self employment taxes

PA MOTOR VEHICLE UNDERSTATED VALUE PROGRAM REVISITED

September 19, 2019 by Frank

Philadelphia Inquirer Interested in PA Motor Vehicle Understated Value Program

Do You Want to Become Famous?

Do you want to become famous and to see your name mentioned in a story in the Philadelphia Inquirer? Okay, we exaggerate. You likely will not become famous if your name were included in a newspaper article.

Opportunity to Share Your Personal Experience with a Reporter

We were contacted by a reporter from the Philadelphia Inquirer about our October 2018 blog posting. The posting dealt with the PA DOR & PA Dept Motor Vehicles assessing PA residents sales tax on private car sales after-the-fact. These are situations where the all-knowing PA DOR (tongue-in-cheek) makes a tax assessment on a private car sale where PA determines that the stated value of the car on the title transfer paperwork was understated and additional PA sales tax is due.

The reporter would like to speak with persons who received one of these deficiency notices and what happened next. If you had such an experience, please call me a 610-594-2601 so we can discuss your situation and if the reporter wishes to speak with you directly.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2019 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA REQUIRES PA COMPANIES TO WITHHOLD PA PERSONAL INCOME TAX ON PAYMENTS MADE TO NON-PA BASED CONTRACTORS

September 17, 2019 by Frank

Brief Overview of the PA PIT Withholding Requirement When PA-Based Companies Make Payments to Non-PA-Based Contractors

PA 72 P.S. §7316.2 Withholding Requirement

PA 72 P.S. § 7316.2 states that a person that (1) makes payments of income from sources within PA to a non-resident individual or an entity that is disregarded that has a non-resident member and (2) who is required to file Form 1099-MISC with the PA Department of Revenue, shall deduct and withhold the PA Personal Income Tax (PIT) at the rate of 3.07%.

Who Is Subject to this Withholding?

This withholding requirement applies to payments made to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.

Who Is Not Subject to this Withholding?

Payments to any of the following are NOT subject to this withholding requirement: Partnerships, Corporations, Multi-Members LLCs, Residents, and disregarded entities (LLCs) owned by partnerships, corporations, multi-member LLCs or PA residents.

What Types of Payments Are Subject to Withholding?

Payments for services rendered in PA by non-residents of PA are subject to the PIT withholding requirement.

Withholding Examples

Ex. 1: PACo, a business located in West Chester, PA, hires Stephanie, a MD resident individual, to perform customer surveys from her home in MD. PACo (the payor) pays Stephanie (the payee) $10,000 for her consulting services. PACo will report the $10,000 on Form 1099-MISC since it exceeds the $600 dollar filing requirement threshold.

However, since Stephanie performed no services within PA, she is not subject to PA PIT withholdings.

Ex 2: If we change the facts to show that Stephanie spent time in PA to perform some of her services, then PA withholding is required for the services provided within PA by this non-resident individual. PACo has the compliance burden of devising a process to substantiate the time Stephanie spent in PA to perform her services and withhold PA PIT on the fees she earned for her work performed within PA.

Ex 3: The facts are the same as in Example 2, except Stephanie is a single owner of her LLC and the LLC (not Stephanie) was contracted to perform the consulting services in PA.

The PA payor is required to withhold PA PIT because the LLC is a disregarded entity.

What Types of Payments Are Not Subject to Withholding?

Payments made related to goods or materials (inventory), sale of property, and interest and dividend income are not subject to the PA withholding tax requirement.

Tax Planning Tip #1:

PA payors should protect themselves from failure to withhold. To determine if the payee is a non-resident individual of PA or a disregarded entity owned by one, have the payee complete PA Form REV-1832, 1099-MISC Withholding Exemption Certificate form. This form lists the reason(s) the payee is not subject to the PA 3.07% withholding tax. The payee simply checks the appropriate box which the landlord can normally accept in good faith.

Tax Planning Tip #2:

Estimate the annual calendar year payments to the non-resident payee. If not more than $5,000 in a calendar year, no withholding is required. If it is unknown whether the $5,000 threshold will be met, the PA DOR encourages withholding.

KEEP IN MIND THAT IF IT WAS ANTICIPATED THAT THE PAYEE WOULD BE PAID LESS THAN $5,000, BUT THAT THRESHOLD WAS EXCEEDED, THE PAYOR IS LIABLE FOR THE FULL 3.07% PIT WITHHOLDING AMOUNT ON THE ENTIRE MONIES PAID TO THE PAYEE.

Tax Planning Tip #3:

If payee will likely be paid more than $5,000 or if the payee wishes to have tax withholdings, register for a 1099 withholding account on E-Tides. Withhold tax at 3.07% rate for payments made to non-PA resident service providers working in PA.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA DEPT. OF REVENUE NOT REFUNDING TAXES WITHHELD

September 3, 2019 by Frank

Taxes Withheld May Not be Refundable in PA

Real Life Scenario #1

You put in your retirement papers to start receiving pension benefits or you decide to withdraw IRA retirement monies.

You are a PA resident and you request to begin receiving your company pension plan. The employer will likely request at what income tax rate do you wish to have your federal and state income taxes withheld. The employer may have default rates. If you do specify the desired withholding rate, the employer will use the default rate.

Do you consult with your tax professional as to how to respond? Likely not because it is a simple form that likely appears not to have much significance. If too many taxes are withheld, your think you will get a refund. If too little taxes are withheld, you believe you may have a small underpayment penalty.

Real Life Scenario #2

You instruct your financial advisor/broker to begin to make RMDs (required minimum distributions) from your retirement account. You instruct your broker to withhold federal taxes at the rate of 30% (your federal effective rate) and PA taxes at 10%. You realize that the PA statutory rate is 3.07%, but you despise making quarterly estimated tax payments for the dividend and capital gains that will be reported to PA. Your thinking is that the rate differential will be used to apply against the taxes due on those sources of income.

Again, you do not consult with your tax professional.

What Is the Problem?

The problem is that one of the few benefits of residing in PA is that many forms of retirement are non-taxable. Pension benefits and RMDs are generally not taxable for PA personal income tax (PIT).

Let’s assume that the payor of the pension plan or RMD properly shows the pension or IRA distribution on Form 1099-R as non-taxable for PA and also reflects the PA taxes withheld on those distributions.

Your PA-40 PIT income tax return claims the tax withheld from your retirement proceeds because those taxes were actually withheld from the gross retirement proceeds. You paid those taxes and now you want those taxes applied against your total PA taxes due. Seems perfectly logical.

All is seemingly well, but then that letter from the PA Department of Revenue arrives in the mail. PA is challenging those withheld taxes on your non-taxable retirement benefits. The PA DOR requests a letter from your employer or broker stating that the taxes withheld were done so in error and should not have been withheld. (After all, everyone knows that those retirement benefits are non-taxable and no taxes should be withheld). The DOR further states that without that letter, the withheld taxes will be ignored. Or, the DOR instructs the taxpayer to prove that those withheld taxes were remitted to PA. After all, simply showing the amount of withheld taxes in the tax withholdings box is not proof that the taxes were remitted to PA.

So you call your employer or broker and tell them that you need this letter stating that they made a mistake. This can be a challenge. First of all, the payor of the retirement funds did not make a mistake. You the taxpayer made the mistake by instructing that PA PIT be withheld. While an employer may be willing to sign such a letter for a long-term and valued employee, a brokerage firm may not wish to issue such a letter stating that it made an error when it merely followed your instructions.

Okay. So you cannot obtain the letter admitting a withholding error, surely the payor can provide proof of payment to PA. Again, it is very doubtful that the corporate office of a Wall Street brokerage firm will take such action due to your error. An employer . . . maybe?

Frantic Call to Tax Professional

Realizing that the PA DOR is about to deny these withheld taxes and will be sending you a tax assessment along with interest and penalties, you now decide its time to call your tax professional to decry the authoritarian and oppressive actions of the PA DOR and get your return accepted without any adjustment.

You are likely not going to be pleased when your tax professional explains that a fee will be charged to represent your issue with the PA DOR, the likelihood of not being successful at the DOR department dealing with your tax account, how PA’s appeal process is draconian, and the cost of going to appeals.

Tax Planning Tip:

When life events occur, be sure to share those with your tax professional at your earliest convenience. Preferably, before the event, such as when you decide to retire. You did not wake up one morning and retire, get married, have a child, etc.

If pre-retirement planning had been done, the withholding rate for PA retirement funds would have been discussed as being zero, and the above scenarios could easily have been avoided.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

WHAT CONSTITUTES LAST KNOWN ADDRESS FOR IRS MAILINGS?

August 20, 2019 by Frank

IRS Prevails Over Taxpayer In Establishing Last Known Address for Contacting Taxpayer

The Facts of the Case

Damian and Shayla Gregory moved in 2015. After moving, they filed their 2014 Form 1040 using their former address. The IRS audited their 2014 tax return and the married couple filed Form 2848, POA, with the IRS using their new address. The couple had also filed an extension of time to file their 2014 tax return and had shown their new address on that filing.

What Happened?

As a result of the IRS audit examination, the IRS mailed the Gregorys a notice of deficiency in October of 2016 to their old address. The Post Office returned the notice of deficiency to the IRS and marked the mailing as undeliverable. At that time, the couple had not yet filed their 2015 Form 1040. The Gregorys were thus unaware that the IRS had sent them a notice of deficiency and did not timely petition the Tax Court for a hearing within the statutory 90 days.

What Is the Last Known Address?

The taxpayers argued before the Tax Court that the IRS had mistakenly sent its audit deficiency to their old address and not their last known (current) address, and therefore the IRS assessment lacked standing before the court. Unfortunately for the taxpayer, the requirements of Rev. Proc. 2010-16 had not been met and the Tax Court concluded that the IRS had sent its notice of deficiency to the taxpayer’s “last known address”. Thus, the taxpayer’s petition was not timely filed.

Rev. Proc. 2010-16

This Revenue Procedure requires a clear and concise written statement , signed by the taxpayer, mailed to the appropriate IRS address for an address change requesting an address change that shows both the former mailing address and the new mailing address. The Forms 2848 and 4868 that the taxpayer had sent to the IRS with their new address did not inform the IRS that these forms should be interpreted as an address change, and neither form included the taxpayer’s former address.

Tax Planning Tip #1:

When filing Form 1040, the taxpayers should always use their current mailing address. For example, the Gregorys likely believed that they should show their 2014 address on their 2014 Form 1040. Instead, they should have used their 2015 mailing address since the move had been completed before the filing of the 2014 tax return.

Tax Planning Tip #2:

Taxpayers can easily notify the IRS of an address change by filing IRS Form 8822, Change of Address, to the service center based on the mailing address of their former residence.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

QUALIFIED OPPORTUNITY ZONES AND FUNDS

August 13, 2019 by Frank

Individuals Who Wish to Invest in Certain Low-Income Areas Can Defer Capital Gains Until Year 2026

What Is a Qualified Opportunity Zone (QOZ)?

A QOZ is an economically-distressed community where new investments may be eligible for preferential tax treatment. Localities that qualify have been nominated by their states and have been certified by the Secretary of the U.S. Treasury (IRS). QOZs are designed to spur economic development and job creation in distressed communities.

Is There a Listing of QOZs?

Yes, the IRS has provided a listing of QOZs on its website. This IRS Notice #2018-48 was amplified by IRS Notice 2019-42.

What Preferential Tax Treatment?

If you own assets with capital gains and have sold those assets or wish to sell those assets in 2019, you can invest those proceeds and/or capital gains (or any portions thereof) in a QOZ within 180 days of the sale, but not later than December 31, 2019, and defer the tax on those invested monies. This tax savings also applies to prior years’ sales if not closed by the statute of limitations and if the required investment criteria are met. Monies invested after December 31, 2019 may lose certain basis adjustments and potentially any future tax benefits enacted.

The law provides for two additional upwards basis adjustments to further minimize capital gains, and if the QOZ is held for at least 10 years, the complete elimination of capital gains tax on the growth attributable to the gain invested.

The gain on the deferral of gains on the funds used in the initial investment isn’t perpetual. Those gains will become taxable at the end of 2026, or when the QOZ is sold, if sooner.

Qualified Opportunity Funds

If you think that this sounds like a good investment opportunity and a worthwhile cause, but do not wish to have direct ownership of property in a QOZ, there is another option. That option is a Qualified Opportunity Fund (QOF). QOFs are investment vehicles that are set up either as a partnership or corporation for investing in eligible property in a QOZ,

Next Step?

Our goal was to make our subscribers aware that such a tax savings opportunity exists. We are not investment advisors and do not make any investment recommendations. We are also not making any claims that this is a prudent investment. As with any investment, you need to exercise caution and perform your normal due diligence when selecting your investments.

We caution you not to solely focus on the tax savings. Remember, bad investments with good tax attributes remain bad investments.

If this is something that you would be interested in including as part of your investment portfolio and tax minimization plan, the next step would be to speak with your investment advisor who can explain how to make a qualified investment in an QOZ or QOF.

Tax Disclosure

The tax rules regarding QOZs are complex and numerous. As stated above, our objective was to make our readers aware that such an investment vehicle exists and that the investment in a QOZ must be made by December 31, 2019.

After meeting with your financial advisor and should you seriously wish to consider investing in QOZs, you need to meet with your experienced tax professional and discuss the QOZ tax rules before making the initial investment.

Tax Planning Tip #1:

When you meet with your tax professional to discuss the tax rules regarding QOZs, be sure to request a discussion if better real estate investment options exist.

For example, discuss if like kind exchanges (LKEs) would be a better fit for you. LKEs provide indefinite deferral of the capital gains and at death, receive a step-up in basis to fair market value, virtually eliminating all capital gain taxes. On the other hand, LKEs do not receive basis upwards adjustments that QOZ investments receive.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

ECONOMIC NEXUS – PA & PHILA. WAYFAIR UPDATE

August 7, 2019 by Frank

The U.S. Supreme Court’s Wayfair Decision Was a Landmark Decision that Replaced the Physical Presence Test with An Economic Nexus Test Significantly Expanding the Tax Reach of Tax Jurisdictions

What Is Wayfield?

In our blog dated July 24, 2018, we predicted that the June 21, 2018 U.S. Supreme Court’s decision in S. Dakota v. Wayfair would likely have very significant tax consequences on both businesses and consumers. As of this date, business owners have definitely seen increased scrutiny and filing requirements by tax jurisdictions looking to expand their tax base, which in turn creates increased tax compliance costs. Consumers that previously may have avoided sales tax on out-of-state purchases are now finding sales tax as an additional cost of those purchases.

Where Is PA & Phila. Today?

In our blog dated December 19, 2018, we discussed NJ & PA’s reaction to the Wayfair decision. As is very common with many tax laws and their enforcement, they evolve. We want to share with you PA & Philadelphia’s current responses to the Wayfair decision.

Updated PA Response to Wayfair

Act 13 of 2019, enacted on June 28, 2019, codified the $100,000 sales threshold previously established in SUT Bulletin 2019-01, effective July 1, 2019. PA has eliminated the $10,000 sales threshold established under Act 43 of 2017 along with the previously required notice and reporting option for remote sellers and marketplace facilitators.

The updated PA law is that remote sellers and marketplace facilitators with more than $100,000 of gross PA sales in the previous 12 months will have to register for PA sales tax and collect and remit beginning July 1, 2019.

Updated Philadelphia Response to Wayfair

Philadelphia has two types of business taxes – the Net Profits Tax and the Business Income and Receipts Tax (BIRT).

The Net Profits Tax is imposed on the net profits from the operation of a trade, business, profession, enterprise or other activity by Philadelphia residents or non-residents who conduct business in Philadelphia. Sole proprietors are subject to this tax. Corporations are not.

In January of 2019, the Philadelphia Department of Revenue enacted an economic regulation for its BIRT. Effective January 1, 2019, a business with no physical presence in Philadelphia will have economic nexus in Philadelphia if it generates $100,000 in gross receipts during any 12-month period; AND has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution.

Vendors of tangible personal property will still be protected from the net income tax if they otherwise meet the requirements of Public Law 86-272 (the standard before the enactment of Wayfair).

Tax Planning Tip #1:

Pre-Wayfair nexus rules were sometimes ignored by business owners who wishfully hoped that states would not find them operating in their states. These businesses hoped to avoid taxation and perhaps more importantly, the compliance filing and registration rules.

States continue to share information between them making it easier for states to identify non-filers. With states adopting dollar thresholds to determine economic nexus, it is now a math test to identify non-filers.

If returns and registration are not completed, the statute of limitations does not toll and the states looking for non-filers can assess a business at any time regarding prior years.

If your business meets the economic threshold in any state, consult with your tax professional about your filing requirements.

Tax Planning Tip #2:

Develop processes and systems to track your total sales on a revolving 12-month basis. Work with your tax professional to ensure that your systems are updated for dollar threshold changes as needed.

Tax Planning Tip #3:

Remember that states have different economic dollar thresholds. Some states may be as low as $10,000 total sales, others may be as high as $500,000.

Making matters more complicated, is that states have different effective dates and some have announced that their dollar thresholds will be changing on certain future dates.

Again, working with your tax professional is a must. You may also need information technology programing assistance.

Tax Planning Tip #4:

If you have economic substance, you MUST collect that state’s sales tax on your sales into that state and remit that tax to the appropriate state. Failure to do so means that your business is liable for the tax.

You will need to make a business decision if you wish to collect sales tax from dollar one. Why? What happens if you do not expect to surpass the $100,000 threshold a state may have enacted because your sales in previous years never exceeded $80,000 and that is where you are headed this year. Then significant sales of $30,000 are made which pushes you over the $100,000 threshold. It’s not just the $30,000 sales that are subject to the state’s sales tax, but the entire $110,000 sales made into that state.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.