Ref: American Rescue Plan

Under the American Rescue Plan, all payment facilitators such as Venmo, Paypal, Zelle, etc will have to send recipients a Form 1099-K if the total received in 2022 was $600 or more. The recipient will have to list that income on his/her tax return for 2022 and tell the IRS what the money was for?

Example: Joe Doe receives a Form 1099-K for $9,000 for 2022. His records show that $4,000 was for room rental in his home; $1,000 for sale of a bicycle (cost $2,500) and $4,000 inheritance.

Result:

1. Rent income: Will be shown (and taxed on Schedule E of his return)
2. Sale of bicycle: Will be shown on Schedule D and the $1,500 personal loss non-deductible
3. Inheritance: Will be shown as non-taxable income under “other income” on his return.

KEEP VERY GOOD RECORDS AND SUBMIT ALONG WITH THE FORM 1099-K.

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: IRS Newsroom Nov 19, 2021

According to a recent IRS news release, there are still significant return processing backlogs from the last filing season. For example:

-6.5 million individual returns

-2.6 million individual amended returns

-3 million payroll Form 941 returns

-412,000 amended payroll Form 941 returns

Additional delays:

-Clogged and unusable IRS phone lines

-Millions of backed up mail answers from taxpayers

At this point, there is no way that they can catch up by the start of the 2021 filing season, so the delays will “merge” into an even larger mess.

Source: Accounting Today / National Conference of CPA Practitioners

Erin Collins, IRS National Taxpayer Advocate, reported:

1. At this point there are 5.5 million Form 1040’s and over 4 million business returns that have been opened but not processed by the IRS.
2. The IRS goal is to process these by December 31, BUT
3. By October 15, 2021, they expect another 4 million paper returns… putting them further behind.
4. The IRS does not have enough employees to do the work.
5. The phone systems are jammed as there is not enough space in the system even to get in line for a multi-hour wait.
6. Even if they were able to hire the additional thousands or workers, there is a multi-month training lag.

DMDCPA’s opinion:

1. Likely the IRS will be working on 2020 timely-filed returns well into 2022.
2. The lack of IRS personnel to service taxpayers (especially in reply to notices) results in the IRS computer continuing to “age” the issues in the system. These then result in more correspondence.
3. Eventually, these work up to the highest levels… the Tax Court and Taxpayer Advocate Office. These replies often require taxpayers to incur additional professional fees in Appeals or Petitions for administrative issues which should have been handled at much lower levels.
4. In our opinion, Congress should pass legislation stalling collections until the IRS can reasonable reply to correspondence, but nothing is forthcoming from that arena.

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.