Archive for the ‘Franchise Tax Board’ Tag
Back to Basics Part XIII – Form 4868 Application for Automatic Extension
Filed under: Back to Basics | Tags: April 15, automatic extension, certified mail, estimated tax payments, Extension, Form 3519, Form 4868, Franchise Tax Board, interest, IRS, late payment penalty, late return penalty, October 15, Social Security Number, underpayment penalty, United States Treasury
Leave a comment Originally published in the Cedar Street Times
April 3, 2015
Two weeks ago we discussed underpayment of estimated tax – a penalty that is assessed prior to the April 15 due date if you did not pay enough tax in ratably throughout the prior year. Essentially these penalties are the equivalent of the taxing authorities wanting to be paid in installments rather than a lump sum check at the end of the year. (You would be equally upset if your employer only paid you once a year as well!) So they effectively charge you interest (currently a three percent rate) if you do not have enough tax paid in quarterly throughout the year. This week we are going to talk about filing an extension and the penalties and interest that you will incur beginning after April 15 if you do not file and/or pay on time. If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog .
The most important piece of advice is to file your return on time! When I say on time, I mean by April 15, or if you file a valid extension, then by October 15. In years where those dates fall on a weekend or holiday, the return due date is pushed to the next business day. There can be hefty penalties for filing a late return, which we will discuss later. Form 4868 is the federal form used to apply for an extension, and you have to postmark it by April 15 for it to be valid. If you are concerned of a postal mishap, U.S. certified mail is the correct way to document it was mailed on time. California gives you an automatic six month extension if you need it, and nothing is required to be filed to receive the extension. (Note there are exceptions regarding extensions for individuals out of the country on April 15, as well as for military people overseas, which we are not discussing in this article.)
Regardless of whether or not you file an extension, the tax is still due on April 15. So you want to be sure you have enough tax paid in to cover the liability when you finally do file the return. This means, you have to do a rough calculation at least, and then send in a check for the estimated tax with the 4868. It would be prudent to estimate on the high side if there is any doubt. If you end up not owing as much as you paid in, you can get a refund when you file the returns, or you can have it applied to the next year’s tax returns, and it will be credited to you as of the original April 15 due date when the first estimated tax payment was also due for the current year taxes (for those that pay quarterly estimates, this is very helpful).
When putting people on extension that pay quarterly estimated taxes, I will typically have them pay the remaining projected balance due from the prior year, plus the first quarter estimate for the current year and have all of this applied as a payment towards the prior year return. This gives them a cushion in case the estimates are wrong. Then, after the returns are filed, any leftover amount is then applied to the current year return and gets credit as of April 15 and everything is fine. If you project you will owe to California, then you will have to fill out a California Form 3519 Payment for Automatic Extension for Individuals and remit a check with that form.
The mechanics of filing the federal Form 4868 are quite simple. On the left side of the form you fill out your name, address, and social security number. On the right side you list your estimate of your total tax liability, the amount you have paid in so far, and then subtract the two to get the estimated amount you are short or over. If you are short, then you write in how much you are planning to pay with the extension. Hopefully you have enough to pay the balance, but if you do not, just pay what you can, and keep making payments when possible. Write your name, social security number, the year for which the tax is due and “Form 4868” on the check as well.
The California Form 3519 Payment for Automatic Extension is quite simple also. You do not even have to list estimates, but just the amount you are paying in addition to your name, address, etc. You would provide similar information on your check to California as well. Federal checks are made out to the “United States Treasury.” California checks are made out to the “Franchise Tax Board.” The mailing addresses are on the forms and related instructions, which can be downloaded online for free. If you are sending in a check for a married filing joint tax return, it is best to put both taxpayer names and social security numbers on the forms AND on the checks.
Now let’s talk about what penalties and interest you will incur if you do not file on time and/or pay on time.
Late Return Penalty
As I mentioned earlier, the most important piece of advice is to file your return on time! A late tax return with the IRS carries a hefty penalty of five percent of the unpaid tax PER MONTH or portion of a month until you file your tax returns. For those of you who aren’t doing the math in your head, that is the equivalent of an annualized interest rate of 60 percent per year (and you thought credit cards were bad!). Fortunately they cap that penalty after five months of delinquency thus maxing it out at 25 percent. Not to be left out, California conforms to this and charges the same for late returns based on the amount of California tax owed.
Late Payment Penalty
Regardless of whether or not you file an extension, if you do not pay the tax by April 15, the IRS will assess you 0.5 percent PER MONTH on the unpaid tax, capping out after 50 months at 25 percent. If the return is also delinquent (no extension filed), the five percent per month late return penalty includes the 0.5 percent per month late payment penalty for the first five months. After the first five months, then you only pay the additional 0.5 percent late payment penalty. So the maximum federal late return and late payment penalty could be 25 percent late return penalty (4.5 percent plus 0.5 percent for five months) plus another 22.5 percent (0.5 percent per month for the next 45 months for the continuing late payment penalty) equals a total of 47.5 percent. California has a slightly different approach on this and immediately charges five percent of the balance if you are even one day late. In addition they assess 0.5 percent PER MONTH or part of a month for the first 40 months, also capping you at 25 percent. So one day late in California will actually cost you 5.5 percent in late payment penalties.
Interest
In addition to the above penalties, interest is also charged starting on April 16 until the taxing authorities get paid in full. Since you had the use of the money and they did not, they want to be paid for their lost use of the funds. The interest rate varies and is adjusted each quarter for the IRS and twice a year for California. The current interest rate is three percent for both the IRS and California. If you had the money sitting in a bank account, you clearly lost out, however, if you had it invested in the markets, you would have probably come out ahead in the past few years. Whereas, you can sometimes get the taxing authorities to waive penalties if you had reasonable cause, interest is virtually impossible to waive. Without the before mentioned penalties, there are many people that would love a three percent loan!
If you have noticed a common thread for the above interest and penalties, it is that they are all based on the amount of tax you were short starting on April 15. If you had paid in more than enough on April 15, there would be no penalties and interest, even if you did not file an extension. Theoretically, you could file several years late and incur no penalties as long as you eventually give them a return showing all the tax had been paid in on time. I do not recommend this practice, however! Eventually you would receive notices and they would even estimate a tax return for you and assess tax, penalties, and interest. Those are usually not in your favor! Also, you never start the statute of limitations running, so you keep yourself open for audit longer.
Most importantly, like me, have fun when you are preparing these forms. If you find all of this interesting, perhaps you should have become an accountant!
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Relief if You Paid Tax on a Short-Sale 2011-2013
Filed under: Foreclosures and Short-Sales, Residence Sale | Tags: 580(b), 580e, anti-deficiency, Barbara Boxer, California, cancellation of debt, Chief Counsel, debt, exclusion, Foreclosure, Franchise Tax Board, FTB, Internal Revenue Service, IRS, nonrecourse, principal residence, qualified debt, qualified principal residence indebtedness, recourse, refund, section 121, Senate bill 458, Senate bill 931, Short-Sale
Leave a comment Originally published in the Cedar Street Times
February 21, 2014
Hopefully we are nearing the end of the short-sale and foreclosure saga that has continued since 2008. My litmus test based on tax return filings is indicating that things are much closer to being back on track. Prior to 2008, it was all about 1031 exchanges. Those turned off like a faucet when the markets crashed, and then short-sales and foreclosures took center stage. I have seen those tapering off over the last couple years, and I am starting to see 1031 exchanges again. The cycles continue!
But before we leave short-sales and foreclosures in the dust, there is a possible silver-lining handed down by the IRS and FTB in the last few months. Taxpayers that generated income tax as a result of a short-sale in California on their principal residence, retroactive to January 1, 2011, may be entitled to a refund.
California Code of Civil Procedure Section 580b has been dubbed California’s “anti-deficiency laws” for years. It had a positive effect on homeowners because it basically said if you had never refinanced your home and you lost it in a short-sale or foreclosure that you could not be pursued for the balance you still owed (the deficiency), and the remaining debt would not be taxable income to you because the debt was considered nonrecourse debt.
This, however, left many people out in the cold that had refinanced. Suddenly, it was a different ball game if you had done a refinance (and who didn’t during the run of good years up through 2007!?), and the debts were then allowed by lenders to be treated as recourse debts and they could pursue your personal assets. Alternatively they could cancel the debt if it was not worth pursuing, leaving you with taxable income for the amount cancelled.
Congress stepped in (and California generally conformed) during the housing crisis and enacted favorable legislation which said you could exclude cancellation of debt income generated by your personal residence. The catch, however, was that the debt had to be “qualified debt.” In short, if you lived off the equity in your house by refinancing to pull cash out and did anything with it other than improve the property, then you were not eligible for the exclusion on that portion and would still have to pay tax.
Then, a few years ago, California passed Senate bills 931 and 458 which were codified into law as California Code of Civil Procedure Section 580e as of January 1, 2011. This resulted because some unscrupulous lenders were entering into short-sale agreements to allow sellers to go through with the sale of their property for less than the amount owed to the bank, but then still pursuing the seller for the remaining debt after the fact (often a big surprise to the seller). California’s enactment of this law was good news for homeowners because it basically said, even if you had refinanced, but had entered into a short-sale agreement with a lender, then you could not be pursued for the remaining balance owed and that lenders would basically have to cancel the debt. Of course, cancelling the debt could mean tax was owed, but that was still better than being pursued for the remaining balance!
Finally, in November 2013 a letter from the Office of the Chief Counsel at the IRS written to Senator Barbara Boxer, due to an inquiry from her, stated that the IRS would treat any debt pursuant to California’s 580e as nonrecourse debt! The Chief Counsel’s office at California’s Franchise Tax Board followed up with their own letter a month later saying they will conform to the IRS interpretation.
This means that anyone who filed a tax return in 2011 or 2012, or even this year, and reported cancellation of debt income related to the short sale of a principal residence, should consider filing an amendment for a possible refund. It is still possible to have income tax, primarily if you did not live in the house for two of the last five years prior to your short-sale. The reason is that when a home is disposed of with nonrecourse debt, the total amount of debt outstanding at the time of the short-sale becomes the sales price of the home. You then subtract your cost basis, and the difference is your gain on sale. However, if you lived in the home for two of the last five years, then you get a $250,000 gain exclusion for filing as a single status, and $500,000 gain exclusion if married filing jointly, pursuant to IRC Section 121.
You need to act on this during the next year if your short sale was in 2011 as the statute of limitations expires three years after filing.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Rental Property Outside of CA: LLC Options and Issues – Part II
Filed under: California | Tags: $2000 penalty, $800, Caliornia, disregarded entities, doing business, Franchise Tax, Franchise Tax Board, liability protection, LLC, non-California, register, registration, Single Member LLC, SMLLC, tax, taxed as a corporation, taxed as a partnership
Leave a comment Originally published in the Cedar Street Times
July 12, 2013
Two weeks ago, I discussed that LLCs are a popular choice for holding rental property, but that it certainly comes at a cost in California when you consider a minimum $800 annual franchise tax, the cost of filing another tax return each year, having to maintain better accounting records, as well as the initial costs to set it all up. I also advised that if you do setup an LLC, you want to utilize an attorney to set things up instead of a do-it-yourself online approach. I have seen plenty of problems from people using the latter method. It is pretty easy to jeopardize the liability protections of the LLC if you do not have competent legal advice. Since liability protection is one of the main reasons you go to all this continued expense and trouble, you might want to consider the old adage: penny-wise, pound-foolish.
Two weeks ago, I also raised the question and left readers pondering about whether you could save the minimum $800 a year tax by setting up your LLC in another state, which of course would be a natural inclination anyway, if the property is located in another state.
Many Californians are already in this boat, and I would say quite a number of them are unaware that even if they have a non-California LLC holding non-California rental property, they are generally required to register in California and pay California the minimum $800 franchise tax. The franchise tax is levied on you if you are considered doing business in California. So how is your rental property in Arizona, for example, that is held in an Arizona LLC (that maybe even loses money every year) considered doing business in California and subject to a minimum $800 California tax?
California’s position is that the mere fact that a managing member of the LLC lives in California, is enough to constitute that the LLC is doing business in California. More specifically, they say that if you have more than one member, LLCs are taxed under partnership law unless you elect to be treated as a corporation. Partnership law says that the activities of the partnership flow through and are attributed to the partners, and that the partners are therefore, by statute, doing business. If they reside in California, then they are doing business while in California, thus requiring registration of the LLC in California and payment of the $800 minimum franchise tax (and filing of a tax return). Limited partners also have statutory rights to participate so California is not letting them off the hook either.
Single member LLCs (a husband and wife are treated as one member in California) are disregarded entities for tax purposes and are not taxed as partnerships or corporations, but are reported directly on your personal tax returns. For single member LLCs and corporations California will look to facts and circumstances. If you could somehow build a case that your LLC had absolutely no connections with California (such as tax preparation, bank accounts, etc.) and that every time any decision needed to be made with regard to managing your property or LLC, you were out of the state of California (and not on your living room telephone), you might have a shot at not “doing business” in California! It is an extremely difficult threshold, and taxpayers have been losing case after case in court over this issue.
California has also put into place a steep new penalty for anyone failing to register. In addition to the minimum $800 franchise tax, they are now assessing a $2,000 penalty plus interest for every year you have failed to register. At about, $3,000 a year, that adds up quickly. Generally, California does not go back to assess past delinquencies if you start reporting before they discover you. The internet and increased sharing of information between state taxing authorities is making this much easier to detect. So make haste and get compliant if you are not already.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Do You Buy Online or Via Catalogs? – Use Tax – Merry Christmas to CA!
Filed under: California | Tags: Board of Equalization, BOE, California, Franchise Tax Board, FTB, Sales Tax, Use Tax
Leave a comment Originally Published in the Pacific Grove Hometown Bulletin
December 21, 2011
If you made any purchases over the Internet or via mail-order catalogs for your holiday shopping (or any time during the year) for business or pleasure, California does not want to be left out of the gift-getting! Due to the strain on California’s budget over the past few years they have been looking high and low for additional revenue – including the enforcement of existing laws that have historically been quite lax.
For decades, California, and many other states have had use tax laws. California use tax is basically sales tax imposed on all those purchases you make online or via mail-order catalogs, or while in no sales tax states like Oregon (you know – all those purchases you made so you could avoid paying sales tax!). If you bring the goods into California and use them here (or give them to somebody in California), you owe California use tax equivalent to the sales tax rate where you reside. This applies to individuals as well as businesses. Certain goods like cold meats, cheeses, crackers and other grocery type foods that are not subject to sales tax are not subject to use tax either.
The California Board of Equalization (BOE) has been aggressively marketing its efforts to pursue this tax including sending letters to tax professionals several times a year, hiring auditors, registering businesses, working with the Franchise Tax Board (FTB) to add a form to your 540 income tax return, and now creating safe-harbor use tax tables based on your income. The downside of not complying is that if audited, they can go back for years looking through your bank statements and credit card statements for purchases from the likes of Amazon.com – and who knows what else they might find…
The new safe-harbor use tax tables are available for use with your individual 540 California tax return (business entities including schedule C businesses cannot use these tables). Instead of collecting all your receipts for non-taxed purchases, California will allow you to pay a predetermined amount based on your adjusted gross income (up to $20K – $7, up to $40K – $21, up to $60K – $35, up to $80K – $49, up to $100K – $63, up to $150K – $88, up to $200K – $123, over $200K – multiply by 0.07%).
If you elect to use the tables, you will be presumed to have met your requirement and they will not ask for more, even if the actual tax based on receipts would have been much higher. Individual purchases over $1,000 are treated separately from the use tax tables. This can be a strategic move. Beware, if you owe money to the FTB for any other reason such as past due taxes, the FTB will not pass the use tax paid to the BOE, and you will get a bill from the BOE with a 10 percent late penalty. Your other option is to file a separate Form BOE-401-DS Use Tax Return, but the safe harbor tables are not available for this return.
All businesses (including schedule C businesses) that have gross receipts over $100K, and do not already have a seller’s permit with the BOE, are required to register with the BOE and file a separate use tax return. Even if they made no qualifying purchases they have to register and file a zero return each year. If you fail to register and file, and the BOE discovers this, they will likely require use tax returns for the past eight years. It is probably in your best interest to register and file simply to avoid the possibility of an eight-year look-back!
So as you open gifts this year and ponder how smart you will look in that new sweater, you may also think, “I wonder if the giver has a use tax issue?!”
For more information on use tax, registering, and filing returns you can go to http://www.boe.ca.gov/sutax/sutprograms.htm.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 