FTB will assume any taxpayer that left the state but kept a home in California has retained their California domicile (because they “intend to return”). So, that is one big step against the taxpayer.
In case study #1, the taxpayer must dispose of the property or they will have trouble proving they ended the residency. This is going to be a particularly difficult situation because the taxpayer has significant income from the sale of his appreciated stock, and the FTB will argue that he is only trying to change his residence to avoid the California tax on that income. We would typically recommend that the taxpayer sell their California residence and purchase a residence in their new home state. However, the taxpayer does not want to sell his home because it has been in the family for generations.
Simply having the children rent the family home will make it hard to prevail, as the FTB may argue that the taxpayer can return to the home at any time. One suggestion might be to gift the home to the children or put the home in an irrevocable trust for the children.
In case study #2, the taxpayer has relatively low income, but the FTB is still likely to find that she continues to be a California resident. Keeping the home here indicates that she intends to return to California, especially if she is periodically using it and working occasionally in California. If the FTB audits her, she will surely lose. The best way for her to end her residency is to sell the home and not work in California when she comes to care for her mother. She can stay with friends or in a hotel, but not in her home.
Cases where taxpayers won and lost
A good way to understand factors that will help or hurt taxpayers in these situations is to review cases where taxpayers have lost on residency issues.
In the Appeal of Murray, the taxpayers were domiciled in California prior to the husband signing with the Cleveland Cavaliers.(3) The Board ruled in favor of the FTB, and found that the taxpayer maintained a domicile in California because the taxpayer and his family resided in Ohio only during the seven-month basketball season. They maintained two homes in California — one occupied by his mother-in-law and the other presumably vacant — and continued to use financial advisors, doctors, and had business registrations in California.
In Appeal of Cummings, the taxpayers had moved to Nevada — or so they thought.(4) However, they retained two homes in California and one in Reno, Nevada. Credit card transactions and amounts and locations of expenses for each spouse demonstrated an overwhelming presence in California. Following all trips, the Cummings always returned to their California location. The Board found that the taxpayers were still California residents.
In Appeal of Norton, the taxpayers, contemplating retirement, began construction of a residence in California and listed their Connecticut homes for sale.(5) In February 1990, they rented a small apartment in California and lived in it until their new home was finished. The Board determined that residency began on April 10, 1990, when the taxpayers moved much of their furniture, including a piano that had been kept in storage, and brought one of their vehicles to California.
In Appeal of Lau,(6) which was dismissed by the FTB before the BOE made a decision, the Board was posed to rule in favor of taxpayers who had retired from running their California business and had moved to Nevada. Due to the poor housing market, they had retained their California home along with its custom made furnishings, kept their Kaiser health plan, their golf membership (which they were unable to sell), and cars in California to use while they were visiting family and checking in on their business interests. The Board indicated that they felt that the taxpayers had demonstrated their intent to establish a Nevada domicile.
In Appeal of Bills,(7) taxpayers allowed their adult daughter to stay in their California home and purchased another home in Washington to move into when the husband retired from his investment company. The BOE ruled that the taxpayers had established a Washington domicile in only one week, even though they made frequent and extended stays in California immediately thereafter. The Board emphasized the subjective intent test rather than a quantitative objective test in establishing domicile.
2 18 Cal. Code Regs. §17014(c)
3 May 22, 2013, Cal. St. Bd. of Equal., Case No. 469418
4 Appeal of Nicholas and Dorothy Cummings (October 7, 1999) Cal. St. Bd. of Equal., Case No. 98A-1239
5 Thomas H. Paine and Teresa A. Norton (October 7, 1999) Cal. St. Bd. of Equal., Case No. 98A-0741
6 Appeal of Lau, Cal. St. Bd. of Equal., No. 739838, heard March 25, 2015, dismissed May 7, 2015
7 Appeal of Bills (April 28, 2016) Cal. St. Bd. of Equal., Case Nos. 610028, 782397
This article is reprinted with permission of Spidell Publishing, Inc.® ©2019
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.
|Election Out||Partnership out of CPAR||Limited to small partnerships with limited kinds of partners|
Must elect on annual basis
|Amend||Simple to implement||Partnership can’t compel partners to amend|
Partnership can’t monitor who amends and who doesn’t
|Pull In||Simple 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 Out||Partnership can compel reviewed-year partners to pay tax on their share of imputed underpayment||Short 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 firstname.lastname@example.org
© Copyright 2019. All rights reserved.
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:
- Separate Books and records must be maintained for each rental real estate enterprise.
- 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.
- 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 their firm with eight new hires: Michael Montgomery, Jennifer Nguyen, Karla Young, Alice Wang, Jeff Hwang, Linh Trinh, 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.
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 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.
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 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.
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 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.
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.
We are always looking to grow our firm. If you would like to see our open positions in audit, tax, and estates and trusts, please head to our Careers page.
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 email@example.com
© Copyright 2019. All rights reserved.