The CARES Act allowed taxpayers to take up to $100,000 from an IRA in 2020 as a penalty-free coronavirus related distribution and recognizer the income in 2020 OR over three years beginning in 2020.

What if the individual moves out of CA before he three years is up? In this case, only the period where the person was a CA resident will be taxed by CA. Example: TP took $100k out in 2020 and moves to TX 7/1/2021. $33,333 will be taxed by CA in 2020 and $33,333 * 1/2 (year) = $16,667 will be taxed by CA in 2021. The remainder will have no state tax as TX is a non-tax state.

The same applies to TP moving into CA after 2020, in reverse.

IRS IR-2021-16 (Jan 15, 2021)

In past years, the IRS has accepted e-filed returns around January 31. This year, because of legislation passed December 28, 2020, they needed additional time to update the tax forms for those changes.

PLEASE CONTINUE TO PREPARE YOUR RETURNS EARLY. We open for client meetings Feb 1, 2021. We will then hold the returns and transmit the e-file when the IRS opens FEBRUARY 12, 2021 (or as soon as possible thereafter).

Source: Consolidated Appropriations Act of 2021 (HR 133)

Following are selected new taxpayer-friendly tax changes:

Business Meal deduction: For 2021 and 2022 restaurant purchases for sole proprietors, corporation, partnerships, LLC’s… NOW 100% DEDUCTIBLE. Old law was 50%. Business purpose and documentation rules continue and business entertainment is non-deductible.

Charitable contributions for those not itemizing: For contributions made in 2021, $300 deduction (single) and $600 (joint) deduction even if not itemizing.

Solar installation credit: For those purchasing (not leasing) new solar energy residential energy property , the 26% credit is extended for years 2020 and 2021. For 2022, the credit is 22%. The credit expires after 2022.

Early withdrawal from retirement plan: [Check with your plan administrator for details]. This is for Presidentially declared disasters between 1/1/20 and 2/25/2021: Penalty free distributions up to $100,000. These can be taxed OR recontributed over three years.

PPP loan expansion: [Check with your bank for details]. Available for those with at least a 25% drop of gross business sales Q1, Q2 or Q3 2020 compared to 2019. Borrowers can submit supplemental PPP loan requests in all cases where the original PPP loan amount would have changed due to new rules. Deadline for application is March 31, 2021.

Ref: IRS Revenue Ruling 2020-27: HR 133 signed by Pres Trump 12/27/20

CONGRESSIONAL OVERRIDE of IRS: On December 21, 2020, Congress passed the newest stimulus bill. In that bill, Congress overturned the IRS interpretation of prior bills: Expenses paid for with PPP funds can be deducted… making PPP funds truly “tax free.” PRESIDENT TRUMP SIGNED THE BILL INTO LAW 12/27/20.

The IRS has made the ruling that if you REASONABLY EXPECT to qualify for forgiveness of the 2020 PPP loan, you must SHOW THE FORGIVENESS in 2020 ..EVEN IF YOU HAVEN’T BEEN NOTIFIED OF FORGIVENESS BY DEC 31, 2020 by your bank.

WHAT’S NEW: The PPP forgiveness will now be shown as non-tax income. In other words, it will be included on the books of the business, but not on the tax return. Additionally, expenses paid for with that money will be fully deductible on the tax return of the business.

Ref: Code Sec 274; Notice 2018-76; TD 9925

The tax world changed after implementation of the Tax Cuts and Jobs Act in 2018. Here’s a quick summary of the new final regulations in this area:

1. Food/beverages: Cannot be lavish and are generally only 50% deductible. Exceptions where full deduction (partial list):
   1. If compensation to an employee (e.g., employer cafeteria);
   2. If part of recreational/social activity for employees (e.g., EE snacks in break room)
   3. Facilities available to general public (e.g., realtor open houses or business seminar)
2. Entertainment/recreation: Generally non deductible. Exceptions (partial list):
   1. Directly related: If entertainment is directly related to the business (e.g., golf range activity relating to sale of new line of clubs) OR
   2. Business discussion exception: If entertainment/recreation is directly preceding or following a substantial and bona fide business discussion (including meetings at a convention). For example, a band playing during pre-meeting assembly time.

Note that travel meals continue to be 50% deductible when employee is away from home on business. Additionally, meals with customers/clients are still 50% deductible. All old rules regarding substantiation and non-lavish continue to apply.

Special rules apply to employee cafeterias and other arrangement under which the employer may consider part of the meal as compensation. CAUTION: If an employer is providing meals to employees and considers the reportable (i.e. wage) market value to be zero, the IRS will disregard the special rule safe harbors under IRC Sec 274(e)… So research the special rules and include something in the employee compensation!

Ref: SB 1447

September 2020: Governor Newsom signed a new law offering a credit to small businesses. UPDATED SEPT 29, 2020.

Here’s the highlights from an AP news release. To qualify the business:

1. Has to have 100 employees or less as of 12/31/2019 AND
2. Has to have lost 50% or more of gross sales within April – June 2020 as compared to the same period in 2019 AND
3. Have gross sales of less than $5 million annually AND
4. Hire new employees by December 1, 2020.

What: A credit of $1,000 per new hire to be taken on the income tax return of the business OR applied against sales tax to be remitted to CDTFA.

Calculation: Compare the average full-time equivalent (FTE) employees for Q2 2020 with the average FTE for 7/1/2020 – 11/30/2020. (Note: Because of this, a business completely closed in Q2 2020 would count all of its FTE during 7/1/2020 through 11/30/2020 as a “net increase.”

RESERVING THE CREDIT: Must be done through California Department of Tax and Fee Administration (CDTFA) on a first-come first -served basis. The request must be filed beginning on December 1, 2020 and ending on either January 15, 2021 OR when the entire $100 million allocated to the credit is reached. The CDTFA will put instructions on its website for credit application.

THIS IS FOR SMALL BUSINESSES IN CA AND MAY WELL BE THERE FOR YOURS.

As of July 28, 2020, the firm passed it’s triannual AICPA peer review.

Once every three years, we are reviewed by another CPA firm trained in peer review techniques. They check that our work is current as to accounting standards and presentation.

Peer reviews are now mandatory for all CPA firms engaging in accounting attestation work. However, we have been engaging in peer review for twenty one years… long before such was required for California licensed CPA firms. All reviews to this point have earned a passing grade.

We are thankful to a well-trained, thoughtful and professional team.

Ref: Assembly Bill 103

This bill prohibits the EDD from charging unemployment compensation benefits paid to employees for the duration of all federal unemployment benefit programs created to respond to the Covid-19 pandemic. In other words, your business SUI rate won’t go up due to unemployment claims during the time that the federal government had federal benefit programs in place.

IMPORTANT: In order to get this rate guarantee the business must respond timely and adequately to the EDD’s requests for information relating to unemployment claims.

It’s important to respond to any correspondence from EDD quickly and accurately.

Ref: : CDTFA

Taxpayers reporting less than $1 million in tax liability on sales or use tax returns originally due July 31, 2020 (including annual returns for the fiscal year ending June 30, 2020) will not be assessed interest and penalties on the return payment or prepayment due as long as the payments are made by November 2, 2020.

You do not have to request penalty or interest abatement related to this second quarter payments. The relief is automatic.

Ref: CA AB 85

On June 29, 2020, Governor Newsom signed into law Assembly Bill 85. There are several tax provisions in the bill, but the one most important to new business is the exemption from the $800 minimum tax for businesses starting on or after January 1, 2021 and before January 1, 2024.

This provision has been around for years for newly formed California corporations, but is new to LLC’s and LLP’s.

Planning point: If you plan on starting a new LLC/LLP near year-end, wait to do so until after January 1, 2021.

Legislative trap: The legislature wrote an “easy out” into the bill… If they don’t fund at least one dollar in the appropriated California budget (each year that the exemption is available), then this new exemption won’t be available that year.

Conclusion: Use the above planning point. Worst case is that the legislature won’t appropriate at least $1 for funding and you’ll owe the $800. Best case is that you’d owe no minimum tax for the given year.