Following the FTB: plenty of happenings CPAs should know about

In the case of an installment sale, common wisdom is that the 3 1/3 percent withholding of state income tax only will be applied to the down payment.

But FTB Publication 1016, Question 56, states that only is true if the buyer agrees to withhold 3 1/3 percent of each principal payment.

The likelihood of a buyer agreeing to do that is probably remote, so the seller should evaluate the required down payment in that light, otherwise the down payment may be inadequate to pay the required withholding.

"Average Income" Assessments

For those who don't know what an "average income" assessment is, the FTB has been cross-checking the lists of professionals who have been licensed by California against the list of income tax returns filed.

If a licensed professional has not filed an income tax return, then the FTB will compute his or her income tax based on the average income reported by taxpayers in that particular profession.

The receipt of such a notice certainly should get the attention of delinquent taxpayers.

CA Built-in Gains Tax and S Corps

The California corporate tax law imposes a tax on "built-in gains" attributable to California sources, derived by an S corporation from the disposition of its assets that appreciated in value during the years when the S corporation was a C corporation.

AB 2328, enacted Sept. 25, which amends Sec. 23809 of the California Revenue & Tax Code, provides as follows (taken from the Legislative Counsel's Digest):

"AB 2328 specifies that the built-in gain provision just discussed applies on the effective date of the election by that corporation to be treated as an 'S' corporation for federal tax purposes, regardless of the effective date for state tax purposes."

Is it possible to be both an employee and an independent contractor?

This question is frequently asked on the TaxTalk listserve. It seems that some employers want to do that for some of their employees, and in some instances, the owners of small corporations wish to do that with respect to themselves.

Based on the following old Appeal Board decision furnished by CPA Jim Counts, the position of the Employment Development Department seems to be that one may not be both an employee and an independent contractor.

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"Unemployment insurance taxes accrue only on amounts paid as remuneration for service rendered by employees. The relationships of employer and employee and of principal and independent contractor have long been recognized to be mutually exclusive. They cannot exist simultaneously with respect to the same transaction. The proof of the one status automatically precludes the existence of the other," according to the EDD.

Thanks to the following TaxTalk participants for their contributions to this article: Jim Counts, CPA, Chet Swart, CPA and Jim Bone, CPA.

By Leonard W. Williams, CPA