Ref: Franchise Tax Board release 2/24/23

Background: If your business received a Covid Employee Retention Credit from the IRS, you must amend the year to which the credit applies (e.g. 2021) reflecting receipt of the money.

CA approach: A few weeks ago, CA FTB announced that they were looking into whether the IRS ERC would result in tax on the CA state return… with an indication that they were leaning toward assessing tax on it.

New CA approach: Today the CA FTB reversed themselves and stated:

“Recently, the Franchise Tax Board provided a response to a question regarding the taxability of the refundable portion of the federal Employee Retention Credit (ERC). The previous response indicated that the portion of the refundable ERC that is refunded to the taxpayer would be income for California income tax purposes. However, upon further review of the applicable federal rules and guidance related to the ERC, the Franchise Board has modified its previous response. An employer receiving the ERC is not required to include the portion of the credit that reduces the employer’s applicable employment taxes, nor the refundable portion of the credit, in its gross income for California income tax purposes.”

Source: IR-2023-03: Jan 10, 2023 UPDATED 2/24/23: IR-2023-33

NEW DEADLINE FOR SOME = OCTOBER 16, 2023

Who: CA counties included in the FEMA storm victim declared disaster area. A partial list is Los Angeles, Orange, Riverside, Santa Barbara, San Diego and Ventura Counties. 31 counties qualify as of today and the full list can be found on https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-severe-winter-storms-flooding-and-mudslides-in-california

What returns: Individuals due April 18, 2023 and businesses due March 15, 2023 or April 18, 2023.

Additional: Individuals have until October 16 to fund traditional and Roth IRAs.

How: IRS uses mailing addresses to determine eligibility and treatment is automatic.

Payments: Regularly due 3/15/23 or 4/18/23 are now due 10/16/2023.

Source: IR 2022-234; Released Dec 29, 2022

Effective 1/1/2023:

-Business use is 65.5 cents per mile

-Medical use is 22 cents per mile

-Charitable use is 14 cents per mile

Ref: IR-2022-226: December 23, 2022

One year delay for third party settlement organizations such as PayPal, Venmo, Cash App, etc to report payments on business transactions of $600 or more per year.

We’re back to the old rules: Form 1099-K will be issued for aggregate amount of $20,000 or more than 200 transactions.

TAKE AWAY: DON’T make personal transfers to/from a business PayPal, Venmo or similar third party settlement account.

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.