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Archives for Emerging Tax Issues

Electing The New California Pass-Through Entity Tax

Governor Newsom recently signed Assembly Bill 150, which creates a pass-through entity tax election for companies doing business in California. The entity tax is a workaround to the $10,000 state and local income tax deduction reported on Schedule A attached to Form 1040.

The pass-through entity tax may reduce your overall taxes in the following way:
  1. The pass-through entity pays a 9.3% tax on the net income of each shareholder, partner, or member that consented to have its share of income included in the entity’s income, and
  2. Each consenting shareholder, partner, or member reports a credit against state income tax on their California income tax return.

An example of how this election works and the potential tax reduction the election can provide is shown below.

Click: Example – New California Pass-Through Entity Tax Election

We are studying the new law and have identified a few drawbacks, such as:
  1. the pass-through entity tax election becomes inoperable if the U.S. Congress repeals the $10,000 limitation,
  2. many California taxpayers may be subject to the alternative minimum tax if Congress repeals the $10,000 limitation, and the repeal causes California to revoke the election
  3. the election applies for tax years 2021 through 2025 only,
  4. the credits reported on the California return expire after five years,
  5. tiered partnerships cannot make the election,
  6. the election does not apply to sole proprietorships and disregarding entities, such as single-member limited liability companies, and
  7. the Franchise Tax Board guidance is greatly needed.

We recommend proceeding cautiously until the Franchise Tax Board issues guidance and regulations. Making the election may not benefit all owners equally; therefore, we recommend analyzing, modeling, and planning for this tax before making the election.

Disclaimer: Tax laws are complicated, and your taxes are unique to you. A law favorable to you may not benefit the next person because the facts and circumstances are different. Therefore, we are notifying you that our emails are not comprehensive and do not provide specific tax advice to you for which you can use for tax planning purposes. We highly recommend contacting us before taking any action concerning the content of this email.

 

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Should you disclose your bitcoin account to the U.S. Treasury?

U.S. citizens and residents are required to disclose foreign bank and other international financial accounts to the U.S. Treasury if the combined balance of all accounts exceeds $10,000. The penalties for failure to file start at $10,000 and can exceed the account balance if the non-filing is willful. So what is a foreign bank account?

Accounts not maintained in the United States are foreign. So if you opened a bitcoin account administered outside of the U.S., the account is foreign. But is it a bank account?

The IRS has not published guidance for bitcoin accounts. But a federal district court recently authorized the IRS to serve a John Doe summons on Coinbase to get account holder’s names. And the IRS successfully argued in court that particular online gambling accounts are foreign bank accounts and reportable to the U.S. Treasury. In this case, the taxpayer had to pay $40,000 in penalties.

It is not clear if bitcoin accounts (or similar cryptocurrency accounts) are reportable to the U.S. Treasury. But the penalties are high, so it is best to take a cautious approach and report the account(s) to avoid paying penalties.

Our company has experience preparing foreign bank account disclosure forms and available to assist you. Please call our office at 323-285-9880 for additional information. The reports are due by April 15th.

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