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Important Dates

• July 22 — Seminar: New Business Entity 6:30 pm
• August 15 —Extended non-profit returns due
• August 26 — Seminar: Retirement and Investment Planning 6:30 pm
• September 15 — Corporate tax filing deadline, Third Quarter Estimated Tax due
• October 15 — Personal Tax filing deadline

S-Corp Blues

New laws regarding income for S-Corporations will affect many taxpayers. Don't be caught by surprise at the end of the year. Find out more here.

First time homebuyers credit expired!

The Federal First Time Homebuyers credit has expired. In order to qualify for the credit, home buyers were required to be locked in to a binding sales contract no later than April 30, 2010. If you have a binding contract signed by that date, it is vital that closing is completed no later than June 30, 2010.

If you have made a purchase that qualifies for the credit there are two methods available to claim the credit:

1. Once closing is complete and you have your final closing statement, you can amend your 2009 tax return to claim the credit. Amended returns are paper filings and the time between filing and receiving your additional refund could be three months or more.
2. You can wait to claim the credit as part of your 2010 tax return. As a result of rampant fraud that occurred early in the credit program you will not be able to e-file your 2010 return. Instead you will be required to file a paper 2010 return with your closing statement and proof of purchase included. The requirement for paper filing will add significantly to the time required to receive your 2010 refund.

Call Karen or Gary if you have any questions, especially if you want to use the 2009 Amended Return option to receive the credit.

California 2010 Tax Credit for New Home / First-Time Buyer

With the Federal Home Buyers Credit expiring, California has announced two new state programs. One is a credit available for purchases of newly constructed homes (never occupied prior to purchase). The second credit is available for first-time buyers, defined as people who have not had a controlling interest in a principal residence during the proceeding three years. These credits can be valuable to those who were unable to qualify for the federal credit However, there are significant differences between the federal and state credits that potential purchasers need to be aware of. Some of the major differences include:

1. Both credits are non-refundable. Since the credits are divided evenly across three years, this means that you need to have a California tax liability of at least $3,333 each year in order to receive the full credit. In other words, if your 2010 California liability is $1,500, your credit for 2010 is limited to that amount. The remainder of the $3,300 credit for 2010 (in this case $1,800) expires and can not be used in later years. The same rules will apply on your 2011 and 2012 return. Karen or Gary can give you a quick idea of your 2010 tax liability based on your 2009 return, which will give you a rough idea of the benefit you would actually receive from the credit.
2. Both credits have a maximum of $100 million available. Once the total available has been awarded, the credits will be terminated. The credits will be allocated on a first-come, first-served basis, so acting quickly to get a certificate of allocation is vital. Many reputable sources expect the total credits available to be claimed by the end of May— at the latest.
3. Taxpayers who qualify for the New Home Credit can request a reservation (by fax only) prior to close of escrow. Doing so will give you a better chance of getting in before the credit expires.
4. Taxpayers qualifying for the First Time Buyers credit cannot request a reservation.

Full details on the credits are available on the Franchise Tax Board website.

Debt Forgiveness

With the housing slump continuing, thousands of homeowners have had to reorganize their mortgages or enter short sales. Others have lost their homes through foreclosure. Despite efforts by government and lenders, even more homeowners will face these prospects in the coming year.

Depending on many complicated factors, all of these scenarios can result in debt being forgiven, which can create taxable Cancellation of Debt Income. With passage of the Conformity Act of 2010, California now conforms, with exceptions and modification, to the Federal rules regarding Foreclosure, Short-Sale and Cancellation of Debt Income. This is a welcome change which can simplify the process, allowing for the same tax treatment on both Federal and State returns. However, the rules regarding debt forgiveness remain extremely complex and the potential tax implications can place a huge burden on taxpayers who are already suffering.

If you ore someone you know is faced with this situation we urge you to call Karen or Gary to schedule a consultation before you make a decision. We will determine the exact nature of your individual situation, explain the options available to you, and work with you to determine the best method to limit or eliminate any negative tax consequences. We will also provide you with record-keeping tools to use as you work through the process, ensuring that when you are finally finished you have all the necessary information accurately assembled.

Find out more here.

Mileage Matters — Increased IRS Scrutiny

The auto mileage expense deduction is right at the top of the of IRS audit items list. Whether you are self-employed, a landlord or an employee using your vehicle for your employers convenience it is imperative that you are in compliance with the IRS record keeping requirements.

Bottom line: you MUST have a mileage log! If you are ever required to substantiate your mileage deduction and are unable to produce a mileage log that meets the reporting standard your deduction will be disallowed, resulting in additional tax due. You will also owe interest on the added tax and may be hit with an accuracy penalty as well.

To assist you in meeting the standard we have a mileage log template available.

What is California Use Tax — and do I have to pay?

You may have heard about California’s efforts to increase compliance with (and income from) use tax and found yourself asking, So now they’re going to tax me for USING stuff?. The next obvious questions are: Is this new, do I owe it, how much and to whom?

As happens way too often with both the Federal and California tax code, much of the confusion surrounding taxes comes from bad word choices when naming or describing a tax. The Use Tax is not a tax on USING items. It’s not new, having been in effect since 2003. It is simply the way California collects sales tax on items purchased either from out-of-state or from vendors who do not properly collect (and pay) California sales tax.

A quote from the California State Board of Equalization (SBOE) puts it pretty clearly:

You generally owe California use tax when you use, consume, give away or store tangible personal property (i.e., products you can see, weigh, feel or touch, such as clothing, books, computers, DVDs or CDs) in California that you purchased from an out-of-state vendor. If the out-of-state vendor does not collect the California tax on your purchase, you must pay the tax.

Yes, they’re talking about Amazon, E-Bay, etc.

Any use tax owed should be reported on California 540 as part of your annual income tax return filing. There is a form on which you report your total purchases subject to the tax and compute the total amount due.

For more info, call or e-mail us, or visit the SBOE website.

Knowledge is power — Accountability's free seminar program

Our free financial seminars were a great success in 2009, so look for more in 2010. And of course, your feedback is always welcome.

Tax laws are always changing.

We can keep you up to date.