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R-2024-51, Feb. 27, 2024

WASHINGTON — The Internal Revenue Service announced today tax relief for individuals and businesses in parts of California affected by severe storms and flooding that began on Jan. 21.

These taxpayers now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, this includes San Diego County. Individuals and households that reside or have a business in this locality qualify for tax relief.

The same relief will be available to any other California localities added later to the disaster area. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The tax relief postpones various tax filing and payment deadlines that occurred from Jan. 21, 2024, through June 17, 2024 (postponement period). As a result, affected individuals and businesses will have until June 17, 2024, to file returns and pay any taxes that were originally due during this period.

This means, for example, that the June 17, 2024, deadline will now apply to:

• Individual income tax returns and payments normally due on April 15, 2024.
• 2023 contributions to IRAs and health savings accounts for eligible taxpayers.
• 2024 estimated tax payments normally due on April 15, 2024.
• Quarterly payroll and excise tax returns normally due on Jan. 31 and April 30, 2024.
• Calendar-year partnership and S corporation returns normally due on March 15, 2024.
• Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2024.
• Calendar-year tax-exempt organization returns normally due on May 15, 2024.

Also, penalties for failing to make payroll and excise tax deposits due on or after Jan. 21, 2024, and before Feb. 5, 2024, will be abated as long as the deposits were made by Feb. 5, 2024.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for relief during the postponement period.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief.

It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these kinds of unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

The IRS urges anyone who needs an additional tax-filing extension, beyond June 17, 2024, for their 2023 federal income tax return to request it electronically by April 15, 2024. Though a disaster-area taxpayer qualifies to request an extension between April 15, 2024, and June 17, 2024, a request filed during this period can only be submitted on paper. Whether requested electronically or on paper, the taxpayer will then have until Oct. 15, 2024, to file, though payments are still due on June 17, 2024. Visit IRS.gov/extensions for details.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the prior year (2023, normally filed this year). Taxpayers have extra time – up to six months after the due date of the taxpayer’s federal income tax return for the disaster year (without regard to any extension of time to file) – to make the election. For individual taxpayers, this means Oct. 15, 2025. Be sure to write the FEMA declaration number – 4758-DR − on any return claiming a loss. See Publication 547, Casualties, Disasters, and Thefts, for details.

Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

The IRS may provide additional disaster relief in the future.

The tax relief is part of a coordinated federal response to the damage caused by these storms and is based on local damage assessments by FEMA. For information on disaster recovery, visit DisasterAssistance.gov.

Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed.  Called an Offer in Compromise.

Before applying for an Offer in Compromise, here are some things to know:

• In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit IRS.gov for information on Payment Plans Installment Agreements.
• A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.
• The IRS has an Offer in Compromise Pre-Qualifier tool on IRS.gov. Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.
• Taxpayers wishing to file for an Offer in Compromise should visit IRS websitess Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at www.irs.gov/forms or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.

Additional IRS Resources:

• Tax Topic 204- Offers in Compromise

IRS YouTube Videos:

• Offer in Compromise English

Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed.  Called an Offer in Compromise.

Before applying for an Offer in Compromise, here are some things to know:

• In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit IRS.gov for information on Payment Plans Installment Agreements.
• A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.
• The IRS has an Offer in Compromise Pre-Qualifier tool on IRS.gov. Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.
• Taxpayers wishing to file for an Offer in Compromise should visit IRS websitess Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at www.irs.gov/forms or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.

Additional IRS Resources:

• Tax Topic 204- Offers in Compromise

IRS YouTube Videos:

• Offer in Compromise English

It is Important to know the rules whe it comes to Employee or Independent Contractors.The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.Here are two key points for small business owners to keep in mind when it comes to classifying workers.

1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a workers job, it exercises financial control. This includes:

• The extent of the worker's investment in the facilities or tools used in performing services
• The extent to which the worker makes his or her services available to the relevant market
• How the business pays the worker, and
• The extent to which the worker can realize a profit or incur a loss

2. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:

• Written contracts describing the relationship the parties intended to create
• Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
• The permanency of the relationship, and
• The extent to which services performed by the worker are a key aspect of the regular business of the company
• The extent to which the worker has unreimbursed business expenses

The IRS can help employers determine the status of their workers by using form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer's Supplemental Tax Guide, is also an excellent resource. 

Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing -- no matter what a persons passion, the Internal Revenue Service offers some tips on hobbies.Taxpayers must report on their tax return the income earned from hobbies. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five tax tips to consider:

1. Is it a Business or a Hobby? A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. Consider nine factors when determining whether an activity is a hobby. Make sure to base the determination on all the facts and circumstances. For more about not-for-profit rules, see Publication 535, Business Expenses.
2. Allowable Hobby Deductions.  Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
3. Limits on Hobby Expenses. Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can't be deducted from other income.
4. How to Deduct Hobby Expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.

With the election of Donald Trump, tax reform is on the front burner for this President Elect.  If and when his changes materialize is another question.Individual Tax Change Proposals

• 1. Mr. Trump has proposed reducing the top individual tax rate from 39.6% to 33%.  For higher income individuals, postponing income until next year will be more important than in the prior years.

Warning: Mr. Trump has proposed three tax brackets: 12%, 25% and 33%.  Some may find that they were paying at 28% rate may be pushed into paying 33% rate on a portion of their taxable income.  Single parents are also likely to pay more taxes as Mr. Trump has proposed to eliminate personal exemptions and the head of household status.

• 2. If rates drop next year, accelerating deductions into this year might make them more valuable-deductible at 39.6% instead of 33% with Mr. Trumps proposal for lower rates.
• 3. Under Mr. Trumps proposal, capital gains remains the same but the 20% capital gain rate would begin when income is taxed as Mr. Trumps top bracket of 33%.  The capital gains rate begins at $127,500 for singles and $255,000 for married filing jointly.  Under the current law, the 20% rate doesn't begin until $425,400 for singles and $487,650 for married couples filing jointly.

For gains subject to the 3.8% tax on net investment income (NII), the different is minimal.  If you are a real estate professional or the gains are from assets used in the individuals material participation business, there could be an $11,000 increase in taxes between a sale in 2016 and 2017.

• 4. Proposed increasing the standard deduction from $6,300 to $15,000 for single and from $12,600 to $30,000 for married filing jointly.  With the possibility of a substantial increase to the standard deduction in 2017, some clients with minimal itemized deductions will want to bunch deductions into 2016.
• 5. Proposed limiting itemized deductions to $100,000 Single ($200,000. MFJ).  If exceptionally large contributions are in the clients plans, a 2016 contribution may save some deduction.
• 6. Proposed that the deduction for donation of appreciated assets to a family foundation be limited to bias, rather than fair market value. Those with family foundations, or who are considering family foundations that donations shall be accelerated to assure maximum tax benefits.
• 7. Proposed repealing the 3.8% on net investment income.  Thus you might want to postpone passive and portfolio income, capital gains, and carried interested into 2017.  Selling stock and rental property, as an example, in 2017 rather than 2016, may help you save in NII tax.
• 8. Proposed repealing AMT.  For those individuals subject to AMT in 2016, postponing real estate tax payments, state tax payments and miscellaneous itemized deductions until 2017 may result in tax savings.
• 9. If AMT is repealed, AMT credits may be wasted.  You may want to consider selling assets with AMT basis that is lower than regular tax basis to use up as many AMT credits as possible before the law change.

Estate & Gift Tax Change Proposal

• 10. Mr. Trump has proposed repealing state tax.  If estate tax is repealed, avoid taxable gifts-those above the current estate tax exemption.  In the mid 2016 the IRS released 2704 regulations that would have restricted discounting of family gifts and we advised that clients see their estate planner to consider gifting before the regs took effect.  Now Mr. Trump plans to repeal estate tax will send many government proposals back to the drawing board.  And in case we need to say it, stay healthy for another year.
• 11. Mr. Trumps proposed to repeal state tax includes change to the step up of basis for inherited assets.  Assets above $5 million would not receive a step up basis.  Aging clients should be advised to recognize gains at least to extent of capital loss carryovers.  Passive gains should be recognized to extent of suspended passive losses maybe boot on an exchange to the extent of suspended losses. Capital losses are generally lost at death.
• 12. If rates drop next year, accelerating business deductions, including timing differences, 179 and 168 (k) bonus depreciation, into the tax year 2016 might make them more valuable deductible at 39.6% instead of 33% with Mr. Trumps proposal for lower rates.

Corporate Tax Change Proposal

• 13. Proposed lowering corporate rates from 35% to 15%.  A reduction in corporate rates may be good for global competitiveness but what does it mean for domestic business?  Will rates drop for S corporation passthrough income?  LLC passthrough income? What about schedule C or F income?  Until we know more, a client who asks about his or her entity structure for a new business might want to consider an LLC.  It is easy form, change or dissolve.  The LLC can be a place holder until we know more about the law.

Proposed Repeal of the Affordable Care Act

• 14. Proposed to repeal Obamacare (the Affordable Care Act). The House of Representatives has voted 60 times to repeal the law.  With the new President and the new Congress wanting the same thing, the repeal of the Affordable Care Act would likely occur in the first 100 days of the new administration.  When the repeal would be effective, what the transition rules would look like, and what would happen to health insurance purchased from the exchange in 2017 is unknown.

What you should be aware of about the repeal? If now receiving a premium assistance credit, the credit will disappear when Obamacare is repealed.  This does mean that some people will not be able to afford health insurance without the governments subsidy.  Also employers who were pushed into offering health insurance to their employees because of Obamacare may drop their policies.  If you are likely to lose coverage in 2017 all medical services should be completed while insurance is still in place. (Maybe before February 2017?) Self-employed individuals that now receive a premium assistance credit, the credit will disappear when Obamacare is repealed.  This means that some individuals will not be able to afford health insurance without the government subsidy.  If you are likely to lose coverage in 2017 all medical services should be completed while insurance is still in place. (Maybe before February 2017?)  Small Business owners who now benefit from the small employer health insurance credit, it will disappear with the repeal of Obamacare.  Because the small employer health insurance credit is only available for two years, this change will have a short term impact.· Small business owners who dropped their health reimbursement account (HRA) because the limits on an HRA violated health care reform that the repeal of Obamacare may allow then to reinstate the reimbursement of individual health insurance premiums, medicare premiums and out of pocket medical costs.  But NOT yet! You will tell them when. Advise large business owners (applicable large employers) should not invest in compliance infrastructure (people, software and service providers) because the record keeping and requirements to file form 1095 will disappear with Obamacare. 

If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure: As you start out, you'll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You'll report your business activity using the IRS forms which are right for your business type.
2. Business Taxes: There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.
3. Employer Identification Number: You may need to get an EIN for federal tax purposes. Search do you need an EIN on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.
4. Accounting Method: An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.
5. Employee Health Care: The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

Have you ever wondered if the Alternative Minimum Tax applies to you? You may have to pay this tax if your income is above a certain amount. The AMT attempts to ensure that some individuals who claim certain tax benefits pay a minimum amount of tax.Here are some things from the IRS that you should know about AMT:

1. You may have to pay the tax if your taxable income, plus certain adjustments, is more than the AMT exemption amount for your filing status. If your income is below this amount, you usually will not owe AMT.

2. The 2017 AMT exemption amounts for each filing status are: 

• Single and Head of Household = $54,300
• Married Filing Joint and Qualifying Widow(er) = $84,500
• Married Filing Separate = $42,250

3. The rules for AMT are more complex than the rules for regular income tax. 4.If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax or consult your tax professional.5.If you owe AMT, you usually must file Form 6251, Alternative Minimum Tax Individuals. Some taxpayers who owe AMT can file Form 1040A and use the AMT Worksheet in the instructions.