Ref: CA Revenue & Taxation Code 18662

Application: All businesses in CA using nonresidents to provide SERVICES TO THE BUSINESS.

California has begun an aggressive campaign to catch businesses using nonresidents to provide services to CA businesses without collecting the 7% nonresident withholding on payments to the out-of-state service provider.

Example: You are Corporation ABC based in Los Angeles. You use a graphic designer in AZ. The invoice is $1,000. You remit $930 to the vendor and $70 to CA on their behalf. (You then send the $70 to the CA Franchise Tax Board and provide the vendor with a statement at year-end showing all nonresident withholding paid on their behalf).

Penalty: If you are found to be out-of-compliance with this law, you will owe the 7% that you should have withheld plus penalties.

If you think that you may be subject to this regulation, please call us immediately for further information.

Ref: CA budget deal 6/28/22.

The CA Governor and Legislature have reached a 2022-23 budget agreement containing refunds to return to taxpayers some of the current large budget surplus. The bills have not yet been voted on by the California General Assembly. IF PASSED, they will provide refunds to CA taxpayers. Qualifications:

1. Be a CA resident when the payment is issued and for at least six months during 2020;
2. Have filed the 2020 individual tax return by October 15, 2021;
3. And, not be claimed as a dependent on another taxpayer’s 2020 return.

The timing and method of payment are not yet determined.

A chart of the table for specific refund amounts is at:

www.caltax.com/files/2022/cataxrefunds.pdf

The IRS has expanded their online tool “Where’s My Refund” to allow access to information for two filing years. As of this writing that’s tax returns for 2020 and 2021.

The link to this tool is:

https://www.irs.gov/refunds

Source IR-2022-11

National Taxpayer Advocate Erin M Collins presented her annual report to Congress on January 12, 2022. This report highlighted 2021 as “the most challenging year taxpayers and tax professionals have ever experienced.” She highlighted the following executive summary items as well as reflecting that likely the 2022 season will see more of the same:

1. Backlog: As of late December 2021, the IRS backlog was 6million unprocessed original individual returns; 2.3 million unprocessed amended individual returns; 2 million unprocessed employer’s quarterly tax returns and 5 million pieces of taxpayer correspondence (responding to IRS notices).
2. Online “Where’s My Refund?” tool: Often was unable to answer that question… it had no data due to the backlogs.
3. Telephone service: 282 million phone calls received and IRS answered only 32 million = 11%.
4. IRS processing averages: The IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days to process them (up from 74 days in 2019).
5. The IRS is unable to find new employees to hire to meet the gap when existing employees retire or leave government service.

Our opinion: Starting 2022 with such a backlog will lead to similar issues this year and some refunds (especially amended returns) may take six to eight months to process.

Ref: CA Assembly Bill 150 (IRS approval via IRS Notice 2020-75)

IMPORTANT: THIS ONLY APPLIES TO CALIFORNIA INDIVIDUALS WHOSE BUSINESS IS USING A PASS-THROUGH ENTITY SUCH AS AN S CORPORATION, PARTNERSHIP OR LLC.

Executive summary:

1. State and local tax deduction (SALT) is limited to $10,000 on the federal return itemized deduction. This effectively means that the state income tax paid via the taxpayer’s W2 is not a federal deduction.
2. If the election is made on the entity return, the entity pays tax on behalf of the shareholder/owner/partner (s/h) equal to 9.3% of the net income from the entity.
3. The s/h reduces CA income tax withholding on his/her W2 by the same amount.
4. The federal net income on Form K-1 is reduced the the amount paid to the state, effectively providing a deduction.
5. The s/h receives a state credit on his/her individual return for the amount paid on his/her behalf. This credit is NOT REFUNDABLE, but can be carried forward five years.

When is the DUE DATE of the payment?

1. For 2021 calendar year entity: March 15, 2022.
2. For 2022 through 2025: Greater of $1,000 or 50% of the prior amount due 6/15 of the following year and remainder by the March 15 filing date. (If this date is missed, the entity cannot use this election for that year).

IMPORTANT: For cash-basis individual shareholders (and most are)… THE ABOVE DUE DATES IN ITEMS 1 & 2 ABOVE WOULD CHANGE TO DECEMBER 31, 2021 AND DECEMBER 31, 2022 RESPECTIVELY (not March 15).

Source: Consolidated Appropriations Act, 2021. PL 116-260.

100% business deduction for food from restaurant.

For 2021 and 2022, to help the restaurant industry, Congress has removed the 50% limitation for business meals from a restaurant. Restaurant is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.

Restaurants are not:

1. grocery, beer, wine or liquor store
2. vending machine or kiosk
3. an eating facility located on the employer’s business premises

THE ABOVE CONTINUE TO RECEIVE THE 50% DEDUCTION ‘HAIRCUT.’

In your accounting records for 2021/2022 it will be important that you specifically segregate business food that is not from a restaurant and continues to be subject to the 50% rule.