Visit Intuit for Information

Those rules were repealed under H.R. 4 (P.L. 112-9) and made retroactive, as if they had never been enacted. Therefore, landlords, in the ordinary situation of renting out a house or two, do not have to issue 1099s to service providers. In that situation, you would answer “no” to the first question, “Did you make any payments in 2011 that would require you to file Form(s) 1099?” The second question (“If yes …”) can be left blank.

There are still situations where a Schedule E filer would have to issue 1099s. In general, you would have to file 1099s if you materially participate (nonpassive) in the activity. For example, if you are a real estate professional and treat the rental activities as nonpassive, you are in a trade or business and you must issue 1099s.

2. Are all business that process credit cards and electronic payments required to send a 1099-K to sellers when they have more than 200 transactions and $20,000 gross income?

No. The $20,000 and 200 transactions threshold applies to “third-party payment networks” (such as PayPal and Amazon). There is no threshold for a “merchant acquiring entity” — credit cards, debit cards, or any other card accepted as payment by a network of persons unrelated to the issuer. As such, a 1099-K is issued by a credit card company for even one transaction of any amount.

3. I accept credit cards in my practice. Do my clients have to issue me 1099-Ks?

No. The credit card company issues the 1099-K to you.

4. So, does my client have to issue me a 1099-MISC?

Generally, the rules on 1099-MISC have not changed. If your client had to issue you 1099s in the past they still do, UNLESS they pay you with a credit card (in which case the credit card company will issue you a 1099-K that will cover the payment). To avoid double reporting, payments by credit cards are not included in a 1099-MISC.

5. What if a business client makes some payments to me by check and some by credit card?

Let’s say the client makes two payments to you — one by credit card for $800 and one by check for $700. The $800 will be included in the 1099-K and the client will need to issue you a 1099-MISC for $700.

6. What if you change the facts of question 5 to say that the cash payment was only $300? Does he still have to issue a 1099-MISC because his total payments to me were over $600 ($800 + $300), or not because the total 1099-MISC payments were under $600?

Neither the regulations nor the instructions to the forms answer this question. It would seem that the safe answer would be to issue the 1099-MISC for $300.

7. What about ACH debit payments? Is a 1099-K required? They do go through a third-party payer.

Generally, no.

8. I run a beauty shop and have hairdressers who are independent contractors. They have to pay me a space rental fee. Their customers often pay by credit card, which runs through my merchant account. I pay them by check after deducting the space rental and other charges. Do I have to issue them a 1099-K?

Yes. The regulations talk about “aggregated payees.” (Treas. Regs. §1.6050W-1(d)(1) and instructions to Form 1099-K) An aggregated payee situation exists when a person receives payments from a payment settlement entity on behalf of one or more participating payees and distributes the payments to one or more participating payees. In this case, you are one participating payee and your hairdresser is another.

Therefore, you, the account owner, would receive a 1099-K from the credit card company and you would be obligated to issue a 1099-K to the hairdresser. Example 21 of the regulations uses the example of an independently-owned franchise store in which a single corporation receives payments for credit card sales and allocates them to the franchise stores. The single corporation gets a 1099-K from the credit card company and must issue 1099-Ks to the franchise stores. Another example is that of cab drivers who are independent contractors and accept credit cards that run through the cab company’s merchant account.

Comment
In the above situations, if the hairdresser and cab driver were employees, they would not receive 1099-Ks because they are not aggregated payees. The cab company, for example, would receive and have full rights to the payments. The cab driver’s income would be reported on a W-2.

9. With regard to question 8, the hairdresser charged $2,000 to customers through credit cards but after deducting space rental and other charges I’m issuing her a check for $1,500. How much goes on the 1099-K that I issue to her?

$2,000. The regulations make it clear that you report the gross amount. The hairdresser is responsible for reporting the full amount and may take deductions for allowable business expenses.

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

As you have probably heard, both chambers of Congress passed an amended version of the two-month payroll tax cut this morning and have sent the measure to President Obama’s desk for signing later today. After the holiday break House and Senate members will resume negotiations on a year-long extension of the tax cut.

The agreement, however, calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers. According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February, 2012. If an employee’s wages during the first two months of 2012 exceed $18,350, and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012. If you have any questions about any of the new provisions, contact us at 805.541.2500. We will be happy to help.

Also we want to take this opportunity to wish you a Happy New Year and to provide you with the attached information that we have compiled regarding payroll issues and rates for 2012 and hope it will help you manage the New Year.

Click the link to download the 2012 Payroll Tax Rates & Limits PDF.

2012 PAYROLL RATES AND LIMITS

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

The use tax in California is not new. The California use tax law became effective on July 1, 1935. According to the California Board of Equalization website,

“The use tax is intended to protect California sellers who otherwise would be at a competitive disadvantage when out-of-state sellers make sales of goods to California customers without charging tax. The use tax also assures that all consumers in the state contribute fairly to the funding of state and local programs whether they choose to make purchases in California or outside the state.”

In the past you were required to prepare a separate return for the State Board of Equalization – now, to make it easier on taxpayers, you can report the used tax on your California income tax return. There are two options to reporting the unclaimed use tax on your California individual income tax return. You have the option of totaling all your out-of-state purchases where sales tax was not collected, computing the use tax on those purchases, and then adding that amount to your overall California income tax liability.

Your second option is a lookup table. If all of your purchases subject to use tax were each under $1,000 (meaning that you didn’t buy any one item for more than $1,000), you can use a table based on your income to lookup your tax.

If you purchased items that cost $1,000 or more, and you also had some that cost less than $1,000, and you do not want to total all of your purchases, you can total just the purchases over $1,000 and compute the use tax on those items, plus use the lookup tables for the small purchases.

Using the Use Tax Lookup Table to compute your use tax liability provides a safe harbor, which means the FTB will not challenge you regarding the correct amount of your use tax liability. With this new reporting option you will see this question on your tax organizers as you gather your 2011 tax information.

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

These cities send the Franchise Tax Board a listing of business licenses that the FTB then compares to tax records. Where there is no match, the FTB sends a notice to the non-filing business licensee. The cities receive a similar list showing who has filed an income tax return and we can speculate that cities will compare the list to their business license list and reach out to those who have business income but no business license.

If you have self-employment or business income and don’t have a business license you probably need one in the city where you do business. This includes rental income, an often overlooked requirement. If you are in this situation you can probably expect to hear from your city.

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

The IRS has specific criteria for determining the status of an individual as an employee or a contractor. Generally, the IRS will treat a worker as an employee if the following situations apply:

• You or your representative tells the worker where, when, and how to work.
• The worker is paid by the hour, weeks, or month, you furnish tools and materials.
• You set the workers work hours.

A contractor, on the other hand, is a worker who contracts with an employer to complete a particular piece of work or task. The contractor sets their own hours and is paid for the specific job or service. From the employer’s side, treating someone as a contractor simplifies a lot of payroll and employer regulation requirements. These benefits may cause some employers to incorrectly classify someone working for them as a contractor.

Willful misclassification is defined in the new law as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Ignorance is not a defense for willful misclassification of an employee. Some courts have defined “knowingly” in this context as including constructive knowledge, which can mean what a professional purportedly should have known. No longer are you considered safe from penalties because you filed forms 1099-Misc.

If you are found to willfully misclassify an employee as an independent contractor, the penalty is $5,000 to $15,000 for each violation (a single misclassified individual). If the court determines there is a “pattern and practice” of these violations, a penalty of $10,000 to $25,000 for each violation may be imposed.

Before the year ends and you prepare those 1099-MISC forms, it would be prudent to evaluate your vendors to determine if you have any possible misclassified individuals. Seeking advice on this topic could save you from some very punitive consequences.

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

Businesses that will see their income reported are those with more than 200 credit card transactions and more than $20,000 gross income from credit card sales. While the threshold for reporting will not require reporting on all businesses, don’t be surprised if merchant services providers file Form 1099-K for those who fall below the threshold.

Beginning in 2013, the IRS regulations indicate that there will be a 28% backup withholding when an Employer Identification Number (EIN) or Social Security Number (SSN) has not been provided to the merchant service provider or third party payer. This means that merchant services provider will withhold 28% of the amount owed to your business from the credit card settlement. This withholding applies to any vendor with at least 200 transactions at any level of gross income. If you have not already done so, you may want to contact your merchant card and third party processers to verify they already have your EIN or SSN on file to avoid a surprise withholding in 2013.

Businesses should also consider making adjustments to their bookkeeping in light of these new reporting rules. The IRS will now require that all the proceeds that have been handled by a third party payer to be separately stated from other monetary payments on the 2012 tax return. Segregating credit card receipts from income received by cash or checks will help you reconcile total gross receipts at year-end with the amount reported on Form 1099-K.

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

The IRS has identified the most common issues as follows:

• Unreimbursed employee business expenses
• Mileage
• Travel, meals, and entertainment
• Charitable contributions
• Fully reporting gross receipts for your business
• Expenses must be ordinary and necessary and paid during the taxable year

The IRS will be visiting tax preparers now and through April 15^th , 2012 to see that they are knowledgeable in tax law and prepare accurate returns while exercising due diligence. If they discover any inaccuracies in client returns while performing these examinations, the clients may be liable for additional tax, interest, and penalties.

What can you the taxpayer do? Provide as much detail as possible to your tax preparer for them to document that the information on your returns is true, complete, consistent and accurate. Only report expenses that you can fully substantiate as an ordinary and necessary business purpose. A little preparation now can prevent some expensive headaches later!

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

The IRS generally takes a dim view of taxpayer attempts to treat investment securities losses as anything other than capital losses. Capital losses fare poorly under our beloved federal income tax system. You can only deduct them to the extent of capital gains for the year, plus another $3,000 ($1,500 if you use married filing separate status). Any leftover capital losses get carried forward to the following year, and the same limitation rule applies all over again. As a result, it can take years to fully deduct big capital losses.

In contrast, ordinary losses are treated quite well. They can be written off against any type of income (salary, interest, dividends, capital gains, self-employment income, you name it). If you have a big ordinary loss that exceeds what you can deduct in the loss year, the excess can potentially create a net operating loss which can be carried back to previous years and recover taxes you paid earlier, or you can carry it forward to shelter income in future years, which will be especially helpful if tax rates go up.

The IRS issued guidance days after Bernard Madoff’s guilty plea, providing several generous safe harbors for qualified investors who were victims of Ponzi schemes. The safe harbors were designed to eliminate uncertainty about (i) the year of the loss, and (ii) how much was lost (i.e., because of problems in determining how much income that was reported in the scheme was fictitious and how much was real).

The safe harbors applied only to “qualified losses,” namely those resulting from a Ponzi scheme in which (a) the lead figure was charged by indictment with the commission of fraud, embezzlement or a similar; or (b) the lead figure was the subject of a state or federal criminal complaint, and either (1) the lead figure admitted the crime; or (2) a receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen.

Since the IRS published that guidance the deaths of some lead figures in Ponzi schemes have foreclosed authorities’ ability to charge them with criminal theft, leaving qualified investors in these cases unable to meet the definition of a qualified loss, or use the optional safe harbors.

This week the IRS issued new guidance that modifies the definitions of “qualified loss” and “discovery year” if the death of the lead figure precludes a charge by indictment or criminal complaint.

In summary, now a qualified investor’s discovery year is his tax year in which: a) the indictment, information, or complaint is filed; or b) the complaint or similar document is filed or the death of the lead figure occurs, whichever is later.

If you are a victim of a Ponzi scheme or similar fraud, we have the experience and expertise to walk you through the process of benefiting from the IRS treatment of these losses.

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

The Master Loan Agreement typically contains detailed covenants that, if not fulfilled, could constitute a breach in the Agreement. If the bank determines there was a breach in the covenants, and therefore an “Event of Default” has occurred, the bank has the right to “accelerate” the repayment of the indebtedness and require repayment immediately. Their ability to enforce this right and the resulting impact could devastate a business.

Understanding your own specific Master Loan Agreement is important to knowing the special loan conditions, covenants, and requirements that your bank is watching for as you provide them with the information they periodically request.

While each bank has different lending criteria there are some covenants that appear frequently included in the Master Loan Agreement. Examples of these include:

• Requirement to provide monthly internal financial statements and/or CPA prepared financial statements that have been compiled, reviewed or audited (often this requirement has a time limit such as “by the 20^th of the following month or within 120 days of year-end)
• The bank can require that capital expenditures over a certain dollar amount be approved by the bank prior to purchase.
• Owner draws or officer salaries are subject to limitations or bank approval.
• Requirement to maintain certain insurance policies to insure the collateral.
• The bank can reserve the right to grant or deny approval prior to selling any part of the business, disposing of substantial equipment, obtain credit or loans from other lenders or become a guarantor.

Managing your relationship with your bank is critical to helping you in future negotiations with the bank. Reading and understanding the loan covenants will allow you to create a proactive system to monitor progress on all financial loan covenants and better prepare you for renegotiation of the covenants when the loan needs to be renewed or refinanced. Creating an overview listing of the loan covenants that your or your accounting staff can regularly monitor will help you stay on top of any potential breeches of loan covenants.

In today’s tight credit environment it is critical that your business stay on top of all covenant issues. If you ever find yourself in the unfortunate position of being in breech of your loan covenants, or knowing that you are soon going to trigger a breech, it is important that you come up with a plan to discuss this with you bank as soon as possible. Your CPA can help you come up with a proactive plan that you can present to the bank to avoid the unnecessarily surprised and alarmed banker. Given enough warning, most banks can absorb many potential breeches of covenants. If the breech does occur, your bank will have had ample opportunity to evaluate the impact of the breech, and hopefully come up with a plan to help your business navigate past the breech.

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.