NEW CALIFORNIA REPORTING REQUIREMENT
Effective January 1, 2001, California has a new law that requires all businesses to report on independent contractors to the Employment Development Department (EDD). The reporting requirements are somewhat complex and burdensome, to say the least! We have summarized the highlights of this new law below for your reference.

The law defines an independent contractor as an individual who is not an employee of the business who receives compensation or executes a contract for services performed for that business. Please note that under this new law, payments to a partnership, corporation, or other form of legal entity would not fall under the definition of independent contractor and thus would not need to be reported on Form DE 542.

As of January 1, 2001, you must report information to EDD within twenty (20) days of either (1) making payments totaling $600 or more; or (2) entering into a contract for $600 or more with an independent contractor in any calendar year; whichever is earlier.

The EDD may assess penalties for non-compliance. If you need forms or have questions, please call us.

PAYROLL TAXES
FICA Tax Rate - Effective for all payrolls paid after 1/1/01, the social security withholding rate and the employer tax rate are 7.65% on wages up to a limit of $80,400 per employee. Wages in excess of $80,400 will be taxed at 1.45% for employers and employees.

SDI Withholding Rate - The employee tax rate for 2001 is .9% of wages to a maximum wage amount of $46,327 per employee for a maximum contribution of $416.94.

FUTA Tax Rate - The FUTA wage base per employee remains at $7,000 and the tax rate is .8%.

ANNUAL INFORMATION RETURNS
Individuals, partnerships, corporations, or other organizations engaged in a trade or business are to file information returns (Forms 1099). These forms are required to be sent to payees by 1/31/01.

WHAT PAYMENTS ARE REPORTED ON FORM 1099?

Payments of $10 or more, relating to interest, stock dividends or distributions, royalties, unemployment compensation, state tax refunds, or original issue discount

Payments of $600 or more, for non-employee services, rent, providers of health and medical services, or liquidation distributions

Payments (regardless of the amount) for acquisition or abandonment of property secured for debt, broker or barter transactions, pension proceeds, proceeds from the sale or exchange of real estate, or distributions from an IRA are reportable

Payments made to corporations are generally not reportable. Exceptions: If, in the course of your trade or business, you paid attorney fees or gross proceeds to an attorney of $600 or more, it is reportable.

Payments for medical and health services are also reportable.

Banks and other businesses administering escrow accounts, including construction accounts, will be required to issue 1099-MISC for payments made on construction loans made after December 31, 1993.

Form 1096 - This form is used for submitting the copies of the various types of informational returns to the Internal Revenue Service. These are all due by 2/28/01.

There are severe penalties for failure to file any of these returns, as well as substantial penalties for incorrect filings. We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements.

MILEAGE RATES
The standard mileage rate for using a car for business purposes jumps to 34.5 cents for 2001. It’s 12 cents a mile for moving and medical expenses.

SALES TAX
On January 1, 2001 the California Sales tax rate decreased by 1/4%. The sales tax rate in San Diego County fell to7.5%. Other Counties may have higher or lower rates.

BUILD A COLLEGE FUND
A 529 Plan, more formally known as a Qualified State Tuition Program or QSTP, is a state-sponsored investment program that qualifies for special tax treatment under Section 529 of the Internal Revenue Code.

A Section 529 plan lets you make regular contributions to a state-sponsored plan. You set up the account in your name. The beneficiary can be your child, grandchild, your friend's child or even yourself. The money will accumulate on a tax-deferred basis until you withdraw it. If the money is spent on college costs, it's taxed at your beneficiary's rate, not yours. In most cases, that's much lower than yours. Best of all, you can use the money for any qualifying college in the country.

Other benefits to a Section 529 plan:

You can contribute $100,000 per beneficiary.

If Junior decides not to go to college, another member of your family can use the money.

Most colleges consider Section 529 money as belonging to the parent, not the student, which makes getting financial aid easier.

So what are the drawbacks? If the money doesn't go to college, you'll owe a 10% penalty, as well as federal and state taxes, on the earnings. Also, you don't control how your money is invested. Most states use an age-based asset allocation system: the younger the child, the more money in stocks, and vice-versa. TIAACREF runs California's plan.

WHY IT MAY PAY FOR YOUR NEXT BUSINESS CAR TO BE A HEAVY SPORT UTILITY VEHICLE
The car you own and use for business is subject to more restrictive depreciation rules than those that apply to other depreciable assets. For example, a car used for business is treated as five-year property under the depreciation rules, which normally would entitle you to a deduction of 20% of the depreciable basis of the car (its cost for tax purposes) in the year you place it in service. However, under the so-called “luxury auto” rules, depreciation deductions are artificially capped. For example, if you bought a business auto and placed it in service in 2000, your combined depreciation and expensing deduction for it for 2000 couldn't exceed $3,060 regardless of the cost of the
car.

If you're thinking of getting a new business auto, you may be better off taxwise if you buy one of those popular sport utility vehicles (SUVs) instead of a car. That's because the annual depreciation and expensing caps don't apply to trucks or vans (and that includes SUVs) that are rated at more than 6,000 pounds gross (loaded) vehicle weight. So, for example, if you buy one of those heavy SUVs in 2000 for $35,000, and use it 100% for business, you could write off $23,000 of its cost on the 2000 return (that assumes you're eligible to use the full $20,000 “expensing” amount on the SUV, plus you get $3,000 of regular depreciation) – that's almost 66% of the cost. However, if your business use of the vehicle doesn't exceed 50% of total use, then the heavy SUV would have to be depreciated via straight line and wouldn't be eligible for expensing.

COMMUTING COSTS-OFFICE AT HOME
If you maintain your office in your home, you may be entitled to a special tax break on
your commuting costs. For most people, the cost of daily travel between home and a regular work location is a nondeductible commuting expense. However, if you have an office at home you can deduct the daily costs of travel between home and another work location in the same business, regardless of distance, and regardless of whether the other location is regular or temporary.

Note that you get this break only if your home is your principal place of business. In other words, you must meet the tests for deducting expenses of an office at home.

If your office at home isn't your principal place of business, the costs of travel between your home and the first and last business stops of the day are nondeductible commuting expenses. However, the costs of going between home and a temporary work location are deductible, provided that you have a regular work location away from home. Generally speaking, employment at a work location is temporary if it is realistically expected to last (and does in fact last) for no more than a year.

OVERHAUL OF IRA AND 401(k) DISTRIBUTION RULES
Effective immediately, the U.S. Treasury has simplified the rules regarding distributions from IRA and 401(k) plans. The change does away with key deadlines, creates simplified distribution tables and eliminates traps that have cost some individuals or their families millions of dollars in income taxes. People who have made paperwork mistakes, poor beneficiary choices or other snafues now get a fresh start.

The new proposed regulations simplify the rules by:

Providing a simple, uniform table that all employees can use to determine the minimum distribution required during their lifetime. This makes it far easier to calculate the required minimum distribution because employees would:

No longer need to determine their beneficiary by their required beginning date,

No longer need to decide whether or not to recalculate their life expectancy each year in determining required minimum distributions, and

No longer need to satisfy a separate incidental death benefit rule.

Permitting the required minimum distribution during the employee's lifetime to be calculated without regard to the beneficiary's age (except when required distributions can be reduced by taking into account the age of a beneficiary who is a spouse more than 10 years younger than the employee).

Permitting the beneficiary to be determined as late as the end of the year following the year of the employee's death. This allows:

The employee to change designated beneficiaries after the required beginning date without increasing the required minimum distribution and

The beneficiary to be changed after the employee's death, such as by one or more beneficiaries disclaiming or being cashed out.

Permitting the calculation of post-death minimum distributions to take into account an employee's remaining life expectancy at the time of death, thus allowing distributions in all cases to be spread over a number of years after death.

These simplifications would also have the effect of reducing the required minimum distributions for the vast majority of employees.

Untouched by the new rules are tax law issues such as the amount that can be contributed annually to IRAs. Nor is there any impact on estate taxes.

WE ARE GROWING
It is with pleasure that we welcome Alan Blitz as an associate of Blitz, Lee & Company. No, he’s not Ed’s brother, or father, but he is his son.

Alan is a CPA with more than 7 years of tax accounting experience. Prior to joining the firm he was a manager with the international accounting firm of KPMG.

Alan’s experience includes providing tax and financial planning to individuals and closely-held businesses. Alan was most recently assigned to Mexico City where he provided tax consulting services to U.S. executives working abroad. Alan has extensive technical tax experience in the areas of individual income taxation, estate and gift taxation, flow-through entity taxation, retirement planning, and international executive taxation.

Alan holds a Master’s Degree with an emphasis in business taxation from San Diego State University and a Bachelor of Arts Degree, with an emphasis in economics, from Cornell University. He is a member of the American Institute of Certified Public Accountants and has completed the education requirement to obtain the Certified Financial Planner certification.

The addition of Alan to our firm has added depth and scope to the services that many of our clients now require. We recently expanded our bookkeeping and write-up services. Meaningful, well-organized financial records ensure that our clients’ business operations run more efficiently on a daily basis and provide the foundation for success. Our qualified staff assists with day-to-day tasks associated with bookkeeping. They are also well versed in Quickbooks, for clients who require set-up or help on an ongoing basis.