Get ready

For the new tax environment!

Both the IRS and state tax agencies are looking for revenue anywhere they can find it. The laws may not have changed radically— but enforcement has. They're looking hard at certain types of transactions. And if you come under their scrutiny, they'll presume you owe money—until you prove otherwise.

Meanwhile, you may be surprised at the tax bill you're racking up without knowing it. Here are some common activities that can incur tax liabilities:

Purchased anything from eBay, Amazon, Craigslist?

California law requires you to pay Use Tax on anything you buy (online, garage sales, catalogs, etc.) and use in California without paying sales tax—if the items would be subject to sales tax if purchased at the mall, etc. Beginning with your 2011 tax return, you have two options for calculating your use tax due:

  1. Track all purchases during the year and tell your tax preparer the total when you have your return prepared. The use tax will be calculated and included with your state income tax return.
  2. Use the new Use Tax Lookup Table. California has created a "safe harbor" method for calculating use tax. Using the lookup table, you pay a predetermined amount of use tax based on your income, and do not need to track your purchases during the year.

There is one MAJOR exception to the Safe Harbor lookup table method: It can only be used if you do not have a single purchase of $1,000 or more. If you do, you will need to calculate the actual use tax owed on these purchases, and use the table to report use tax on all other purchases. Also, to use the safe harbor, your use tax must be reported on your California tax return and NOT on a BOE Use Tax Return (BOE-401-DS).

Of course, if you didn’t buy anything subject to use tax during the year, you can ignore all of the above. But, a word of warning: California is aggressively enforcing use tax collection, and is working with PayPal and other credit card processors to identify taxpayers who may owe unpaid use tax!

Congress is working on a plan to resolve this issue at the national level by requiring all online retailers to collect and pay some form of sales tax to states. Until that is finalized, the ssafe harbor will be enforced.

Sold stuff on eBay, Craigslist or other websites?

Beginning in 2011 the IRS, California Franchise Tax Board and State Board of Equalization are increasingly focusing on e-commerce, especially individuals selling items on eBay or other websites. Anyone selling online needs to address the following issues:

  1. Do your online sales constitute a trade or business, or is it strictly a hobby? If your online sales are a business, you may be eligible to deduct losses. For hobbies, expenses are limited to your income, so losses are not deductable. There are a number of tests to determine whether you are conducting a business. The simplest is the three out of five test: If you have a net profit from your activity for three out of five years, you are probably in business. If not, it’s probably a hobby. Additional information is available on the IRS website.
  2. Business or hobby, you must report the net income from your online sales on your tax return. This means, among other things, that you must track your cost for each item sold (along with all other costs associated with the activity) to determine your profit.
  3. Sales of collectables: If you are operating as a trade or business, the sale of collectables is treated the same as sales of all other products. If you are not operating a business, your profit on the sale of collectables is treated as a capital gain and collectables are NOT eligible for the reduced capital gains tax rate. Instead, gains on collectables are taxed at 28%.
  4. Sales Tax: If you sell and deliver goods to anyone living in California you are required to collect and report sales tax on the total sales price paid (before PayPal fees, etc.) to the State Board of Equalization. In order to report and pay sales tax you must register with the SBOE and get a sellers permit and number. Generally you are required to hold a sellers permit if you make three or more sales in a 12 month period. Even if you do not make three sales, you must have a permit and pay sales tax if your intent is to operate as a trade or business.
  5. PayPal and other merchant credit card processers: Beginning in 2011 all businesses that process credit card and electronic payments will be required to send Form 1099-K to sellers with more than 200 transactions per year and/or $20,000 paid to them. Beginning with the 2012 tax, return businesses and landlords will be required to report credit card and other electronic income received separately from cash and check income so be sure you start tracking cash vs. credit beginning 1/1/12.

Sold stocks?

For Tax Year 2011 there are MAJOR changes to Schedule D, the form used to report capital gains and losses. There will also be substantial changes to the 1099-B that investors will receive from their brokers if they sold stock during the year.

The biggest change to Sch. D is the creation of a NEW form- 8949 Sale and Other Dispositions of Capital Assets. This new form will be used to report the details of each capital gains transaction. The information provided on Form 8949 will then be summarized on the new Schedule D.

The purpose behind these changes is to guarantee that taxpayers are providing an accurate basis for each transaction, since your basis is used to determine your gain or loss on each transaction.

Beginning with TY 2011 brokers are required to provide adjusted basis , gain or loss, and whether the gain or loss is long term or short term. A few issues:

  1. This new provision only applies to "covered securities" which only include securities purchased after 1/1/11 AND purchased through the same account from which they were sold.
  2. The requirements DO NOT cover mutual fund purchases and sales, which will begin in TY 2012.
  3. Not all securities are included.

The bottom line: If you sold stocks, bonds, other securities, or anything subject to capital gains tax it is your responsibility to provide the purchase date, adjusted basis, sales price and gain or loss. Brokers are required to send 1099-B’s no later than February 15. Once you receive your 1099-B you must review all the information reported to insure that you have everything required to prepare your "New and Improved" Schedule D.

Own a business and receive payment via credit card or other electronic payment methods?

Among LOT of other things, the Housing Assistance Tax Act of 2008 added a new provision to the tax code. This provision requires all businesses that process credit card and electronic payments to send a (NEW) Form 1099-K to all sellers with more than:

  1. 200 transactions for the year
  2. $20,000 gross income paid to them

Sellers are supposed to be provided the 2011 Form 1099-K no later than January 31, 2012. All sellers will be required to provide a TIN or EIN to their credit card service providers (PayPal, etc.) to avoid automatic 28 percent withholding.

Beginning with Tax Year 2012, all businesses will be required to separate their gross receipts from "Merchant card and third party payments", and report this amount on a separate line on their tax returns with an additional line below to report all other gross receipts. The merchant card gross receipts line is printed on the 2011 Tax Return forms, but includes "For 2011 enter 0" because congress and the IRS changed their minds and the provision will not be enforced till Tax Year 2012.

Bottom line, you may receive Form 1099-K this year but will NOT be required to report the amount separately on your return. However, since the provision WILL be enforced beginning January 1, 2012, be sure that your accounting system is set up and capable of accurately tracking this information.

About that Mileage Deduction

Beginning January 1, 2012, the standard mileage rates for use of a car (also vans, pickups or panel trucks) are::

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