Businesses organized outside California, please pay attention

The Franchise Tax Board (“FTB”) takes the position that an LLC organized in a jurisdiction outside California is nevertheless “doing business” in California if:

  • It is a member of an LLC that does business in California.
  • It is a general partner in a partnership that does business in California.
  • Any of the LLC’s members, managers, or other agents conducts business in California on behalf of the LLC.

In addition, an out-of-state LLC is “doing business” in California if:

  • The LLC is commercially domiciled in California (i.e., California is the place where realistic control of the LLC’s functions is centered).
  • Sales, including sales by the LLC’s agents and independent contractors, in California exceed the lesser of $500,000 or 25% of the LLC’s total sales.
  • Real or tangible property of the LLC in California exceeds the lesser of $50,000 or 25% of the LLC’s total real and tangible property.
  • The amount paid in California by the LLC for compensation exceeds the lesser of $50,000 or 25% of the total compensation paid by the LLC. For purposes of these calculations, the sales, property and payroll of the LLC include the LLC’s pro‑rata or distributive share of any pass‑through entities (i.e., partnerships, LLCs and S‑corporations).

LLC & Federal Income Tax

  • Single member (one member) default status is a “disregarded entity”, Schedule C, Sole Proprietor
  • Multi member (two or more members) default status is Form 1065, Partnership
  • May elect to be taxed as a Corporation by Form 8832
  • May make the S‐election by filing Form 2553

Disadvantages of an LLC

  • State regulation laws vary widely
  • Potential franchise fees

Advantages of al LLC

  • Simple and low‐cost
  • Administrative requirements less than a corporation

Single Member LLC Default

  • Net profit subject to self employment tax (SE)
  • Net profit may qualify for the 20% qualified  business income (QBI) deduction
  • Net losses can and be deductible up to at‐risk limits  and offset other income
  • Administrative ease dissolution

What Qualified Business Income (QBI) Deductions are all about?

QBI is defined as the net amount of qualified items of income, gain, deduction and loss with respect to a qualified trade or business that is effectively connected with the conduct of a business within the United States.

QBI is not…

  • Reasonable compensation
  • Guaranteed payments
  • Net gain from foreign currency transactions
  • Capital gains
  • Net §1231 gain not in QBI
  • Net §1231 loss reduces QBI • Dividend income • Non-business interest income

QBI applicable for pass‐through Entities:

  • Sole‐proprietorships: Schedule C, Form 1040
  • Partnerships: Form 1065, Schedule K‐1
  • Subchapter S Corporations: Form 1120S, Schedule K‐1
  • Estates & Trusts: Form 1041, Schedule K‐1
  • C corporations not eligible

Defer your tax on any prior gains by investing in a Qualified Opportunity Fund (QOF)

The list of Qualified Opportunity Zones (QOZ) in which QOF may invest to meet its investment requirements can be found at Notice 2018-48.

Please use new IRS Form 8949 for QOF.

Is my rental activity a trade or business and qualifies for QBI

Is My rental activity a trade or business?

Please refer to the IRS Section 162 Trade or Business that outlines the following factors:

  • Taxpayer must be involved in activity with continuity and regularity
  • Type of property
  • number of properties
  • service provided
  • terms of lease

The IRS provided Taxpayers with Safe Harbor (Notice 2019-07)

Your rental activity is qualified for QBI if all the followings are satisfied:

  • Separate books and records are in place.
  • 250 or more hours of rental services were rendered (please consider contractors, subcontractors, management company services).
  • Contemporaneous records of time (except for 2018) exist.

“Failure to satisfy the requirements of this safe harbor does not preclude a taxpayer’s rental real estate activities from being a §162 trade or business.”

Taxation of Social Security Benefits

If you file a federal tax return as an individual and your combined income is

  • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $34,000, up to 85 percent of your benefits may be taxable.

If you file a joint return, and you and your spouse have a combined income that is

  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
  • more than $44,000, up to 85 percent of your benefits may be taxable. are married and file a separate tax return, you probably will pay taxes on your benefits.

How do you Qualify for Retirement Benefits?

  • You qualify by earning “credits” when you work and pay Social Security taxes
  • You need 40 credits (10 years of work) and you must be 62 or older
  • Each $1,360 in earnings gives you one credit
  • You can earn a maximum of 4 credits per year
  • Please remember that 62 is the earliest age to retire with 75% of Benefits
  • Age of 66 is Full Retirement Age with 100% of Benefit
  • Age of 70 is Max Delayed Retired Credit with 132% of Benefit.
  • You can create your Social Security account by visiting socialsecurity.gov/myaccount

Meals & Entertainment

 The TaxCuts and Jobs Act of 2017 has made significant changes to the deductibilityof business mealsand entertainment starting in 2018. At a high level, entertainment expenses are nondeductible and most mealsare 50 percent deductible.

There are 2 ways to deduct meal:

  • Per diem

Pleases see attached link where you can find rates (the rate will depend from the state)

OR

  • You can use 100% meal deduction rule if food purchased from restaurant.

 No tax deduction is allowed for entertainment, amusement or recreation expenses. This includes tickets to not-for-profit high school or college sporting events, leased skyboxes for sporting events, transportation to/from sporting events, cover charge, taxes, tips and parking for entertainment events.