PPP Flexibility Act gives borrowers more time to spend loan funds and still obtain forgiveness.

Payroll Protection Program Flexibility Act which was enacted earlier this month, amends the loan forgiveness provisions of the PPP Act by giving borrowers more time – 24 weeks instead of 8 weeks – to spend the loan funds and still obtain forgiveness. The Act also reduces the minimum amount required to be spent on payroll from 75% to 60% and with up to 40% of the loan amount to be used for mortgage interest, rent, or utility payments to obtain full loan forgiveness of that amount.

PPPFA has extended the date to replace full-time equivalent employees and restore salaries from June 30, 2020 until December 31, 2020 which provides relief for those businesses that have a loss of Full time equivalent employees it its workforce because of Covid-19 related restrictions that prevent the same level of business activity through the end of the year.  Borrowers have been given flexibility, whereby they could obtain full forgiveness if there is a reduction in workforce based on the inability to find qualified employees or if they were unable to restore operations to Feb. 15, 2020, levels due to COVID-19 restrictions. These are in addition to previous guidance that let companies exclude workers who turned down good-faith offers of re-employment.

For the unforgiven portion of the PPP loan, the PPPFA also extends the repayment period to five years from the original two while retaining the original 1% interest rate in respect of loans made after June 5.

The  Borrower  can now apply for forgiveness of its Paycheck Protection Program (PPP) loan using SBA Form 3508. In the alternative the borrower could use SBA Form 3508EZ in any of the following  conditions –

The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form.

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 and The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period OR  the Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020

USCIS Issues New H1B Policy Memorandum Significantly Easing Employer-Employee Guidance

USCIS has issued a Policy Memorandum wherein, effective immediately, they have rescinded two of their own controversial policy memorandum which had become cause of denial of a large number of H1B petitions for the last 10 years– one for  determining Employer-Employee Relationship for Adjudication of H-1B Petitions (including Third-Party Site Placements), issued in January 2010 (popularly known ‘Neufeld’ Memo) and the other requiring  Contracts and Itineraries Requirements for H-1B Petitions Involving Third-Party Worksites issued in February 2018.

Hopefully, this Memorandum ends 10 years of relentless harassment of both the employers & employees in terms of H1B adjudication process wherein USCIS had created their own arbitrary rule defining ’employer-employee relationship’ and the USCIS adjudication officers were even more whimsical in their interpretation of that rule and deny genuine cases.

This new Policy Memorandum follows the landmark March 10, 2020, District Court judgement whereby the judge ruled that key USCIS memos and policies   interpreting an employer-employee relationship and an itinerary rule/short term approvals of H-1B petitions, were unlawful. Ruling in the case of  ITServe Alliance v. L. Francis Cissnathe judge focused on USCIS policies interpreting an employer-employee relationship and an itinerary rule/short term approvals of H-1B petitions.

The now rescinded 2010 memorandum provided guidance on the requirement that a petitioner establish that an employer-employee relationship exists and would continue to exist with the beneficiary throughout the duration of the requested H-1B validity period. The memorandum became the ground for denial of a heavy number of genuine and valid H1B petitions by USCIS’s over zealous adjudicators who interpreted this memo as having armed them with unlimited discretionary power, which they could use arbitrarily. The 2018 memorandum provided guidance relating to H-1B petitions filed for workers who would be employed at one or more third-party worksites and was intended to be read in conjunction with the 2010 memorandum and as a complement to that policy.

The new Memorandum, while replacing the 2010 and 2018 Memoranda clarifies that the USCIS adjudicating officers should rely on submitted Labor Condition Application (LCA) and a copy of any written contract between the petitioner and the beneficiary and depending upon the content of such documentation, it may establish the employer-employee relationship.

The USCIS has further clarified that the adjudicating officer should apply the existing regulatory definition in assessing whether an employer and a beneficiary have an employer-employee relationship and that the officer should consider whether the petitioner has established that it meets at least one of the  five- “hire, pay, fire, supervise, or otherwise control the work of” factors with respect to the beneficiary.

In support of the petition, an H-1B petitioner henceforth is not required by the regulations to submit contracts or legal agreements between the petitioner and third parties.

The Memorandum also clarifies that while a petitioner is not required to identify and document the beneficiary’s specific day-to-day assignments, the petitioner must still meet all statutory and regulatory requirements, excluding the itinerary requirement. An officer should deny a petition when the petitioner has not established that the beneficiary will work in a specialty occupation.

If the officer finds that a petitioner has not established, by a preponderance of the evidence, statutory or regulatory eligibility for the classification as of the time of filing, the officer should articulate that basis in denying the H-1B petition. To make this determination, the officer should apply statutory and regulatory requirements, (excluding the itinerary requirement); binding court precedent; Administrative Appeals Office (AAO) adopted and precedent decisions; and current USCIS policy guidance concerning H-1B nonimmigrant classification.

According to the Memorandum, the guidance concerning benching remains unchanged and except in certain limited circumstances, “benching” is prohibited by law and may be viewed as failure to work according to the terms and conditions of the petition approval, which may attract, among other enforcement actions, revocation of the petition approval, a finding that the beneficiary failed to maintain status, or both. If a beneficiary is in non-productive status because of a lack of work, that could indicate to the USCIS that the beneficiary no longer is in a specialty occupation and that may affect eligibility. However, it would not be a violation of H-1B nonimmigrant status for a beneficiary to be in non-productive status during a period that is not subject to payment under the petitioner’s benefit plan or other statutes such as the FMLA-Family and Medical Leave Act or the ADA-Americans with Disabilities Act.

USCIS is likely issue new guidance pertaining to itinerary of employment, but in the meantime the officers will abstain from the application of the itinerary requirement.

USCIS guidance also states that USCIS may issue approvals for H-1B petitions with validity periods shorter than the time period requested by the H-1B petitioner, only if the decision is  accompanied by a brief explanation as to why the validity period has been limited, eg. instances in which the certified LCA has a validity period of shorter duration than that specified on the H-1B petition.

INTEREST FREE DEFERRAL OF CALIFORNIA SALES TAX LIABILITY

As part of the Covid relief, California is providing Small businesses with an option for  interest free deferral of sales/use tax up to $50,000 for businesses with less than $5 million in taxable sales.. Under this relief, qualifying sales and use taxpayers with deferred liabilities up to $50,000 will pay their tax due in 12 equal monthly installments. No interest or penalties will be assessed against the liability.

Besides, If taxpayers choose to use this program to distribute the burden of their May or June prepayments or their July return, CDTFA will work to accommodate those taxpayers.

The above payment plans are in addition to the previous announcement made whereby CDTFA has provided a three-month extension for a tax return or payment to any businesses filing a return for less than $1 million in tax. For such business taxpayers their current California sales and use tax obligation, returns for the 1st quarter 2020 will now be due on July 31, 2020. All businesses will also have an extra 60 days to file claims for refund from CDTFA or to appeal a CDTFA decision to the Office of Tax Appeals.

Businesses who do not fall within these parameters can contact CDTFA who retains administrative flexibility to assist businesses needing relief in the case of disasters.

COVID TAX RELIEF thru CARES ACT – (Coronavirus Aid, Relief, and Economic Security Act)

 

RECOVERY REBATES FOR INDIVIDUALS.

The CARES Act gives advance tax rebates for the 2020 tax year of up to $1,200 per individual (or $2,400 for joint return filers), plus $500 per child to eligible taxpayers.

The rebates phase out for single individuals with incomes between $75,000 and $99,000, and joint return filers with incomes between $150,000 and $198,000, and are not available for single individuals and joint return filers (with no children) with incomes exceeding $99,000 and $198,000, respectively.

The IRS will use tax return information provided on the taxpayer’s 2019 tax return (or alternatively the taxpayer’s 2018 tax return) to issue the advance tax rebate.

For this purpose, eligible Taxpayers are those residents who have a valid Social Security number (SSN), are not considered as a dependent of someone else, and whose adjusted gross income (AGI) does not exceed certain thresholds, is eligible to receive the credit. Spouses of military members are eligible without a SSN. An adopted child can use an Adoption Tax Identification Number to be eligible.

IRS has also created a special tool whereby non-filers (who have income below filing threshold) could also go to IRS website and enter certain details and get the Economic impact payment. Individuals who receive Social Security retirement, disability (SSDI), or survivor benefits and those who receive Railroad Retirement benefits do not need to enter such information as they will automatically receive the payment.

 

DELAY OF CERTAIN FILING & ESTIMATED PAYMENT DEADLINES

The Treasury Department and Internal Revenue Service announced on March 21st that the federal income tax filing due date for Individual, C Corporation and GST returns is automatically extended from April 15, 2020, to July 15, 2020. This extension, however, does not apply to Pass-through entities (Multimember LLCs and S Corporation who had a filing deadline on March 15, 2020.

In addition, taxpayers can defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed.

This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax. Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the July 15 deadline, can request a filing extension by filing Form 4868.

In addition, the due dates for payment of Estimated Tax installments for 2020 in respect of Individuals and Corporations shall be deferred to October 15, 2020, when all the installments due till that time will become due.

 

Tax-Favored Withdrawals From Retirement Plans

The CARES Act allows a taxpayer to take a “corona virus-related distribution” of up to $100,000 in the year 2020 free from penalty.  Such distribution is allowed to an individual who, or whose spouse or dependent is diagnosed with Covid-positive condition, or who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.

While the distribution escapes the 10% penalty, it doesn’t escape the income tax. However, CARES Act allows the taxpayer to spread the income over a 3-year period beginning with 2020.

The taxpayer also gives the taxpayer the choice to avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.

 

Loans From Qualified Plans

In addition, the amount an individual may borrow from his or her retirement plan is increased from $50,000 to $100,000 for the 180-day period beginning after the enactment of the Act.

 

REQUIRED MINIMUM DISTRIBUTION (RMD) WAIVED

For those required to withdraw a “required minimum distribution” from their retirement plan in

2020, the CARES Act temporary waives the requirement for this year only.

 

CHANGES TO CHARITABLE CONTRIBUTIONS

For those who do not itemize, the CARES Act allows an individual to make a cash contribution of up to $300 made to certain qualifying charities and deduct the contribution “above-the-line” in computing adjusted gross income. Thus, the taxpayer receives the deduction in addition to the standard deduction. This above-the-line deduction is here for 2020 and beyond.

 

SUSPENSION/ INCREASE OF LIMITATIONS ON CERTAIN CASH CONTRIBUTIONS MADE IN 2020

For those individuals that itemize, the CARES Act removes the 50 percent of adjusted gross income limit on charitable deductions for cash contributions in 2020

For Corporations, the CARES Act increases the charitable deduction limit from 10 percent to 25 percent of a corporation’s taxable income for cash contributions in 2020.

 

DELAY OF PAYMENT OF EMPLOYER PAYROLL TAXES

The CARES Act allows employers (including self-employed individuals) to defer payment of the employer’s share of Social Security taxes on wages (6.2%) that accrue from the date of enactment of the CARES Act until the end of 2020 (the “Deferral Period”). Half of the deferred amount must be paid by December 31, 2021, and the other half must be paid by December 31, 2022.

Self-employed individuals can also likewise defer the ‘employer portion (6.2%)’ of the Social Security Tax in the Deferral Period.

  

MODIFICATIONS FOR NET OPERATING LOSSES.

– Modification Of Rules Relating To Carrybacks of losses

The CARES Act repeals the 80 percent income limitation brought in by the JOBS ACT on set off of brought forward losses for tax years beginning before 2021 and allows 100 percent of loss carry forwards. Thus, losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income, as opposed to 80% under the TCJA.

In addition, the CARES Act also reintroduces carryback of losses by permitting taxpayers (other than REITs) to carryback for up to five years NOLs arising in tax years beginning in 2018, 2019 and 2020.

For corporations, NOLs carried back to tax years before 2018 may be particularly valuable because the corporate income tax rate was as high as 39% percent at certain income levels.

Businesses with NOL carrybacks would be able to obtain tax refunds for taxes paid within the five-year carryback period. As a result, these changes may provide many business with liquidity from accelerating the use of NOLs to reduce taxes and permitting immediate tax refunds for tax paid in prior years.

To qualify for a carryback adjustment, a taxpayer must file the application within 120 days of the enactment of the CARES Act.

 

– Suspension of “excess business loss” limitations on non corporate taxpayers for 2018, 2019 & 2020

JOBS ACT placed a limit on an individual’s ability to use business losses arising to offset non business income in subsequent years by limiting the offset of brought forward losses to $250,000 for individuals ($500,000 for joint return filers) prior to 2026, and such losses that are disallowed as “excess business losses” are carried forward and treated as NOLs in future tax years. The CARES Act suspends these excess business loss limitations for tax years beginning in 2018, 2019 and 2020. Qualifying taxpayers should take advantage of these additional deductions to reduce taxes for 2019 and 2020, and should consider filing amended returns for excess business losses that arose in 2018.

 

 MODIFICATION OF LIMITATION ON BUSINESS INTEREST.

The TCJA limited the business interest deduction to 30% of adjusted taxable Income. The CARES ACT increases the limitation on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020.

The limitation increase does not apply to partners in partnerships for 2019 but applies only in 2020. For excess business interest in tax years beginning in 2019, partners can elect to have 50 percent of that excess business interest treated as business interest paid in 2020 that is not subject to the business interest deduction limitation, and the remaining 50 percent of that excess business interest subject to the 30 percent business interest expense limitation can be carried forward.

Taxpayers may elect to calculate the interest limitation for 2020 using their 2019 adjusted taxable income (which in many cases would be higher, especially if their business is adversely affected in 2020.

 

Expedited refunds for remaining corporate AMT credits

Before the 2017 TCJA, certain corporations paid a 20 percent alternative minimum tax (AMT) and that paid AMT generated a tax credit that could be carried forward and used to offset regular income tax paid by those corporations in future tax years. The CARES Act provides that a corporation can claim a full refund of these AMT credits in its 2018 and 2019 tax years. To take advantage of this immediate refund, corporations must apply by the end of 2020 and the IRS will process the application within 90 days.

 

Employee Retention Credit :Refundable payroll tax credit for affected employers

The CARES Act gives eligible employers a refundable payroll tax credit equal to 50 percent of “qualified wages” (including health benefits) paid to each employee from March 13, 2020 through the end of 2020 (the “COVID-19 Period”), with a maximum credit limited to 50 percent of each employee’s qualified wages up to the first $10,000 (i.e., a credit of up to $5,000 per employee).

To be eligible, an employer’s (i) operations must be fully or partially suspended during the COVID-19 Crisis Period, due to a COVID-19-related shut-down order; or (ii) gross receipts must have declined by 50 percent or more when compared to the same quarter in 2019.

Employers with Less Than 100 Employees

If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees (including those furloughed), regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.

 Employers with More Than 100 Employees

If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

 

Exclusion from Income of Employer Payment of Employee Student Loan Debt

As part of the CARES Act, an employer can pay up to $5,250 in 2020 of an employee’s student loan obligation on a tax-free basis.

Note, however, that this provision modifies existing Section 127, which permits an employer to pay up to $5,250 of an employee’s qualified educational expenses .This is now a combined limit; thus, an employer could pay $3,000 towards an employee’s Master’s degree and another $4,000 of the same employee’s student loan payments in 2020, but the maximum amount that will be tax-free to the employee is $5,250.

To the extent an employee’s student loan is paid on a tax-free basis under new Section 127 by his or her employer, the employee cannot deduct the interest on the student loan under Section 221.

 

Small Business Loan Forgiveness

CARES ACT creates a loan forgiveness program for small businesses, whereby any cancellation of debt income under the program would be tax-free.

An eligible recipient is allowed tax-free forgiveness of indebtedness on a covered loan in an amount equal to the cost of maintaining payroll continuity during the covered period March 1, 2020 till June 30, 2020. Covered loan means a loan guaranteed under section 7(a) of the Small Business Act that is made during the covered period;

 

TECHNICAL AMENDMENTS REGARDING QUALIFIED IMPROVEMENT PROPERTY

The 2017 TCJA generally permits taxpayers to take 100 percent bonus depreciation on property with a recovery period of 20 years or less if that property is placed in service before 2023. However, the 2017 TCJA mistakenly excluded from 100 percent bonus depreciation business expenses for certain improvements to existing nonresidential building (“qualified improvement property” or QIP). The CARES Act fixes this error by extending 100 percent bonus depreciation to QIP and by permitting taxpayers to retroactively claim 100 percent bonus depreciation on QIP placed in service in 2018 and 2019. If this applies, qualifying taxpayers should consider filing amended returns to take advantage of this benefit.

 

CALIFORNIA

COVID RELIEF BY FRANCHISE TAX BOARD

 

State Postpones Tax Deadlines Until July 15 Due to the COVID-19 Pandemic

The Franchise Tax Board (FTB) has announced updated special tax relief for all California taxpayers due to the COVID-19 pandemic. Accordingly, FTB has postponed until July 15 the filing and payment deadlines for all individuals and business entities for:

  • 2019 tax returns
  • 2019 tax return payments
  • 2020 1st and 2nd quarter estimate payments
  • 2020 LLC taxes and fees
  • 2020 Non-wage withholding payments

State Postpones Deadlines for Filing Tax Protests, Appeals, and Refund Claims Due to COVID-19

State Controller and Franchise Tax Board (FTB) Chair Betty T. Yee today announced an extension of time until July 15, 2020, for California taxpayers to complete certain time sensitive acts pertaining to state taxes due to the COVID-19 pandemic.

FTB Issued Notice- 2020-02PDF Download, detailing the new deadlines to file:

  • Claims for refunds with FTB
  • Protests of proposed tax assessments with FTB
  • Appeals to the Office of Tax Appeals of Notices of Action denying claims for refund or affirming tax assessments

CA EDD Relief

Businesses directly affected by COVID-19 can request up to a 60-day extension to file their state payroll reports and deposit state payroll taxes without penalty or interest. They need to include the impact of COVID-19 in their written request for the extension. The request must be received within 60 days from the original past-due date of the payment or return.

 

 

COVID RELIEF LOAN PROGRAMS THROUGH SBA

THE PAYCHECK PROTECTION PROGRAM (PPP)

 

The Paycheck Protection Program (PPP), is a loan designed to provide access to cash so that businesses can keep paying their employees and other expenses such as health insurance premiums, rent or mortgage payments and utilities. This important financial relief will help small businesses return to being fully operational quicker once conditions improve. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.

This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.

Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries. Small businesses in the hospitality and food industry with more than one location could also be eligible if their individual locations employ less than 500 workers.

As per the SBA, the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.  Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

This loan has a maturity of 2 years and an interest rate of 1%.

The loans under the “paycheck protection loans” are generally limited to the lesser of:

  • the sum of 1) average monthly “payroll costs” for the 1 year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5, and 2) any disaster loan taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, and
  • $10 million.

Payroll costs do not include, however the compensation of any individual employee in excess of an annual salary of $100,000,

Applications under this program are submitted through the borrower’s banks.

 

Economic Injury Disaster Loan Emergency Advance

The Small Business Administration’s (SBA) EIDL- disaster loans are the primary form of Federal assistance provided for the repair and rebuilding of non-farm, private sector disaster losses. The Economic Injury Disaster Loan Program (EIDL) can provide financial assistance  to small businesses or private, non-profit organizations that suffer substantial economic injury as a result of the declared disaster.

Small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. According to the SBA, Funds will be made available following a successful application. This loan advance will not have to be repaid.

SBA’s this program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19. Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries. The Economic Injury Disaster Loan advance funds will be made available within days of a successful application, and this loan advance will not have to be repaid.

This application is directly submitted to SBA.

 

IRS Amnesty for former citizens to come into compliance with US Tax and filing obligations

IRS has recently announced a new procedure whereby certain individuals who relinquished their U.S. citizenship could come into compliance with their U.S. tax and filing obligations and receive relief for back taxes.

As per US Tax laws, U.S. citizens, and Green Card holders, regardless of whether they live in the United States or abroad, are required to report and pay to the Internal Revenue Service (IRS) all applicable taxes on their worldwide income, including on their income from foreign financial assets. Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime.

Individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible to avail of relief provided by the new procedure announced by the IRS so long as they satisfy the other criteria of the procedures.

According to the IRS, the Relief Procedures for Certain Former Citizens apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million.  Moreover, only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures.

Expatriated individuals who are eligible to avail of the Relief Procedures and wish to use them, are required to file delinquent U.S. tax returns, including all required information returns, for the five years preceding besides the one for their year of expatriation. If the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is even relieved from paying U.S. taxes, penalties and interest.

Announced in September 2019, the IRS is currently offering these procedures without a specific termination date as of now, but IRS will announce a closing date prior to ending the procedures.

 

California passes law stringently defining Independent Contractors after the Dynamex case

Last week California Governor Gavin Newsom signed a new legislation that codifies the test for determining when a worker is an independent contract as outlined in a California Supreme Court decision last year. This legislation, which goes into effect on January 1, 2020, is based on the stringent “ABC” test adopted by the California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles  case of 2018.

This legislation codifies that a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.

Under this new law, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

As can be seen from the above, the new law lays down a very expansive definition of ‘employee’ by adopting the Dynamex case, whereby a worker is considered to be an independent contractor only if all three of the laid out factors are present.

The new legislation following the Dynamex ruling, marks a significant departure from the Borello multi-factor balancing test This could have far reaching impact on nearly every sector of the economy. The supporters of the legislation hail it as a landmark legislation to improve pay and benefits for low- and middle-wage workers, that could change the employment status of more than a million Californians including janitors, truckers, health care workers, construction workers, among others. This legislation would also cover gig economy workers such as software coders/ developers and other independent workers. The critics of the new legislation feel that the new classification test hampers the modern day employment models, especially in the Silicon Valley as it is out of tune with the flexibility and multiple freelance income opportunities that are available to independent software professionals.

Uber, Lyft and several other gig economy companies are finding ways to challenge the applicability of the tests on workers associated with them and are continuing with their lobbying campaign to keep them out of reach of the new legislation.

Exemptions

The following occupations have however, been provided exemption from the coverage of the new law and instead, the determination of employee or independent contractor status for individuals in those occupations shall be governed by Borello test.

(1) A person or organization who is licensed by the Department of Insurance

(2) A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California

(3) An individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer, architect, engineer, private investigator, or accountant.

(4) A securities broker-dealer or investment adviser or their agents and representatives

(5) Certain direct sales salesperson who perform services as a real estate, mineral, oil and gas, or cemetery broker or as a real estate, cemetery or direct sales salesperson, or a yacht broker or salesman.

(6) A commercial fisherman working on an American vessel

Severe criminal and civil penalties and fines

Employers not following the new law by mis-categorizing a worker as independent contractors, instead of as an employee could be subject to statutory fines and penalties under California Labor Code, EDD laws and California Franchise Tax board besides Internal Revenue Service as well.

Double Whammy for certain workers as well

Although the new law seems to be for the protection and benefit of workers by and large, as it provides them with employment law protection and benefits, for certain sales or field workers it may come as a disadvantage. This would be as as the JOBS Act 2017 removed the unreimbursed employment expense deduction for all employees. A lot of workers working purely on commission, cannot claim their legitimate travel, supplies, meals and many other out of pocket expenses if they are categorized as employees working on W2, but if they work as independent contractors, they could claim all such expenses while filing Schedule C for their tax returns as independent contractors.

 

California shifts Sales Tax compliance responsibility on intermediaries – ‘Marketplace Facilitators’ instead of sellers beginning October 1, 2019

Beginning October 1, 2019, California joins those states that are looking to hold intermediaries and agents, or marketplace operators, or as they are technically called ‘marketplace facilitators’ responsible for collecting and remitting sales tax on behalf of all marketplace sellers.

The new law shifts the onus from ‘Marketplace seller’ to ‘Marketplace facilitator’, whereby the marketplace facilitator will be considered the seller and retailer for each sales facilitated through its marketplace. As a result, th Marketplace facilitator will be required to register with CDTFA, pay Sales Tax or collect and pay use tax on each retail sale facilitated by a marketplace seller through its marketplace on all retail sales for delivery to California customers facilitated through its marketplace. This new requirement is included in the Marketplace Facilitator Act, added by Assembly Bill 1471.

To be responsible under the new law, the Market place facilitator must actively sell tangible personal property in California, or be a retailer engaged in business in this state because they have a sufficient physical presence in California, such as a business location, sales representative, or inventory; or have an economic nexus with California. In the absence of physical presence in California, economic nexus threshold test is satisfied, if the total combined sales of tangible personal property for delivery in California by such marketplace facilitator, and all persons related to the retailer exceed $500,000 in the preceding or current calendar year.

Marketplace facilitator, in general, is any person who contracts with marketplace sellers to facilitate the sale of the marketplace sellers’ products through a marketplace operated by the person or a related person.

Specifically, “Marketplace facilitator” means a person who contracts with marketplace sellers and on their behalf or on is own behalf engages in:

  • Transmitting or otherwise communicating the offer or acceptance
  • Owning or operating the infrastructure, electronic or physical, or technology that brings buyers and sellers together.
  • Providing a virtual currency for transaction or Payment processing services.
  • Software development or R&D activities related to payment processing, fulfillment or storage or listing of products for sale.
  • Fulfillment or storage services.
  • Listing products for sale or Setting prices or Order taking.
  • Branding sales as those of the marketplace facilitator.
  • Providing customer service or accepting or assisting with returns or exchanges.

“Marketplace facilitator” however, does not include Newspapers, internet websites, and other entities that advertise tangible personal property for sale, that do not perform the functions listed earlier or a ‘Delivery network company’- a business entity that maintains an internet website or mobile application used to facilitate delivery services for the sale of local products.

It is interesting to note that the term “Marketplace” used in this context means a physical or electronic place, including, a store, booth, internet website, catalog, television or radio broadcast, or a dedicated sales software application, where a marketplace seller sells or offers for sale tangible personal property for delivery in this state.

Obligation of Marketplace Sellers selling through Market place facilitators

Beginning October 1, 2019, Marketplace sellers that sell tangible merchandise through a marketplace facilitator, such as an Internet website, may not be responsible for the sales or use tax on their marketplace sales for delivery to California customers. However, a marketplace seller is not necessarily relieved of its duty for Sales/ Use Tax, if it makes sales independent of Marketplace facilitator.

Background – Wayfair case

US Supreme Court’s decision in Wayfair vs. South Dakota in June 2018 has paved the way for more than 30 states to redefine the economic nexus for States to impose Sales Tax obligations on out of state businesses.  In the Wayfair case  the Supreme Court overruled the 1992 Quill case judgement which required physical presence of the out of state business to satisfy the nexus requirement, thereby holding that South Dakota State laws  imposing obligations on out of state sellers to comply with the State laws Tax laws even though they do not have physical presence in the state, does not violate the Commerce clause and Due process clause of the Constitution. In this landmark decision the Supreme Court ruled that the ‘physical presence rule’ is not a necessary interpretation of the requirement that a state tax must be “applied to an activ­ity with a substantial nexus with the taxing State”.  This case thereby affords greater latitude to the States to enforce their reach on certain out of state retailers selling to instate buyers.

Post Wayfair changes – Effective April 1, 2019 – Sales made to California customers:

After the Wayfair case decision, California has enacted changes whereby as of April 1, 2019, certain out-of-state retailers are required to register with the California Department of Tax and Fee Administration (CDTFA), collect California sales tax and remit taxes to the CDTFA regardless of having a physical presence in the state.

The new obligation would apply to out of state retailers who have more than $500,000 in annual sales to California customers within the preceding or current calendar year.

Change for In state businesses as well (Sales within a single District):

Beginning April 1, 2019, any retailer whose sales into a district exceed $500,000 in the preceding or current calendar year in any district, is considered to be engaged in business in that district and is required to collect that district ‘s use tax on sales made for delivery in that district.

Sales made in other states:

About 30 other states have passed laws post Wayfair decision imposing obligations on Out of State businesses to register, collect and deposit Sales tax with their State. Other state lawmakers are still studying the impact of Wayfair decision on their states and may pass similar laws soon.

Majority of the states have adopted the South Dakota threshold whereby, businesses with more than $100,000 in annual sales to customers in their state, or businesses with more than 200 sales transactions made to customers in their state within the preceding or current calendar year are covered by the obligation.

From April 1, 2019 California has New Use Tax Collection Requirements for In-State and Out-of-State Retailers

Effective from April 1, 2019, California has introduced new Sales Tax registration and collection requirements from out of state retailers post Wayfair case decision of the Supreme Court

Sales made to California customers:

As of April 1, 2019, certain out-of-state retailers are required to register with the California Department of Tax and Fee Administration (CDTFA), collect California sales tax and remit taxes to the CDTFA regardless of having a physical presence in the state.

Out of states businesses with more than $100,000 in annual sales from California, or businesses with more than 200 transactions in the state within the preceding or current calendar year would fall within the ambit on new requirements.

The new California law follows the June 2018 decision of the Supreme Court in South Dakota v. Wayfair, Inc wherein the Supreme Court overruled the 1992 Quill case judgement which required physical presence of the out of state business to satisfy the nexus requirement so as not to violate the Commerce clause and Due process clause of the Constitution. In this landmark decision the Supreme Court ruled that the ‘physical presence rule’ is not a necessary interpretation of the requirement that a state tax must be “applied to an activity with a substantial nexus with the taxing State” thereby affording greater latitude to the States to enforce their reach on certain out of state retainers selling to instate buyers.

In light of the freedom afforded by this judgment CDTFA Director Nick Maduros stated that “California will now require more out-of-state retailers to collect and remit taxes just as brick-and-mortar retailers have done for decades. With the Supreme Court ‘s decision in Wayfair, California is able to help level the playing field for California businesses.”

Change for in state businesses as well (Sales within a single District):

Beginning April 1, 2019, any retailer whose sales into a single district exceed $100,000 or who makes sales into a district in 200 or more transactions in the preceding or current calendar year will also considered to be engaged in business in that district and will be required to collect that district ‘s use tax on sales made for delivery in that district. This requirement will apply to both in-state and out-of-state retailers. Retailers will be required to report and pay any district tax to the CDTFA on their sales and use tax return.

Sales made in other states:

California retailers doing sales to customers in other states also need to be aware that about 30 other states have passed laws post Wayfair decision imposing similar obligations on Out of State businesses to register, collect and deposit Sales tax for sales made to buyers in their states. Many other states are still studying the implications of the Wayfair decision and may pass similar laws soon.

Majority of the states have adopted the South Dakota threshold of $100,000 in sales or over 200 transactions annually, but some states have different requirements

For 2019, IRS announces Inflation adjusted limits for various tax provisions

For 2019, IRS announces Inflation adjusted limits for various tax benefits, deductions, adjustments, exemptions, etc

The Internal Revenue Service has recently announced the tax year 2019 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes.

Tax Cuts and Jobs Act signed by President Trump last year had made major changes in various tax provisions including tax rates, deductions, benefits and adjustments. The current announcement applies the annual inflation adjustments to those tax changes for the year 2019. Revenue Procedure 2018-57 provides details about these annual adjustments.

The tax year 2019 adjustments generally are used on tax returns filed in 2020. The tax items for tax year 2019 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married filing jointly rises to $24,400 for tax year 2019, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,200 for 2019, up $200, and for heads of households, the standard deduction will be $18,350 for tax year 2019, up $350.
  • The personal exemption for tax year 2019 remains at 0, as it was for 2018, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
  • For tax year 2019, the top rate is 37 percent for individual single taxpayers with incomes greater than $510,300 ($612,350 for married couples filing jointly). The other rates are:
    • 35 percent, for incomes over $204,100 ($408,200 for married couples filing jointly);
    • 32 percent for incomes over $160,725 ($321,450 for married couples filing jointly);
    • 24 percent for incomes over $84,200 ($168,400 for married couples filing jointly);
    • 22 percent for incomes over $39,475 ($78,950 for married couples filing jointly);
    • 12 percent for incomes over $9,700 ($19,400 for married couples filing jointly).
    • The lowest rate is 10 percent for incomes of single individuals with incomes of $9,700 or less ($19,400 for married couples filing jointly).
  • For 2019, as in 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
  • The Alternative Minimum Tax exemption amount for tax year 2019 is $71,700 and begins to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption begins to phase out at $1,020,600). The 2018 exemption amount was $70,300 and began to phase out at $500,000 ($109,400 for married couples filing jointly and began to phase out at $1 million).
  • The tax year 2019 maximum Earned Income Credit amount is $6,557 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,431 for tax year 2018. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2019, the monthly limitation for the qualified transportation fringe benefit is $265, as is the monthly limitation for qualified parking, up from $260 for tax year 2018.
  • For calendar year 2019, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is 0, per the Tax Cuts and Jobs act; for 2018 the amount was $695.
  • For the taxable years beginning in 2019, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,700, up $50 from the limit for 2018.
  • For tax year 2019, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, an increase of $50 from tax year 2018; but not more than $3,500, an increase of $50 from tax year 2018. For self-only coverage, the maximum out-of-pocket expense amount is $4,650, up $100 from 2018. For tax year 2019, participants with family coverage, the floor for the annual deductible is $4,650, up from $4,550 in 2018; however, the deductible cannot be more than $7,000, up $150 from the limit for tax year 2018. For family coverage, the out-of-pocket expense limit is $8,550 for tax year 2019, an increase of $150 from tax year 2018.
  • For tax year 2019, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $116,000, up from $114,000 for tax year 2018.
  • For tax year 2019, the foreign earned income exclusion is $105,900 up from $103,900 for tax year 2018.
  • Estates of decedents who die during 2019 have a basic exclusion amount of $11,400,000, up from a total of $11,180,000 for estates of decedents who died in 2018.
  • The annual exclusion for gifts is $15,000 for calendar year 2019, as it was for calendar year 2018.
  • The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $14,080, up from $13,810 for 2018.

Link for full details of Revenue Procedure 2018-57 are given in link below:

https://www.irs.gov/pub/irs-drop/rp-18-57.pdf