Businesses are required to file annual income tax returns with federal and state tax authorities, and they may also have to file payroll and sales tax reports. Failing to file a return on time can lead to penalties, interest, and other consequences. Even if you or your business is not able to pay the full amount of tax owed, it is better to file a return on time. For most types of tax, the IRS and state authorities are willing to allow a payment plan. The most notable exception is federal payroll tax. To avoid any penalties, you should promptly consult a California tax lawyer who can advise you on your obligations.

What Taxes Does My Business Have to Pay?

Businesses in California must pay federal and state income tax. The federal form they must use depends on the type of business entity, such as a corporation, limited liability company (LLC), partnership, or sole proprietorship.

If a business has employees, it must pay payroll taxes and file a separate return with the IRS. Employers must also pay into federal and state unemployment insurance funds. Businesses that sell goods or provide services deemed taxable by state and local law must collect sales tax from customers and file reports with the state.
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Bankruptcy allows individuals and businesses in financial distress to obtain relief from their debts. “Financial distress,” in this context, typically refers to situations in which one’s income is not enough to continue making required debt payments. The “relief” offered by bankruptcy may involve a discharge of debt after a period of making payments or liquidating assets. Not all debts, however, are eligible for discharge. Discharge of tax debt in bankruptcy is particularly tricky. It depends on the type of taxes owed, and the circumstances in which the debtor accrued the tax debt.

A bankruptcy case is often a difficult process for debtors. This is largely by design. Federal bankruptcy law requires debtors seeking relief to undergo an extensive process of accounting for all of their assets and debts. A court-appointed trustee oversees the debtor’s property, known as the “bankruptcy estate” while the case is pending. The trustee notifies the creditors and holds a meeting to allow them to present their claims. The debtor has to abide by payment schedules created by the trustee.

Three chapters of the Bankruptcy Code form the most common types of bankruptcy cases. Chapter 7 allows for discharge of debts after liquidation of assets. Chapter 11 involves a restructuring of debts and debt payments. Chapter 13 establishes a plan for payment of debts, followed by a discharge of remaining debts. Individuals and families usually file for bankruptcy under either Chapter 7 or 13. Businesses can file under Chapter 7 or 11, but they can only obtain a discharge of debts under Chapter 11.
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The IRS recently issued out a warning to taxpayers who owe tax and have not filed their 2018 tax return, or a valid extension, to act before Friday, June 14, before facing higher penalties. Although the IRS lowered the threshold for imposing under withholding and underpayment penalties earlier this year during tax season due to the complications in the 2017 tax law and various changes it made in the withholding rules, the leniency did not apply to the failure-to-file penalty.

Under section 6651 of the Internal Revenue Code, a failure-to-file penalty is assessed if a taxpayer has unpaid tax and fails to file a tax return or request an extension by the April due date. This penalty is usually 5 percent of tax for the year that’s not paid by the original return due date. The penalty is charged for each month or part of a month that a tax return is late. But, if the return is more than 60 days late, there is a minimum penalty, either $210 or 100 percent of the unpaid tax, whichever is less.

However, the IRS is not completely heartless in the application of the failure-to-file penalty. The IRS recognizes special deadlines that affect penalty and interest calculations for certain taxpayers who qualify, such as members of the military serving in combat zones, taxpayers living outside the U.S., and taxpayers living in presidentially declared disaster areas.  Taxpayers in combat zones, such as members of the military, can extend the filing deadline and find the details of the extension in Publication 3, Armed Forces’ Tax Guide.

With the federal tax due date of April 15 fast approaching, some people may worry about being able to pay their tax bill on time. Several options are available, each with benefits and drawbacks. Any taxpayer who worries about covering their bill should carefully consider each of these options. Nobody should skip filing their tax return by the due date. The penalties for failing to file a return on time can be far worse than for failing to pay in full, and it could cut you off from some of the following options for payment extensions in the future.

Request a Payment Extension

Federal tax law permits extensions of time for an individual to pay income tax. The IRS has decided to allow this when a taxpayer can demonstrate that they will experience “undue hardship” if required to pay in full right away. They may request an extension by filing IRS Form 1127.

The IRS states in the instructions for this form that “‘undue hardship’ means more than an inconvenience.” The taxpayer “must show [they] will have a substantial financial loss (such as selling property at a sacrifice price).” This requires submitting substantial information on assets, liabilities, income, and expenses.
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The IRS compiles an annual list of “tax scams,” known as the “Dirty Dozen” list. Its 2019 list, published in March, includes “offshore tax avoidance,” or “failure to report offshore funds.” This refers to taxpayers’ obligation under the Foreign Account Tax Compliance Act (FATCA) to report financial assets held in foreign countries to the IRS. This reporting requirement is different from the Report of Foreign Bank and Financial Accounts (FBAR), which is required by the Bank Secrecy Act (BSA). The two requirements may seem redundant, and they often overlap. They go to different agencies within the Department of the Treasury and have separate penalties for non-compliance.

The “Dirty Dozen” list functions as much as a warning to taxpayers about not perpetrating tax scams as a warning about possible scams targeting taxpayers. Half of the items on this year’s list address scams directed at taxpayers. These include several scams that involve people posing as IRS agents in phone or email communications, “unscrupulous return preparers,” and various identity theft schemes. The other half of the list involves attempts to game federal tax laws and regulations. Aside from offshore tax avoidance, the list includes padding tax deductions, falsely claiming tax credits, “abusive tax shelters,” and “frivolous tax arguments.”

Congress enacted FATCA in 2010 in an effort to identify U.S. citizens, residents, and business entities with financial assets in foreign countries. This includes U.S. citizens living abroad. It requires U.S. taxpayers to self-report foreign financial assets,. It also requires foreign financial institutions (FFIs) to identify and report accounts held by U.S. taxpayers, and in some cases to withhold certain amounts from accounts of non-compliant U.S. taxpayers. The provisions affecting FFIs are generally not enforceable without an agreement between the IRS and the FFI, or the government of the country where the FFI is located.
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The IRS has authority to take certain actions to recover unpaid taxes from individuals and businesses, provided it has given sufficient notice. Some confusion exists over the difference between two tactics that the IRS may use: a federal tax lien and a federal tax levy. The key difference is that a levy involves an actual seizure of property, while a lien is merely a claim on property because of an unpaid debt. The IRS must provide taxpayers with notice before levying property or filing a lien. In either case, the taxpayer may request a hearing to dispute the IRS’s determination.

Federal Tax Liens

A “lien” is an interest in property by someone who does not have the right to possess that property. Mortgage liens are a common example. When a person takes out a mortgage to buy real property, the mortgage lender typically has a lien on that property until the mortgage loan is paid in full. The document creating the lien is filed in the public record and serves as notice that the mortgage lender has a claim on the property. If the owner defaults on the loan, the lienholder can recover the debt through foreclosure. If the owner sells the property without paying off the loan, the lien remains attached to the property, along with the right to foreclose.

A federal tax lien is not attached to a single piece of property. It attaches to any property owned by the taxpayer, including a home or other real estate. A tax lien also covers automobiles, securities and other financial assets, and personal property. Tax liens often have priority over other liens, meaning that it gets paid before other debts.

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Taxes are a huge problem for those who are working in the marijuana industry. That’s because high tax bills frequently hit cannabis businesses. Often, marijuana excise taxes are being assessed along with the regular business taxes. Although some business owners of marijuana are fighting back, they usually lose.

One of the marijuana tax law problems is the IR Code Section 280E. It is a part of a tax rule that prevents businesses in the industry from writing off those standard business deductions. As a result, it created a high tax rate.

Cannabis is a controlled substance. Although the marijuana tax law denies any deductions, it allows cannabis business to continue to deduct a portion of their expenses which are covered by the Cost of Goods Sold (COGS). To maximize their deductions, marijuana business owners allocate their expenditures to COGS.

As a business owner, one of your responsibilities is to file and pay the payroll taxes for your staff. The Employment Development Department (EDD) administers this type of tax in the State of California. The EDD also identifies and investigates any potential California payroll tax problems.

In California, EDD is one of the largest departments. It regulates payroll tax regulations for businesses and individuals in this state. It administers the following areas:

Employment Training Tax. It is retained at a rate of 0.1 percent with a wage limit of $7,000. This tax provides funds for training employees to make California a more competitive state in business.

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