Heading Toward Tax Season

xena110708As filing season approaches for the 2012 tax year, I am presenting here a few selected tax tips and updates that are often overlooked by traditional tax sources, hopefully brief enough to not induce boredom but complete enough to give you some valuable information:

The 1099 Matching Nightmare Continues

  • 1099-MISC:  Don’t forget to EXCLUDE payments to vendors made with credit cards from your total 1099-MISC payments.  Those payments will get reported to vendors on Form 1099-K.  If you do get 1099s that are wrong, ask the payer to correct the 1099.  If that is a pain, then report the full amount on your tax return, and then back out the erroneous portion somewhere on your expense lines.  And, make sure you can document why the 1099 you received is wrong.
  • 1099-K:  Even though IRS claims it is not now or ever going to match 1099-K payments into your tax returns, there’s a reason you are getting a 1099-K and that is to tap the underground economy by making sure that all businesses are reporting their gross income.  If you report less gross income than is shown on your Form 1099-K you will be subject to IRS inquiry, for which they have developed new notices related to Form 1099-K.  Be sure to provide all Forms 1099-K to your tax preparer so that they can help you avoid receiving these notices.
  • 1099-B:  If you receive broker 1099s related to your investments, you are by now used to receiving corrected 1099s, often long after you have filed your returns.  Due to new basis matching requirements, you will need to seriously consider whether you are better off extending your tax returns while you wait for all the corrections to come through, rather than having to amend your returns later for the corrections, or having to respond to IRS notices.  IRS plans to match all 1099-B reporting on the new Form 8949, first developed in 2011.  There are now 6 different ways to report capital gains and losses, and there are 21 different codes to use when reporting.  Due to the extra time involved, investors should seriously consider consolidating their brokerage accounts in order to save on accounting fees at tax time.

Charitable Contribution Receipts Must Contain Required Language       

Even if you have a “contemporaneous” receipt (one that you have in hand at the time you file your tax returns), it may be defective and result in the complete disallowance of your charitable deductions.  It MUST contain required language concerning whether or not the donor received any goods or services in exchange for a contribution.  If it doesn’t your contribution deduction will be disallowed in full.

W-2 Reminders to include HSA payments and Health Insurance Premiums

Don’t forget to include ALL H.S.A. payments on the W-2 Form, Box 12, not just payments made by employees through a cafeteria plan.  The purpose of this is to make sure that taxpayers are not contributing beyond the maximum amounts allowed in 2012 to their H.S.A. plans.

For 2012, you don’t have to report the value of health insurance premiums on the W-2s if you issue fewer than 251 W-2s.  If issue more than 250 W-2s, you must report the value of the health insurance premiums on Form W-2.  The reporting is “informational only” and is not subject to income or payroll taxes.

City of Portland Business Tax Rental Property Exemption Is Gone, Gone, Gone

If you own a few rental properties in Portland, but have no other business activities you may be blissfully unaware of the long reach of the City of Portland Business Tax.  Beginning in 2012, the City successfully changed its tax code to include ALL rental activity, not just owners with over 9 rental units within the City.  Don’t panic yet:  there’s a new exemption of $20,000 in gross income with 1 or 2 rentals, but you still have to file a special new Form to receive your exemption.  More info is available at the City’s website.  Remember that the City of Portland has its own special version of taxation without representation:  the gross receipts exemption means gross receipts EVERWHERE, including rentals you own in other states and capital gains on ANYTHING except securities, and includes all activities of your spouse if you file jointly, even if your spouse does not live in the City or have any business interests or activities there.

City of Portland School Arts Tax – You owe the City $35

This was the infamous Measure proposed by Mayor Adams which even arts and education groups such as Stand for Children opposed, mainly because only about ½ of the revenue raised will go to fund arts teachers for our public schools.  It did pass, however, so beginning in 2012 a new form is required of EVERY CITY RESIDENT AGE 18 AND OVER, accompanied by a $35 payment, or an exemption request for those below the poverty level.  The City of Portland is administering the tax, and the filing form has not even been developed yet.  However, the city has designated this link which will go live when the forms are ready:   http://www.artstax.net

Why the Portland/Multnomah County Business Tax Needs Reform

Mayor Sam Adams recently announced a tax amnesty for scofflaws who have so far succeeded in not rendering unto the City/County what they owe in business income taxes.  While I am not a big fan of amnesty programs, as they reward the wrong behavior and the wrong taxpayers, it is not surprising that businesses and property owners who have “nexus” within the City/County find themselves out of compliance with the tax code.  Some do so deliberately, while others may simply be blissfully unaware of their tax obligations.

This is because the City/County tax code, unlike its counterparts among other municipalities, taxes only certain businesses and individuals.  It relies on a very narrow tax base, and thus has an extremely high flat rate of 3.65%.  It is essentially a payroll tax on successful business owners, and an income/capital gains tax on successful property owners.

But more importantly, the tax punishes privately held companies who do business within City/County borders while rewarding public companies doing the same.  How can this be?  Well, here’s a real life example from my CPA practice:  Locally owned company with 3 shareholders, nets $4 million before owner salaries, and $1 million after owner salaries.  In my example, none of the shareholders actually live within the City/County boundaries.  What is their City of Portland/Multnomah County Business Tax?   The total tab will be $136,500.  If this same business were to be bought out by a publicly traded company, and management salaries were the same, the business would now have a tab of $36,500.  In this example, that’s a $100,000 punishment for the locally owned company.  Outrageous, no?

This strange phenomenon takes place because wages over $87,000 paid to more than 5% owners are “added back” to business net income to determine the tax.  Basically, you have a payroll tax on owners who pay themselves more than $87,000 per year, a tax that is not paid by companies who do not have more than 5% owners.

Further, the filing requirements imposed by the City are highly invasive (and perhaps illegal?).  Taxpayers who owe no tax whatsoever to the City/County are still required to provide copies of their individual tax returns, along with related Schedules C, D, and E, even though they have no income to report.  The TriMet tax, administered by the State of Oregon has no such requirements.  If you don’t owe the tax, you simply don’t file.

But, this is not so with the City/County.  I have clients who fear their personal financial details are now sitting on some City employee’s desk, and that information that is required by federal law to be kept in strict confidence is being exposed to those who have no need (or right?) to see such information.

But worst of all, the City/County tax is neither a fair tax nor a simple tax.  It relies on a narrow tax base (unfair) and it is one of the most complex and arcane municipal tax codes I have ever encountered.  A fairer and simpler tax would be a payroll tax/self-employment tax similar to the TriMet tax.  It could have a very low rate because of its broad tax base, and would be extremely simple to administer by simply tacking it on to the Oregon quarterly OQ filing. 

A broader tax base would also help to discourage local businesses from the practice of fleeing the City/County boundaries to escape the tax.  Regardless of what City leaders may say about this practice, every CPA I know has experience with clients who have relocated out of the City/County boundaries to avoid the tax.

In the meantime, if you own property or do business within the City/County borders and have not been filing your tax returns, now is the time to find out if the amnesty program can help you get into compliance.

Update June 20, 2012:  This just in from my tax law reporting service: 

“Oregon—Income Tax: Portland Confidentiality Provision Amended

Portland has amended its provision regarding confidentiality of business license tax taxpayers to provide that, in addition to existing prohibitions, it is unlawful for any Portland employee, agent, or elected official or any person who has acquired information to divulge, release, or make known in any manner identifying information about any taxpayer applying for tax amnesty, unless otherwise required by law. Ordinance No. 185312, City of Portland, effective May 9, 2012″

So, what is the penalty for unlawfully disclosing taxpayer information?  From the City Code: 

“7.02.730 Criminal Penalties for Violation of the Business License Law by City Employee or Agent.Printable Version
Anyone knowingly violating Section 7.02.230 may be punished, upon conviction thereof, by a fine not exceeding $500.00 or by imprisonment for a period not exceeding six (6) months, or by both fine and imprisonment.  Any City employee that is convicted will be dismissed from employment and is ineligible for holding any position of employment or office in the City for a period of five (5) years thereafter.  Any agent of the City that is convicted is ineligible for participation in any City contract for a period of five (5) years thereafter.”

Contrast this to the penalty on IRS employees for unlawful disclosure of federal tax information (which is the same information the City employees have about its licensees): 

“Penalties for Unauthorized Disclosure-Internal Revenue Code

Internal Revenue Code Sections 7213 and 7431 describe the penalties for unauthorized disclosure of federal information.

Under Section 7213 of the Internal Revenue Code, a governmental actor’s unauthorized disclosure is a felony that may be punishable by a $5,000 fine, five years imprisonment or both. Under Section 7213A of the Internal Revenue Code, the unauthorized inspection of federal tax information is punishable by a $1,000 fine, one year imprisonment or both. Section 7431 of the Internal Revenue Code permits a taxpayer to bring suit for civil damages in a U.S. District Court, including punitive damages in cases of willful disclosure or gross negligence, as well as the cost of the action.”

As you can see, City employees are subject to far less punishment than IRS employees who unlawfully disclose the exact same confidential information.