Tax quick fix: TaxTalk hot topics include business use of autos, 1099s and more.

Some recent conferences provided guidance on the following:

* FTB Publication 737 is the guideline for Registered Domestic Partners (RDP). Currently, there is no way for FTB to verify RDP--or marital--status. Find more information at www.ftb.ca.gov/forms/RegDomPrtnr/RegDomPrtnr.shtml.

* Misunderstandings are rampant among the general public about the tax impact of incorporating in Nevada. To help clear up the issue, download Don't Gamble with Your Taxes: Read the Fine Print About Incorporating in Nevada, available at www.ftb.ca.gov/forms/misc/689.pdf. There's also information at www.ftb.ca.gov/amnesty/taxgap.

Business Use of Autos

At the October meeting between Cal CPA's Committee on Taxation and the FTB, mention was made of an FTB plan to examine all individual returns that claimed 100 percent business use on autos. The December 2007 FTB News (www.ftb.ca.gov/professionals/taxnews/2007/1207/1207.shtml) also announced a new "self audit" program, wherein some taxpayers will receive a letter from FTB explaining the rules for claiming auto expenses.

The letter asks those taxpayers to review their claimed auto expenses, complete an accompanying form and remit any shortfall from over-deducting.

A Modest Proposal

CalCPA COT member Jim Counts has proposed a system that would streamline the resolution of issues that often require only minor tweaking to fix, but it's too early to say if the FTB or Employment Development Department will adopt it.

The long-term goal of the system would be that practitioners who have a power of attorney on file with the agency will get a notice before it is mailed to the client. This would enable the representative to fix problems before the client ever hears about it.

The agency would e-mail the practitioner saying that new information has been posted to the client's account, but the practitioner would have to sign-in to see which client was involved.

If the practitioner does not sign-in within a certain period of time, the agency will mail a paper copy to the taxpayer. If the representative sees the notice, then the agency would give him or her a certain period of time to respond and resolve it without sending a notice to the taxpayer.

This is a proposal and has not been adopted by any state agency.

A Practical Problem (Not a Trick Question)

A man moved from California to New Jersey at the end of 2006. Just before he moved, he started a California S corp and he comes to California monthly to check on business. What 2007 California tax forms must he file?

This is a situation where the FTB could go either way on a facts-and-circumstances analysis. Logically, he's a California non-resident and will file a 540NR, but California could take the position that he remains a California resident despite living in New Jersey.

The S corp will continue to file Form 100S. Assuming that the owner will be a New Jersey resident for tax purposes, his individual California return will be a 540NR, reporting both his worldwide income and his California source income.

The key here is to comply with Rev. & Tax Code Sec. 18662, which requires withholding on distributions to non-resident shareholders. A waiver of this requirement can be requested via Form 588.

1099 Denial

Denial of deductions for expenditures not documented by 1099 forms most commonly arises in the context of payments made to independent contractors. Both the IRS and the FTB deny deductions for those payments when 1099 forms haven't been filed. The California denial is based on Rev. & Tax Code Sec. 24447.

In one audit mentioned, an auditor asked the CPA if he'd brought copies of the 1099s the taxpayer had filed to report amounts paid to independent contractors. The CPA had--and it's a good thing. The auditor then said, "Good, because if you hadn't, I'd only be able to allow you to deduct up to $599 per independent contractor."

Reimbursement of Independent Contractors

In an August meeting with IRS and EDD representatives, a CPA mentioned that a client reimbursed the expenses of an independent contactor. The IRS and EDD both said that is an indication of the client being an employee, not an independent contractor.

The TaxTalk discussion brought out the fact that this isn't a slam dunk with respect to a person being an employee or an independent contractor. It's customary in certain professions that independent contractors work for a certain amount per day, plus expenses.

TaxTalk participants said terms of the arrangement should be what's standard within that particular profession and spelled out in an agreement.

Sales Taxes on Maintenance Contracts

Here's something to file under "things they never taught us in school." Maintenance contracts on tangible personal property are only subject to sales/use tax at half the ordinary tax rate if they comply with Reg. 1502(f)(1)(C), effective for reporting on or after Jan. 1, 2003.

The main point here is that the contract is optional with the purchaser.

Thanks to the following CPAs for their contributions: Jim Counts, Joel Garfield, Bob Petersen, Keith Plottel, Tuyet Vu and Ralph Weintraub.

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at [e-mail].

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By Leonard W. Williams, CPA