Newsletters
The IRS has reminded taxpayers still waiting to file their returns to file as soon as possible. Taxpayers can use special tools available on IRS.gov that can help them file. The online tools are avail...
The IRS has announced that more forms can now be amended electronically. This includes filing corrections to the Form 1040-NR, U.S. Nonresident Alien Income Tax Return, Forms 1040-SS, U.S. Self-Employ...
The IRS has issued directions for its taxpayer facing employees to hold video meetings with taxpayers and their representatives. Going forward, the IRS will continue to offer video meetings via secure...
The IRS, state tax agencies and the tax industry have warned tax professionals of new and ongoing threats involving their systems and taxpayer data. This effort began with the Security Summit's annual...
The IRS, and the Security Summit Partners have encouraged tax professionals to inform their clients about the IRS Identity Protection (IP) PIN Opt-In Program to help protect taxpayers against tax rela...
The IRS has released its five-year strategic plan that outlined its goals to improve taxpayer service and tax administration. The plan would serve as a roadmap to meet the changing needs of the taxp...
For personal income tax purposes, the California Office of Tax Appeals (OTA) determined that the owners (taxpayers) of a limited liability company (LLC) were properly subject to additional tax because...
To our business clients:
New Item: Form 1099-NEC, was created last year to be used for reporting nonemployee compensation (NEC). This form must be filed by January 31, 2022 with the IRS and also provided to the recipient by this date. For 2021, California is participating in the combined Federal/State filing program for Form 1099-NEC which means that a copy of the form won’t need to be sent separately to the FTB.
The form 1099-MISC is still required for other types of payments and information. See below for the specific uses of this form.
The 1099-NEC form is unusual in that it needs to be both to the IRS and the recipient by January 31st. Most other 1099s are due to the recipient by January 31st and to the IRS by February 28th. The penalty for each instance of failing to file a correct 1099 form by the due date with the IRS is as follows:
- $50 per form if correctly filed within 30 days of the due date;
- $110 per form if correctly filed after 30 days of the due date but by August 1st;
- $280 per form if filed after August 1st, or not filed (assuming there was no intentional disregard);
- At least $570 per form with no maximum penalty if due to intentional disregard of the requirements.
- 60 per form with no maximum penalty if due to intentional disregard of the requirements.
A similar additional penalty framework applies if the payee isn’t provided their copy by these deadlines.
California may impose its own penalties when conducting an audit, the most severe of which is for failure to file 1099 forms to independent contractors. In those cases, California can effectively negate the deduction for those expenses by imposition of its penalties.
Federal business income tax returns contain two questions regarding the filing of 1099 forms. We'll be checking with you about your fulfilment of the 1099 form filing requirements in order to answer those questions correctly.
WHAT IS A 1099 FORM?
A 1099 form is an informational return on which businesses report various sorts of payments they've made to partnerships, sole proprietorships, individuals and certain types of corporations during the calendar year. Some of the most common types of 1099 forms are:
1099-DIV | Used to report dividend payments of $10 or more and liquidating distributions of $600 or more from a corporation. |
1099-INT | Used to report interest payments of $10 or more, or when interest of $600 or more is paid by a trade or business. |
1099-MISC* | This form has been redesigned and is used to report royalty payments of $10 or more; rent, prizes and awards, and some other forms of payments of $600 or more. Direct sales of $5,000 or more of consumer goods for resale anywhere other than a permanent retail establishment may be reported on the 1099-MISC or 1099-NEC. (Employee travel or auto allowances must be reported on their W-2s, not on the 1099-MISC form.) Medical and health care payments and gross proceeds of legal settlements paid to attorneys of $600 or more are reportable on form 1099-MISC, even if paid to a corporation. |
1099-NEC | This form is used to report nonemployee compensation of at least $600 paid for services and payments made to an attorney for fees. Legal fees are reportable, even if paid to a corporation. |
1099-R | Used to report distributions of $10 or more from retirement plans, profit-sharing plans, IRAs, charitable gift annuities, and insurance contracts, including certain direct rollovers and death benefit payments. |
1099-OID | Used to report the original discount of $10 or more on the issuance of bond or notes. |
1099-B | Used by brokers to report the proceeds of stocks, bonds, commodities, etc. sold or bartered for others. |
1099-S | Used by settlement agents to report the proceeds of real estate sales or exchanges. (If no escrow is used, the person responsible for filing must be determined via complex instructions. Call us for this information if needed.) |
1098 | Used by businesses who received $600 or more from an individual on a mortgage to report the amount of interest received during the year. |
1098-C | Used by charitable organizations to report donations of motor vehicles, boats and airplanes within thirty days of the sale of the vehicle or its contribution. |
WHO SHOULD WE SEND A 1099 FORM TO?
They should be sent to partnerships, sole proprietorships, limited liability companies (LLC), limited liability partnerships (LLP), and individuals you made payments to in the course of your business. A 1099 should also be sent to any attorney, physician, or a supplier of medical services even if they are a corporation. Any payment on which you take backup withholding for Federal income taxes must be reported on the appropriate Form 1099, regardless of the amount of the payment. This means:
- Only send 1099s for payments you made related to the operation of your business.
- You don't need to send 1099s for materials or products you purchased.
- You don't need to send 1099s to corporations (unless it is for medical or legal services). However, the burden to find out if it's a corporation is on you. If the name has "Incorporated", "Inc.", "Corporation", or "Corp." in it, you can assume it's a corporation. Otherwise, you need to ask.
- You don't need to send 1099s to exempt organizations, retirement trusts, or IRA accounts.
FILING RETURNS WITH THE IRS
If you must file any Form 1098 or 1099 with the IRS and you are filing paper forms, you must send a separate Form 1096 with each different type of form, as the transmittal document.
For businesses located in California, the government copies need to be mailed to:
Department of the Treasury
IRS Submission Processing Center
1973 North Rulon White Blvd.
Ogden, UT 84201
Businesses who file 250 or more informational returns are required to file electronically through the IRS' FIRE System (Filing Information Returns Electronically). We can help you with this.
CALIFORNIA REPORTING REQUIREMENTS
If you file IRS Forms 1099 series, Forms 5498, 1098 and W-2G with the IRS on paper, you are not required to file a paper copy of the same form with the Franchise Tax Board. The IRS will forward the information to them.
When the Federal and State payment amounts differ, you may file information returns directly with the Franchise Tax Board.
WHAT INFORMATION DO YOU NEED FOR THE 1099 FORM?
- Name and address of whom you paid.
- The amount you paid them during 2021.
- The type of payment made.
- Their identification number. For an individual this would be their social security number. For a proprietorship, LLC, partnership, or corporation this would be their employer identification number which is a nine-digit number, usually beginning with "94-" or "77-".
IMPORTANT: It is extremely important that the name recorded on the 1099 agrees with the name listed on the Social Security Administration's records for the specified identification number. Therefore, in the case where an individual is self-employed, care must be taken to make sure that the proper name is listed on the 1099. Any "dba" name should be listed on the 1099 underneath the individual's legal name which agrees with the Social Security Administration's records.
WHAT IF SOMEONE WON'T GIVE US THEIR IDENTIFICATION NUMBER?
If someone won't give you their identification number, you're not sure they're giving you the correct number, or you're not sure they're incorporated as they say, then you should send them a W-9 form (available at the IRS website) by certified mail, return receipt requested. The receipt will document your request for their number and help you avoid the penalty for filing a 1099 form without an identification number. If the W-9 form is completed and returned to you, it will take you off the hook for both the accuracy of the identification number used and as to whether they're really a corporation.
WHAT CAN SEEBA & ASSOCIATES DO TO HELP?
Please give us a call if you would like us to help in the preparation of these 1099 forms. We can:
- Answer your questions regarding the issues discussed above,
- Prepare 1099 forms for you from information you've gathered, consisting of name, address, identification number, and amount paid in 2021, or
- Figure the amount you've paid for 2021 from your books and records. Along with the address and identification number supplied by you, we'll prepare the 1099 forms.
- e-File your 1099 forms via the IRS system.
* * * * *
IMPORTANT
Please let us know as soon as possible if we can assist you since the 1099s are due by January 31st.
You should be getting an identification number or completed W-9 form from anyone you pay for services, even if less than $600, before you pay them. Otherwise, you are obligated to withhold 24% of their payment and remit it to the IRS. Please call us if you run into problems where the 24% "backup withholding" may come into effect.
You should also keep in mind that you will need to maintain records of amounts paid to independent contractors as payments are made or contracts are signed in order to comply with the 2022 Employment Development Department reporting requirement for independent contractors.
If you have any questions regarding 1099 filings, feel free to contact us.
To our business clients:
WITHHOLDING FROM EMPLOYEES' PAYCHECKS:
1a. Social Security - The employee portion of this tax remains at 6.2% with a wage limit of $147,000. The employer’s portion of Social Security for 2022 also remains at 6.2%, on wages up to $147,000.
1b. Medicare - The employee and employer each pay 1.45% and there is no cap on the amount of payroll which will be subject to this total tax of 2.9%. Because of the unlimited ceiling on Medicare, there is no maximum tax deduction.
Generally, payroll deposits will include 15.3% of wages (6.2% times 2, plus 1.45% times 2) on wages up to $147,000, and 2.9% of all wages thereafter. However, there is an additional Medicare withholding of 0.9% on employees earning over $200,000 regardless of marital status. So the employee’s normal Medicare tax rate of 1.45%, will rise to 2.35% on their earnings over $200,000, but the employer still pays only the 1.45% rate.
2. The rate for self-employment persons will be 15.3% on wages up to $147,000. The Medicare tax of 2.9% continues on amounts over $147,000. Self-employed people earning over $200,000 and those earning over a combined $250,000 on a joint return will also face the additional .9% Medicare tax. Because the Medicare tax applies to all earnings, there is no maximum self-employment tax. (There is a deduction allowed for self-employed persons for both self-employment tax and income tax computations).
3. Federal and State Income Tax - The amount of withholding will change for both Federal and State effective January 1, 2022. Please see the updated federal Employer’s Tax Guide Publication 15 (Circular E) on the Internal Revenue Service website at: https://www.irs.gov/pub/irs-pdf/p15.pdf and the Employment Development Department’s Publication DE 44 at: https://www.edd.ca.gov/pdf_pub_ctr/de44/pdf.
4. State Disability Insurance - The rate will change to 1.1 %, and the wage base will increase to $145,600. Therefore, the maximum deduction for SDI in 2022 will be $1,601.60.
EMPLOYER TAXES PAID QUARTERLY:
1. Federal Unemployment Tax - The 2022 federal unemployment tax rate is .6% on the first $7,000.
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2. State Unemployment Insurance and Employment Training Tax - The wage limit will remain at $7,000. Rates are set individually for employers. You will receive a notice of your 2022 rate in the mail or it can be accessed in your EDD e-Services for Business account. Please send a copy of any notice you receive to your payroll report preparer.
2022 FEDERAL PAYROLL DEPOSIT REQUIREMENTS:
Federal Payroll Tax Deposits must follow the monthly or semi-weekly deposit method assigned to each employer by the IRS. The IRS will send a notice if your status changed from 2021; however, the employer is ultimately responsible for determining which deposit schedule actually applies. If you didn’t receive an IRS notice, you can make your own determination as shown below:
1. An employer’s status as a monthly or semi-weekly depositor should be known before the beginning of each calendar year and is determined annually. This determination is based on the amount of employment taxes the employer reported on the four quarterly reports for the 12-month period from July 1, 2020 through June 30, 2021.
2. Employers who accumulated less than $2,500 of employment taxes during a quarter are only required to make a deposit at the end of the quarter. They can pay their payroll taxes with the quarterly form.
3. Employers who report $50,000 or less of employment taxes (taxes withheld from the employee plus the employer portion) during the 12-month period from July 1, 2020 through June 30, 2021, and all new employers, will be monthly depositors. The deposits will be due the 15th of the following month. NOTE: In many cases these deposits will have to be made electronically (see below).
4. Employers who reported more than $50,000 of employment taxes during the 12-month period from July 1, 2020 through June 30, 2021, will be semi-weekly depositors. The deposits will be required on or before either Wednesday or Friday, depending on the timing of the payroll. Semi-weekly depositors will still have at least three banking days after a payday to make the deposit. NOTE: In many cases these deposits will have to be made electronically (see below).
Under the semi-weekly rule, the payroll taxes withheld plus the employer’s portion of the FICA/Medicare on payrolls which were paid on Wednesday, Thursday or Friday must be deposited by the following Wednesday. Payroll taxes, accumulated for a payroll period, which were paid on Saturday through Tuesday must be deposited by the following Friday. Remember, your deposit will be due either on a Wednesday or Friday.
5. Employers who accumulate $100,000 of employment taxes during a monthly or semi-weekly period are required to deposit those taxes by the next banking day. Once you make a next-banking-day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.
FEDERAL ELECTRONIC DEPOSIT REQUIREMENTS FOR 2022:
Employers may use the IRS’ EFTPS for making tax payments. There is an exception for employers with a deposit liability of less than $2,500 for a return period. These employers can remit employment taxes with their quarterly or annual return.
If you are required to use EFTPS for your Federal tax deposits and fail to do so, you may be subject to a 10% penalty. For deposits made by EFTPS to be considered on time, you must initiate the transaction at least one business day before the date the deposit is due. If you are new to EFTPS you will need to allow seven (7) days to get your pin number and complete your account set-up.
You may voluntarily participate in the Electronic Federal Tax Payment System even if you are not required to do so.
To get more information or to enroll in EFTPS, call 1-800-555-4477, or visit the EFTPS web site at www.eftps.gov.
EMPLOYER’S QUARTERLY FEDERAL TAX RETURN, FORM 941
Each quarter’s wages subject to income tax, social security and/or Medicare taxes must be reported on Form 941. Any employment taxes totaling less than $2,500 for the period and not previously deposited for the quarter can be paid with the report.
Due dates for 2022 employment tax deposits are May 2, August 1, and October 31, 2022, and January 31, 2023, for the previous quarter. If all taxes have been deposited when due, and no tax is being paid with the return, an additional ten days is allowed to file the return. Late returns are subject to penalties on any unpaid tax due with the return.
2022 STATE PAYROLL TAX DEPOSIT REQUIREMENTS:
These deposits are required to be paid electronically. The depositing requirements are described below:
1. State deposit due dates are generally the same as federal deposit due dates.2. Employers who are required to make federal monthly deposits and have accumulated more than $350 of undeposited state income tax withholding, are required to deposit all State Income Tax and State Disability Insurance withholding using the federal monthly deposit schedule.
3. Employers who deposit semi-weekly for federal purposes and have accumulated more than $500 of undeposited state income tax withholding are required to deposit all State Income Tax and State Disability Insurance withholding to the Employment Development Department using the federal semi-weekly deposit schedule.
4. Employers, who accumulate $100,000 of federal employment taxes, and more than $500 of state withholding taxes, must deposit all State Income Tax and State Disability Insurance withholding by the next banking day. Once you make a next banking day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.
5. If you accumulate more than $350 of state withholding taxes in a month or in the cumulative of two or more months, but are not required to make a federal monthly deposit, you are still required to deposit all State Income Tax and State Disability Insurance withheld by the 15th of the following month. Any withholding which is not required to be deposited based on the above will be due on May 2, August 1, and October 31, 2022 or January 31, 2023 for the preceding quarter.
6. State Unemployment Insurance (SUI) and Employment Training Tax (ETT) must be deposited at least quarterly.
A penalty of 15% plus interest will be charged on late payroll tax payments.
CALIFORNIA ELECTRONIC DEPOSIT REQUIREMENTS:
e-Services for Business can be used to electronically submit all tax payments, wage reports and employment tax returns. Register at https:/www.edd.ca.gov or contact the Taxpayer Assistance Center at 1-888-745-3886.
STATE WAGE AND WITHHOLDING REPORTS:
Employers file two quarterly reports, the DE 9 and DE 9C. These reports must be filed by May 2, August 1, and October 31, 2022, and January 31, 2023 for the previous quarter, even if you don’t have payroll during a quarter. A wage item penalty of $20.00 per employee will be charged for late or unreported employee wages. On these reports, be sure to include the full first name, not just the first initial.
The DE 9 and DE 9C forms must be filed on-line together using e-Services for Business.
STATE REPORTING REQUIREMENTS FOR NEW OR RE-HIRED EMPLOYEES:
All employers are required to report the full name, social security number, home address and start-of-work date of each employee within twenty days of the start-of-work date.
Form DE 34, Report of New Employees, is used to report new employees. The information may be faxed to the EDD at 1-916-319-4400, filed online at https://eddservices.edd.ca.gov, filed electronically, or mailed to:
Employment Development Department
Document Management Group, MIC 96
P.O. Box 997016
West Sacramento, CA 95799-7016
The reporting of new employees is required for all newly hired employees, employees rehired or returning to work from a furlough, separation, leave of absence without pay, or termination. If a returning employee was not formally terminated or removed from payroll records and is returning after less than sixty consecutive days, you don’t need to report the employee as a rehire.
STATE REPORTING REQUIREMENTS FOR INDEPENDENT CONTRACTORS:
Businesses are required to report specific independent contractor information to the EDD if the following statements all apply:
- You will be required to file a 2022 Form 1099-NEC for the services performed by the independent contractor.
- You pay the independent contractor $600 or more OR enter into a contract for $600 or more.
- The independent contractor is an individual or sole proprietorship.
If all the above statements apply, you must report the independent contractor to the EDD within 20 days of paying/contracting for $600 or more in services. You are not required to report independent contractors that are corporations, general partnerships, limited liability partnerships, and limited liability companies. Form DE 542, Report of Independent Contractor(s), is used. The information may be faxed to the EDD at 1-916-319-4410, filed online at https://eddservices.edd.ca.gov, or mailed to:
Employment Development Department
Document Management Group, MIC 96
P.O. Box 997350
West Sacramento, CA 95899-7350
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While we’ll try to inform you of any additional changes made during 2022, please be vigilant yourself and also seek out information on changes from your payroll processors.
If you need assistance in preparing your payroll checks or have other questions relating to these taxes, please call.
July 1 Change to 2022 Standard Mileage Rates
Due to the gas price increase caused by Russia’s invasion of Ukraine, the IRS is increasing the standard rate for business mileage effective July 1st to 62.5 cents per mile. The rate for January-June has been 58.5 cents per mile.
Effective July 1st 2022, standard mileage rate for the use of your car for medical expenses or deductible moving expenses will increase to 22 cents per mile. The rate for January-June has been 18 cents per mile.
The standard rate for the use of a car when providing services to a charitable organization will be remain at 14 cents per mile.
BONUSES- Just a reminder - holiday bonuses are subject to all payroll taxes.
This is true whether the bonus is paid in cash, by check or by a gift card. For income tax withholding, the rates are 25% federal and 10.23% state. If you have a net figure in mind, the gross amount can be calculated as follows:
- If the employee has not passed the wage limits for SDI ($128,298) or FICA ($142,800), divide the desired net by .5592 to arrive at the gross.
- If the employee has exceeded the SDI limit only, divide the desired net by .5692 to arrive at the gross.
- If the employee has exceeded both the SDI and FICA limits, divide the desired net by .6312 to arrive at the gross.
Example: You wish to pay Employee A a net bonus of $100.00 -
If the employee has earned $4,000.00 for 2021, they are subject to all taxes. Dividing $100.00 by .5592 (See #1 above) yields a gross of $178.83. Deductions would be: Federal income tax $44.71 (25%); Social Security $11.09 (6.2%); Medicare $2.59 (1.45%); State income tax $18.29 (10.23%); SDI $2.15 (1.2%).
The percentages and example shown above pertain to checks dated prior to January 1, 2022. For checks dated after December 31, 2021, you must use the 2022 withholding rates and limits.
AWARDS - As part of a meaningful presentation, employers can give employees awards for length of service or safety achievements of up to $400 per year. In order to be deductible to the employer and non-taxable to the employee, the awards must be made with noncash items. Awards of cash or items readily convertible into cash, such as gift certificates, are subject to payroll taxes, no matter the amount. Length of Service Awards are deductible to the employer if employees have more than five years of service and have not received such an award in the last four years. Safety Achievement Awards aren't deductible if given to a manager, administrator, clerical employee, or professional, nor if given to more than 10% of the other employees. We recommend that any prizes awarded be documented by corporations in their corporate minutes, although the law doesn't require this.
GIFTS - Business gifts are still limited to $25 to any individual per year. They can be made on a discriminatory basis and can be in cash. These gifts are deductible to the business and non-taxable to the recipient.
Items clearly of an advertising nature that cost $4 or less, such as promotional items, aren’t considered gifts and therefore, aren’t included in calculating the $25 limit for an individual.
In addition, gifts that are considered “de minimis” fringe benefits aren’t restricted by the $25 per recipient limit, and are considered to be made tax-free to the employee. For a gift to be considered as a de minimis fringe benefit the value must be nominal, the accounting for such a gift would be administrative nitpicking, it’s only an occasional gift, and it’s given for the purpose of promoting the health, goodwill, contentment or efficiency of the employees. Some examples of such gifts are holiday turkeys, a Christmas luncheon or party.
There is no limit on gifts made to corporations or partnerships.
So that the reporting for this fringe benefit is not so burdensome, the IRS allows employers to include the personal use of business-owned cars during November and December in the following year's W-2s. This means that W-2s for 2021 need to include the value of the personal use of the vehicles from November 1, 2020 to October 31, 2021 and that this value can be calculated now. Those clients using computerized payroll systems which prepare W-2s will have to inform the system of this fringe benefit value which needs to be included in payroll before the end of December.
The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:
- For non-office/shareholders: If commuting is the only personal use of a business-owned car allowed by an employer, then the employer would need to include $3 a day in the employee's wages to recognize the value of the commute, plus 5.5 cents/mile for the fuel provided by the employer.
For officers and shareholders: The personal use of a business-owned vehicle must be included in their W-2. The formula for computing the value of their personal use is as follows:
- Annual lease value based on the IRS table (see attached table) prorated for the number of months the vehicle was used from November 2020-October 2021.
- Times this value by the personal use percentage determined from mileage records maintained throughout the year which list business and personal miles driven.
- Then add the lesser of the actual cost, or 5.5 cents/mile, for gasoline provided by employer that was used for personal travel
- Next subtract any reimbursement that the employer receives from employee.
- The result is the value of the personal use of the business-owned vehicle to be included in employee's W-2 compensation.
or
(A x B) + (C - D) = E- It is possible to avoid income tax withholding on the value of the personal use of an employer-provided vehicle. However, early action was required in order to avoid withholding income tax for 2021. The employer must have notified the employee in writing by January 31, 2021 or within 30 days after receiving the vehicle during the year, in order to avoid income tax withholding on this fringe benefit. If the employee is not notified of the withholding election by the specified dates, the employer must withhold income taxes on the value included in the W-2. For 2020, the employee must be notified in writing by January 31, 2022 or within 30 days of receiving the vehicle, in order to avoid 2022 withholding on this fringe benefit.
Even though an employer can avoid withholding income tax on the value of the personal use of a vehicle (as described in item 3 above), the Social Security tax (FICA), the Medicare tax, and State Disability Insurance (SDI) must be withheld on the value included in the W-2. However, there are some choices available on the timing of these withholdings. The employer is given the option of calculating and withholding these taxes on a pay period, quarterly, semi-annual, or annual basis. As stated previously, the annual period would run from November through October, which means that the employer could wait until the end of October to figure the taxes to be withheld. If the employee will reach the maximum Social Security wages for the year by that time, without considering the fringe benefit, only Medicare tax withholding would be necessary.
Please feel free to contact us if you need help in calculating the value of the personal usage of business-owned cars, but remember it must be done soon and included on the 2021 W-2 forms.
Click here to view the Business Car Usage
With certain key exceptions, employers must pay nonunion, non-exempt employees (who are not working an alternative workweek schedule) at least time and one-half pay for: *Hours worked in excess of eight hours in one day, *Hours worked in excess of 40 hours in one workweek, and *The first eight hours worked on the seventh day of work in a given workweek.
In addition, employers must pay employees at least double time for any hours worked in excess of 12 hours in one day and hours worked in excess of eight hours on any seventh day of a workweek.
Under the new law compensatory time off in lieu of payment for hours worked by non-exempt employees in excess of the normal workday and workweek (as described above) is no longer permissible
Exceptions
Employees, who on July 1, 1999, were voluntarily working an alternate workweek schedule (adopted without an employee election), may continue to work that schedule, of not more than 10 hours work a day, and continue to be exempt from the overtime rules if the employer approves a written request by the employee to continue to work that schedule. In addition, employees may elect, by two-thirds vote, to work an alternative workweek of up to 10-hour work days within a 40-hour workweek without being subject to the overtime rules.
Personal Time Off
Employees may make up lost time due to a personal obligation by giving a signed, written request to an employer to make up the work. Please note however that, if an employer approves an employee's written request to make up work time that is lost as a result of a personal obligation, the hours of that makeup work time, if performed in the same workweek in which the time was lost, should not be counted toward computing the total number of hours worked in a day for purposes of the overtime pay requirements. The only exception would be in the case of an employee who works more than 11 hours in one day or 40 hours in one workweek.
All businesses are required to report independent contractors, to whom they will be issuing a 1099-MISC form, to the California Employment Development Department. The information provided will be forwarded to state and local child support agencies to help in their efforts to locate parents who are delinquent in their child support obligations.
The information must be reported to the EDD, using form DE 542 ("Report of Independent Contractors"), within twenty days of either entering a contract for $600 or more, or the date during the calendar year when total payments to the independent contractor reach $600. Form DE 542 requests the independent contractors' full name, social security number, address and the contract dates and amounts. You may obtain forms by calling the Employment Development Department at (916) 657-0529, accessing the EDD web site at www.edd.ca.gov, or contacting our office.
Only individuals working as independent contractors are to be reported. Thus, you don't need to report corporations or partnerships which you pay for services provided to your business. However, you must report all independent contractors you hire for $600 or more, regardless of whether the independent contractor lives or works in California or another state. You only need to report an independent contractor one time per each calendar year that you contract or pay the contractor $600 or more.
The completed DE 542 forms can be either mailed or faxed to the Employment Development Department. The mailing address is:Employment Development Department PO Box 997350 MIC 96 Sacramento, CA 95899-7350 And the fax number is: (916) 319-4410
The EDD may assess a $24 penalty for each failure to comply with the reporting requirements within the required time frame. Also, a penalty of $490 may be assessed for the failure to report the required information due to an agreement between you and the independent contractor to disregard the filing requirements.
California's state-run college saving program, Golden State Scholarshare Trust allows parents and others to put aside tax-deferred money for college.
Plan Features
Money that participants (parents, grandparents, businesses, etc.) contribute to the Scholarshare Trust will grow while in the participant's account and be tax free for federal and California purposes upon disbursement to the beneficiary's school of choice. The funds disbursed can cover room and board, as well as tuition fees, books, supplies and equipment required for enrollment or attendance at a "qualified institution" (defined below). The participant retains ownership of his/her deposits in the trust until disbursement, at which time ownership is transferred to the beneficiary (student). Interest earnings disbursed from the trust are not included in the beneficiary's gross income (while attending college).
Qualified Institutions
Neither the beneficiary nor the participant will have to choose a college when opening a Scholarshare account. However, the type of college the beneficiary plans to attend will affect the maximum contribution allowed, i.e., community college, state university, private institution, etc. The student may use the funds to attend any qualified institution. A qualified institution is one that offers credit toward:
A bachelor's degree; An associate's degree; A graduate level or professional degree; and Another recognized post-secondary credential. Certain proprietary and post-secondary vocational schools are also eligible institutions.
At the time the beneficiary enrolls in college, the Scholarshare Program will transfer payments from the participant's Scholarshare account directly to the college to pay the beneficiary's qualified expenses.
Transferability
If the beneficiary dies or does not attend college, the contributor has the option of canceling the account or changing the beneficiary. Cancellation results in a refund equal to the then-current market value less a penalty of no less than 10 percent of the earnings. The penalty is waived in the event of the beneficiary's death.
Without cause and before the beneficiary's admission to college, the contributor may change the beneficiary designation to relatives of the original beneficiary or relatives of the beneficiary's spouse, including the contributor if the contributor is a relative of the original beneficiary or a relative of the original beneficiary's spouse.
Income Tax Issues
There are no income tax deductions to the contributor for placing funds into a Scholarshare program. Taxation is avoided on the earnings. Amounts paid for tuition will also be eligible for both the HOPE credit and Lifetime Learning credit, subject to the rules that regularly apply to each of those credits.
Gift Tax Issues
For gift tax purposes, deposits are completed gifts of present interests to the designated beneficiary and therefore qualify for the annual gift tax and generation-skipping transfer tax exclusion of $15,000 per year per donee as indexed. They do not qualify as excludable education expenses under the gift tax rules which allow education expenses to be paid in addition to the $15,000 annual exclusion. If the deposit exceeds the annual exclusion amount, the contributor may elect to take the balance into account ratably over a five-year period on their gift tax return.
The IRS has updated its simplified procedure for estates requesting an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The updated procedure replaces that provided in Rev. Proc. 2017-34. If the portability election is made, a decedent’s unused exclusion amount (the deceased spousal unused exclusion (DSUE) amount) is available to a surviving spouse to apply to transfers made during life or at death.
The IRS has updated its simplified procedure for estates requesting an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The updated procedure replaces that provided in Rev. Proc. 2017-34. If the portability election is made, a decedent’s unused exclusion amount (the deceased spousal unused exclusion (DSUE) amount) is available to a surviving spouse to apply to transfers made during life or at death. The simplified method is to be used instead of the letter ruling process. No user fee is due for submissions filed in accordance with the revenue procedure.
A simplified method to obtain an extension of time was available to decedents dying after December 31, 2010, if the estate was only required to file an estate tax return for the purpose of electing portability. However, that method was only available on or before December 31, 2014. Since December 31, 2014, the IRS has issued numerous letter rulings under Reg. §301.9100-3 granting extensions of time to elect portability in situations in which the estate was not required to file a return under Code Sec. 6018(a). The number of ruling requests that were received after December 31, 2014, and the related burden imposed on the IRS, prompted the continued relief for estates that have no filing requirement under Code Sec. 6018(a). Rev. Proc. 2017-34 provided a simplified method to obtain an extension of time to elect portability that is available to the estates of decedents having no filing obligation under Code Sec. 6018(a) for a period the last day of which is the later of January 2, 2018, or the second anniversary of the decedent’s death. An estate seeking relief after the second anniversary of the decedent’s death could do so by requesting a letter ruling in accordance with Reg. §301.9100-3.
Despite this simplified procedure, there remained a significant number of estates seeking relief through letter ruling requests in which the decedent died within five years of the date of the request. The number of these requests has placed a continuing burden on the IRS. Therefore, the updated procedure extends the period within which the estate of a decedent may make the portability election under that simplified method to on or before the fifth anniversary of the decedent’s date of death.
Section 3 provides that the simplified procedure is only available if certain criteria are met. The taxpayer must be the executor of the estate of a decedent who: (1) was survived by a spouse; (2) died after December 31, 2010; and (3) was a U.S. citizen or resident at the time of death. In addition, the estate must not be required to file an estate tax return under Code Sec. 6018(a) and did not file an estate tax return within the time prescribed by Reg. §20.2010-2(a)(1) for filing a return required to elect portability. Finally, all requirements of section 4.01 of the revenue procedure must be met.
The revenue procedure does not apply to estates that filed an estate tax return within the time prescribed by Reg. §20.2010-2(a)(1) to elect portability. For taxpayers that do not qualify for relief because the requirements of section 4.01 are not met, the estate can request an extension of time to file the estate tax return to make the portability election by requesting a letter ruling.
Under Section 4.01, the requirements for relief are: (1) a person permitted to make the election on behalf of a decedent must file a complete and properly-prepared Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (as provided in Reg. §20.2010-2(a)(7)) on or before the fifth annual anniversary of the decedent’s date of death; and (2) "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)" must be written at the top of the Form 706. If the requirements of sections 3.01 and 4.01 are met, the estate will be deemed to meet the requirements for relief under Reg. §301.9100-3 and relief will be granted to extend the time to elect portability. If relief is granted pursuant to the revenue procedure and it is later determined that the estate was required to file a federal estate tax return, based on the value of the gross estate, plus any adjusted taxable gifts, the extension of time granted to make the portability election is deemed null and void.
If a decedent’s estate is granted relief under this revenue procedure so that the estate tax return is considered timely for electing portability, the decedent’s deceased spousal unused exclusion amount that is available to the surviving spouse or the surviving spouse’s estate for application to the transfers made by the surviving spouse on or after the decedent’s date of death. If the increase in the surviving spouse’s applicable exclusion amount attributable to the addition of the decedent’s deceased spousal unused exclusion amount as of the date of the decedent’s death result in an overpayment of gift or estate tax by the surviving spouse or his or her estate, no claim for credit or refund may be made if the limitations period for filing a claim for credit or refund with respect to that transfer has expired. A surviving spouse will be deemed to have filed a protective claim for refund or credit of tax if such a claim is filed within the time prescribed in Code Sec. 6511(a) in anticipation of a Form 706 being filed to elect portability pursuant to the revenue procedure.
The revenue procedure is effective July 8, 2022. Through the fifth anniversary of a decedent’s date of death, the procedure described in section 4.01 of this revenue procedure is the exclusive procedure for obtaining an extension of time to make portability election if the decedent and the executor meet the requirements of section 3.01 of this revenue procedure. If a letter ruling request is pending on July 8, 2022, and the estate is within the scope of the revenue procedure, the file on the ruling request will be closed and the user fee will be refunded. The estate may obtain relief as outlined in the revenue procedure by complying with section 4.01. Rev. Proc. 2017-34, I.R.B. 2017-26, 1282, is superceded.
The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2025.
The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2025.
Background
Final BEAT regulations adopted with T.D. 9885 include rules under Code Secs. 59A and 6038A addressing the reporting of QDPs, which are not treated as base erosion payments for BEAT purposes. The final regulations generally apply to tax years ending on or after December 17, 2018.
In general, a payment qualifies for the QDP exception if the taxpayer satisfies certain reporting requirements. Reg. §1.6038A-2(b)(7)(ix) requires a taxpayer subject to the BEAT to report on Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts, the aggregate amount of QDPs for the tax year, and make a representation that all payments satisfy the reporting requirements of Reg. §1.59A-6(b)(2). If a taxpayer fails to satisfy these reporting requirements with respect to any payments, those payments are not eligible for the QDP exception and are treated as base erosion payments, unless another exception applies.
The QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) apply to tax years beginning on or after June 7, 2021. Before these rules are applicable (the transition period), a taxpayer is treated as satisfying the QDP reporting requirements to the extent that the taxpayer reports the aggregate amount of QDPs on Form 8991, Schedule A, provided that the taxpayer reports this amount in good faith ( Reg. §1.59A-6(b)(2)(iv); Reg. §1.6038A-2(g)).
In Notice 2021-36, I.R.B. 2021-26, 1227, the IRS announced the intention to extend the transition period through tax years beginning before January 1, 2023, while the IRS studies the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(vi), and the QDP reporting requirements. The IRS has not yet issued regulations amending the applicability date of Reg. §1.6038A-2(g). The IRS continue to study these provisions and has determined that it is appropriate to further extend the transition period.
Deferred Applicability Date of QDP Reporting and Taxpayer Reliance
The IRS intends to amend Reg. §1.6038A-2(g) to provide that the QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after January 1, 2025. Until these rules apply, the transition period rules described above will continue to apply. Taxpayers may rely on this Notice before the amendments to the final regulations are issued.
John Hinman, Director, IRS Whistleblower Office highlighted the importance of whistleblower information in identifying noncompliance and reducing the tax gap in an executive column published by the IRS. Each year, the IRS receives thousands of award claims from individuals who identify taxpayers who may not be abiding by U.S. tax laws. The IRS Whistleblower Office ensures that award claims are reviewed by the appropriate IRS business unit, determines whether an award should be paid and the percentage of any award and ensures that approved awards are paid. The IRS has paid over $1.05 billion in over 2,500 awards to whistleblowers since 2007.
John Hinman, Director, IRS Whistleblower Office highlighted the importance of whistleblower information in identifying noncompliance and reducing the tax gap in an executive column published by the IRS. Each year, the IRS receives thousands of award claims from individuals who identify taxpayers who may not be abiding by U.S. tax laws. The IRS Whistleblower Office ensures that award claims are reviewed by the appropriate IRS business unit, determines whether an award should be paid and the percentage of any award and ensures that approved awards are paid. The IRS has paid over $1.05 billion in over 2,500 awards to whistleblowers since 2007.
Further, Hinman stated that according to the IRS’s Large Business and International (LB&I) division, whistleblowers have provided invaluable insights into violations perpetuated by large corporations, wealthy individuals and their planners. Further, since the inception of the Whistleblower Office, information from whistleblowers has resulted in over 900 criminal tax cases. Hinman stated that individuals can file a Form 211, Application for Award for Original Information, to be considered for an award. Specific, credible and timely claims are most likely to be accepted for additional consideration and referred to one of IRS’s operating divisions. A subject matter expert may contact the whistleblower to ensure the IRS fully understands the information submitted. The IRS will notify whistleblowers when a case for which they provided information is referred for audit or examination.
Further, Hinman noted that the IRS takes the protection of whistleblower identity very seriously.The IRS prevents the disclosure of a whistleblower’s identity, and even the fact that they have provided information, to the maximum extent that the law allows. Additionally, whistleblowers are protected from retaliation by their employers under a law passed in 2019. Finally, Hinman noted that going forward, the Whistleblower Office team will continue to make improvements to this important program, raise awareness about the program for potential whistleblowers and look for ways to gain internal efficiencies to move cases forward as quickly as possible.
A group of Senate Democrats is calling on the IRS to extend the filing deadline for those unable to file for and receive the advanced child tax credit (CTC) due to the processing backlog of individual taxpayer identification number (ITIN) applications.
A group of Senate Democrats is calling on the IRS to extend the filing deadline for those unable to file for and receive the advanced child tax credit (CTC) due to the processing backlog of individual taxpayer identification number (ITIN) applications.
In a July 14, 2022, letter to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, the Senators, led by Robert Menendez (D-N.J.), called on the IRS to "allow families who applied for an ITIN or ITIN renewal prior to April 15, 2022, to file for and receive the advanced CTC if they file a return before or on October 15, 2022."
An ITIN is needed for taxpayers who do not have and are not eligible to receive a Social Security number but still have a U.S. tax filing requirement. This includes individuals who are nonresident aliens; U.S. resident aliens; dependents or spouses of U.S. citizen/resident alien; dependent or spouse of a nonresident alien visa holder; nonresident alien claiming a tax treaty benefit; or nonresident alien student, professor, or researcher filing a U.S. tax return claiming an exception.
The senators cite figures from the Treasury Inspector General of Tax Administration stating that prior to COVID-19 pandemic, it generally took between seven and 11 weeks to process an ITIN application (depending on if it was filed during tax season).
"But, as reported by TIGTA and the IRS’ own website, processing times have increased—with ITIN application processing averaging three to four months and renewal times doubling to 41 days," the letter states.
"Given that the Protecting Americans from Tax Hikes (PATH) Act required that an ITIN had to be issued on or before the due date of the return in order to file for the CTC, many families may not have received their ITIN prior to April 15, 2022," the letter adds, preventing access to the benefit.
The IRS has released a Fact Sheet to help taxpayers understand how and why agency representatives may contact them and how to identify them and avoid scams. Generally, the IRS sends a letter or written notice to a taxpayer in advance, but not always.
The IRS has released a Fact Sheet to help taxpayers understand how and why agency representatives may contact them and how to identify them and avoid scams. Generally, the IRS sends a letter or written notice to a taxpayer in advance, but not always. Depending on the situation, IRS employees may first call or visit with a taxpayer. Further, the IRS clarified that other than IRS Secure Access, the agency does not use text messages to discuss personal tax issues, such as those involving bills or refunds. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS initiates most contacts through regular mail. Taxpayers can report fraudulent emails and text messages by sending an email to phishing@irs.gov.
Further, taxpayers will generally first receive several letters from the IRS in the mail before receiving a phone call. However, the IRS may call taxpayers if they have an overdue tax bill, a delinquent or unfiled tax return or have not made an employment tax deposit. The IRS does not leave pre-recorded, urgent or threatening voice messages and will never call to demand immediate payment using a specific payment method, threaten to immediately bring in law enforcement groups, demand tax payment without giving the taxpayer an opportunity or ask for credit or debit cards over the phone.
Additionally, IRS revenue officers generally make unannounced visits to a taxpayers home or place of business to discuss taxes owed or tax returns due. However, taxpayers would have first been notified by mail of their balance due or missing return. Taxpayers should always ask for credentials or identification when visited by IRS personnel. Finally, the IRS clarified that taxpayers who have filed a petition with the U.S. Tax Court may receive a call or voicemail message from an Appeals Officer. However, the Appeals Officer will provide self-identifying information such as their name, title, badge number and contact information.
The American Institute of CPAs offered the Internal Revenue Service a series of recommendations related to proposed regulations for required minimum distributions from individual retirement accounts.
The American Institute of CPAs offered the Internal Revenue Service a series of recommendations related to proposed regulations for required minimum distributions from individual retirement accounts.
The July 1, 2022, comment letter to the agency covered two specific areas: minimum distribution requirements for designated beneficiaries when death of the employee or IRA owner occurs after the required beginning date, and the definition of employer and guidance for multiple arrangements.
Regarding the minimum distribution requirements, AICPA recommended in the letter that the agency "eliminate the requirement … mandating that a designated beneficiary who is not an eligible designated beneficiary take distribution in each of the 10 years following the death of an employee."
AICPA also recommended that "the final regulations follow the rule … requiring only that the entire interest is to be distributed no later than by the end of the tenth year following the death of the employee/IRA owner."
Regarding the definition of employer and guidance related to multiple employer agreements, AICPA recommended "defining the retirement requirement in section 401 (a)(9)-2(b)(1)(ii) as met at the plan level in reference to MEPs [multiple employer plans] and PEPs [pooled employer plans]; when an employee terminates employment with the employer after attaining age 72 and is reemployed with either the same employer or another employer sponsoring the same MEP or PEP prior to attaining their RBD of April 1 the following year."
The Government Accountability Office (GAO) issued a report on stimulus checks during the Coronavirus 2019 (COVID-19) pandemic. From April 2020 to December 2021, the federal government made direct payments to taxpayers totaling $931 billion to address pandemic-related financial stress.
The Government Accountability Office (GAO) issued a report on stimulus checks during the Coronavirus 2019 (COVID-19) pandemic. From April 2020 to December 2021, the federal government made direct payments to taxpayers totaling $931 billion to address pandemic-related financial stress.
Report Findings
Some eligible taxpayers never received payments. Eligible taxpayers can still claim their payments through October 17. There were challenges for the Service and Treasury to get payments especially to nonfilers, or those who were not required to file tax returns. Taxpayers who think they may be eligible but did not receive the third economic impact payment (EIP) or child tax credit (CTC) can request an extension and file a simplified return at https://www.childtaxcredit.gov/. Although no new EIP and advance CTC payments are underway, the Treasury and Service could learn to manage other refundable tax credits such as the earned income tax credit (EITC). Further, the IRS’s new Taxpayer Experience Office could help improve outreach and improve taxpayer experience.
Recommendations
GAO made two recommendations. First, the Treasury and IRS could use available data to update their estimate of eligible taxpayers to better tailor and redirect their ongoing outreach and communications efforts for similar tax credits. Second, both agencies could focus on improving interagency collaboration. They could use data to assess their efforts to educate more taxpayers about refundable tax credits and eligibility requirements.
The Organisation for Economic Co-operations and Development (OECD) is delaying the implementation of Pillar One of the landmark agreement on international tax reform.
The Organisation for Economic Co-operations and Development (OECD) is delaying the implementation of Pillar One of the landmark agreement on international tax reform.
A new Progress Report on Pillar One, which includes "a comprehensive draft of the technical model rules to implement a new taxing right that will allow market jurisdictions to tax profits from some of the largest multinational enterprises," will be open to stakeholder comment through August 19, 2022, OECD said in a statement.
That report notes that the plan is to finalize Pillar One by mid-2023, with the more than 135 countries and jurisdictions that are a part of the agreement able to put the framework into operation in 2024.
The revised timeline "is designed to allow greater engagement with citizens, businesses, and parliamentary bodies which will ultimately have to ratify the agreement," OECD said.
The Department of the Treasury welcomed the delay.
"Treasury welcomes the additional year agreed to at the OECD to allow further time for negotiations among governments and consultations with stakeholders on implementation of the Pillar One agreement, which will make the international tax system more stable and fair for businesses and workers in the United States and globally," a spokesperson for the agency said. "Tremendous progress has been made, and additional time will ensure we all get this historic agreement right."
OECD also noted that technical work under Pillar Two, which will introduce the 15 percent global minimum corporate tax rate, "is largely complete." The implementation framework is expected to be released later this year.
Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."
Good used or better condition
The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.
Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself."
Household items include furniture, furnishings, electronics, appliances, and linens, and similar items. Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable.
The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.
Fair market value
You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it. Therefore, its value is less than what you paid for it.
If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.
Get a receipt
Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.
Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.
Exception
In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.
If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.
Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.
Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.
Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.
Buying
Advantages.
- You own the car at the end of the loan term.
- Lower insurance premiums.
- No mileage limitations.
Disadvantages.
- Higher upfront costs.
- Higher monthly payments.
- Buyer bears risk of future value decrease.
Leasing
Advantages.
- Lower upfront costs.
- Lower monthly payments.
- Lessor assumes risk of future value decrease.
- Greater purchasing power.
- Potential additional income tax benefits.
- Ease of disposition.
Disadvantages.
- You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
- Higher insurance premiums.
- Potential early lease termination charges.
- Possible additional costs for abnormal wear & tear (determined by lessor).
- Extra charges for mileage in excess of mileage specified in your lease contract.
Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:
How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.
How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.
How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.
If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.