LMGW Certified Public Accountants

Recent Changes in California Apportionment

During 2012 some very significant developments emerged in California that will impact California corporations that operate in other states and out-of-state corporations that operate in California. These recent decisions impact how taxable income (or losses) are apportioned for California corporate income tax purposes.

Income apportionment determines the ratio of income that is subject to tax in a particular state. There are several different methods used to determine state apportionment and acceptable methods for determining apportionment vary by the applicable state law. The acceptable methods have changed numerous times over the past couple of years in California due to a law change beginning with the 2011 tax year, the recent court decision in the Gillette Case and the passage of Proposition 39 in November 2012.  Click here for a reference chart showing the different apportionment formulas referred to in this article. Read more

Make 2012 Charitable Distributions from your IRA Now

If you are age 70½ or older and have an IRA there are two tax savings clauses in the 2012 Taxpayer Relief Act that you may want to take advantage of. First, eligible taxpayers can make a tax-free transfer from their IRA to an eligible charity by January 31, 2013 and treat the transfer as made on December 31, 2012. This strategy can help lower your Adjusted Gross Income (AGI) in future years by lowering the value of your IRA, which in turn lowers the amount of your required minimum distribution. Note the charitable distribution is limited to $100,000 per taxpayer per year. Essentially you have the ability to reduce your IRA value by $200,000 by making a $100,000 transfer by January 31, 2013 and allocating it to 2012 and then making another $100,000 transfer in February 2013 for the 2013 year. With all the tax increases and surtaxes taking effect in 2013, this can be a valuable tool to reduce your future tax liability.

A second option is for taxpayers to treat an IRA distribution received in December 2012 as a qualified charitable distribution as long as the taxpayer transfers the money to an eligible charity by January 31, 2013. This gives taxpayers a way to retroactively reduce their 2012 taxable income.

Remember, charitable IRA transfers are not included in taxable income. Additionally, a qualified charitable IRA transfer is beneficial because the charitable deduction is directly offset “above-the-line” against the IRA withdrawal. Without the charitable transfer the IRA distribution will increase your AGI, which impacts numerous other tax calculations and deduction phaseouts including how much of your Social Security is taxable, allowable deductions for charitable and medical expenses, as well as a myriad of tax credits. You must act quickly to take advantage of either, or both, of the provisions discussed above as transfers must be made by January 31, 2013 in order to qualify.

Independent Contractor vs. Employee Status

Hiring an independent contractor is often the simplest way for a business to get help in the door. However, the IRS, state labor and employment boards, unemployment insurance and worker’s compensation authorities all investigate whether or not employers are properly classifying workers. If any of these authorities determine that a worker that is being treated as an independent contractor should actually be an employee the remedies to correct the misclassification can be costly.

There are many benefits of classifying a worker as an independent contractor such as not providing the contractor with employee benefits, avoiding employer payroll tax liability, the ability to budget a specific amount for a project without paying overtime or holiday pay, savings in clerical costs and recordkeeping, less liability, and savings on workers compensation and unemployment insurance. While a hired independent contractor and employer may be in agreement in regards to their status, the IRS or other authority could disagree if they deem the relationship falls under the definition of employer-employee.

If the IRS or other authority determines that a worker classified as an independent contractor is actually an employee it can prove costly—the employer will be liable for past employer payroll taxes as well as penalties and interest and the burden of filing or amending all necessary payroll tax returns. If the issue is serious enough court time and costs or even criminal sanctions could result. Also, any retirement plans or other benefit plans that require certain compliance could be invalidated. Read more

Private Company Council Established

In 2009 a study was conducted to address how the accounting standards can meet the financial statement reporting needs of US private companies. The study found that accounting principles generally accepted in the United States of America (GAAP) often address issues that are not relevant to smaller, less complex companies, including those that are not public. Some of the most costly and complex standards to implement for a small business were the least relevant and least useful for the reader of the financial statements. 

Many small private companies are normally only required to file income tax returns but lenders and bonding companies are requiring GAAP financials which the companies do not have the accounting resources to prepare. The cost of preparing the GAAP financials for these small private companies often exceeds the benefits.   

The newly established Private Company Council will work directly with the Financial Accounting Standards Board (FASB) to give recommendations of various modifications to GAAP that would be considered beneficial for the small private company. During the first few years the council will meet several times during the year and will be open to the public. Stay tuned for updates on changes to the financial statement reporting standards for private companies as the Private Company Council implements its recommendations.

Financial Regulatory Reform Bill

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by President Obama on July 21, 2010. Among the highlights of bill are:

•The establishment of a Financial Stability Oversight Council. This council will identify and monitor companies that engage in activities that could threaten the stability of the financial system. The council will also have the ability, through the Federal Reserve, to break up large firms.

•The establishment of the Consumer Financial Protection Bureau, which will consolidate most of the federal regulation of financial services offered to consumers. Most credit providers, including mortgage lenders, payday loan providers and bank and credits unions with assets over $10 billion will be subject to the new regulations.

•Executive compensation will require a nonbinding shareholder vote. Compensation based on financial statements that are later restated may have to be returned.

•Companies that file with the SEC will be required to disclose in a proxy statement the reasons why they have separated or combined the positions of chairman and CEO.

•The Office of Thrift Supervision will be eliminated and savings-and-loan institutions will now be regulated by the Office of the Comptroller of the Currency, which currently regulates federally chartered banks.

To read the full bill click here.