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How your business can thrive under California's 2019 tax rules

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Dive deeper in to the text of these new California laws.

Assembly Bill 91, signed July 1, 2019: Income taxation: Loophole Closure and Small Business and Working Families Tax Relief Act of 2019

Assembly Bill 147, signed April 25, 2019: Collection of sales and use taxes by retailers engaged in business in this state

The Business Journal surveyed accountants serving the San Francisco North Bay about key concerns for local businesses, including relevant tax law changes, the best tax strategies for business and top advice they give all their clients.

The following professionals are featured alphabetically.

Michelle Crosbie

Director of tax

BPM LLP

110 Stony Point Road, Suite 210, Santa Rosa 95401

707-524-6562

www.bpmcpa.com

How has recent legislation (Assembly Bill 91 and AB 147) changed how you advise clients ?

One of the most significant changes in the Tax Cuts & Jobs Act of 2017 was the ability for small businesses to use the cash method of accounting if their annual average gross receipts over a three-year period were less than $25 million.

It was difficult to navigate this change for small businesses early in 2019 for the 2018 tax year because California did not conform. With the enactment of AB 91 and California’s decision to conform to the gross receipts test of $25 million it made the discussions and preparation process much easier for preparers and clients.

AB 91 had other California tax provisions, but for my clients, the change to the cash method of accounting has become the first item discussed with all clients if they are under the $25 million in gross receipts.

Since most of my clients are located in California, AB 147 hasn’t been a big area of discussion or concern.

However, I’m glad they raised the economic nexus threshold to $500,000 in cumulative sales of tangible personal property for sales tax reporting, instead of the old rule, which was $100,000 or 200 transactions. There are many companies that may have more than 200 transactions, but will be less than the required threshold amounts. I think the change in AB 147 is more consistent with the income tax rules and will be easier to understand and implement.

What is a piece of advice you give to all of your clients?

Please call before you make any major individual or business decision that could impact your tax liability. It’s much easier to plan for the possible tax implications than it is to deal with an unforeseen income tax bill.

What is the biggest tax advantage most company clients can take advantage of right now?

Beginning in 2018, the ability for small business to switch from the accrual method of accounting to cash method of accounting is one of the biggest tax advantages.

The change in accounting method will be a one-time benefit and most likely eliminate any tax liabilities for the current year. It may expand into a second year, but from then on, accounting for the income on a cash basis will be comparable to computations on an accrual basis, unless there are some large cash transactions right at the end of the year.

For small businesses with large inventory balances, such as wineries, the switch to cash basis allows the company to write off all indirect costs capitalized to inventory, and only capitalize direct purchases and supplies. The large change in the inventory balance accounts for the large one-time tax benefit.

Dive deeper in to the text of these new California laws.

Assembly Bill 91, signed July 1, 2019: Income taxation: Loophole Closure and Small Business and Working Families Tax Relief Act of 2019

Assembly Bill 147, signed April 25, 2019: Collection of sales and use taxes by retailers engaged in business in this state

What is your strategy for finding new clients?

The strategy for finding new clients is our firm culture of building relationships with current clients, and industry professional. Working collaboratively as a team and always providing the best service to our clients leads to some of the best referrals for new clients.

Do you focus more on business development or retention?

Our success as a firm is directly linked to our clients’ success. Our firm has developed client service standards and we focus on the best client service which includes proactively seeking opportunities to provide solutions, quarterly meetings, measuring client satisfaction and working collaboratively across all departments to be sure clients know they have a team supporting them and working with them to succeed.

Jon P. Dal Poggetto, CPA

Managing partner

Dal Poggetto & Company LLP

149 Stony Circle, first floor, Santa Rosa 95401

707-545-3311

www.dalpoggetto.com

How have AB 91 and AB 147 changed how you advise clients?

AB 147 does not impact our client work very much. AB 91 represented expected legislation to conform California law to many of the provisions of the 2017 Tax Cuts and Jobs Act, so it was great to see it enacted. Otherwise, some clients would be keeping up to three sets of financial records, if they took advantage of accounting changes available for federal purposes to them and California did not conform.

What is a piece of advice you give to all of your clients?

Don’t be afraid to call if you have questions. You won’t get an unexpected bill, and it could save both of us time if we deal with it sooner rather than later.

What is the biggest tax advantage most company clients can take advantage of right now?

Bonus depreciation and Section 179 deductions.

What is your strategy for finding new clients?

Referrals from our clients and other professionals.

Do you focus more on business development or retention?

We focus on client service, and that usually translates into new business and retention of existing relationships.

Jennifer Guglielmo

Senior tax professional

Ghirardo CPA

7200 Redwood Blvd., Suite 403, Novato 94945

415-599-2225

www.ghirardocpa.com

How have AB 91 and AB 147 changed how you advise clients?

With so much focus on the new federal Tax Cuts and Jobs Act that went into effect in 2018, California taxes can be overlooked.

It’s important that clients understand that California did not conform to most of the new federal tax law changes. AB 91 provides partial conformity to select Tax Cuts and Jobs Act provisions. (Unsurprisingly, California did not conform to the major taxpayer-friendly changes from the TCJA.)

In reference to AB 147, the Supreme Court Wayfair decision prompted California to enact this new economic threshold for sales and use taxes. Almost every state has their own sourcing rules for sales, so advise for clients must be individualized to a company’s specific fact pattern.

What is a piece of advice you give to all of your clients?

A proactive approach to tax planning and consulting can make all the difference. I advise my clients to consult with me on the “front end” so that opportunities to optimize their taxes are not missed.

What is the biggest tax advantage most company clients can take advantage of right now?

The new Qualified Business Income Deduction under code Section 199A. This is a brand new deduction available to those with business income whereby a taxpayer can exclude up to 20% of that business income from taxable income.

The devil is in the details with this new code section, but there are strategic moves that can be made to optimize a taxpayer’s ability to maximize the benefit of this new deduction.

Also, the Tax Cuts and Jobs Act really liberalized the capitalization and depreciation rules, making it much easier for businesses to get large tax deductions sooner for capital improvement and fixed-asset expenditures.

What is your strategy for finding new clients?

For me, the best strategy for finding new business is forming strong relationships, not only with my clients, but with their entire ”team” of investment advisers, lawyers and other consultants.

Do you focus more on business development or retention?

My experience is that focusing on retention inevitably results in more business development opportunities. There is no better referral source than a current client who trusts me and values the work I do.

Keith Hollander, CPA

Principal, chief financial officer

Mengali Accountancy

205 Foss Creek Circle, Healdsburg 95448

707-431-0600

www.mengali.com

How have AB 91 and AB 147 changed how you advise clients?

The recent change in state-level legislation in reference to AB 91, which has provided more conformity to the federal TCJA, allows our client advice to be more focused on the tax plan rather than evaluation of both federal and state implications.

For example, conformity to allow small businesses to file on the cash basis method of accounting if its average annual gross receipts for the three taxable years do not exceed $25 million, elimination of technical termination for partnerships or treatment of net operating loss (NOL) allows us to more clearly define and communicate the best approach to our clients.

What is a piece of advice you give to all of your clients?

The piece of advice I give all my clients is to always be in communication with us. Having open communication as you make significant business decisions gives us the ability to plan together for the best outcome, and also keeps us informed of the areas we need to focus on to ensure compliance and our clients success.

What is the biggest tax advantage most company clients can take advantage of right now?

A large part of Mengali Accountancy’s clients are in the real estate industry. The biggest tax advantage most of these clients can take advantage of right now is 100% immediate depreciation for new and used assets with a useful life of less than 20 years. This means that improvements such as carpeting, landscaping, driveways and other similar improvements can be written off immediately for the entire cost of these improvements through 2022.

What is your strategy for finding new clients?

Mengali Accountancy’s strategy for finding new clients is by cultivating our personal and client relationships. Developing these relationships often leads to the best clients and growing network of referrals.

Do you focus more on business development or retention?

Mengali Accountancy focuses on business retention, which ultimately leads to business development, especially in our focused industry of real estate accounting and tax. One of our core firm values is caring nature, in which we care about the people behind the debits and credits, so our client base means more to us than another financial statement or tax return. This makes focusing on business retention an easy priority.

Gerarde Moret

Director

Pisenti & Brinker LLP

201 First St., Suite 208, Petaluma 94952

707-762-9900

www.pbllp.com

How have AB 91 and AB 147 changed how you advise clients?

AB 91 made a number of provisions that conform to recent changes in federal law. Thus, client decisions to take advantage of federal law changes, such as changing their method of accounting or changing method of handling inventory, is an easier decision to make, knowing that the client will not have to maintain a separate set of books for California purposes. There are nuanced differences one has to be aware of, though.

AB 147 was a bill passed in response to the recent Supreme Court decision in South Dakota v. Wayfair (June 21, 2018), which overturned a long-standing “physical presence” standard that determined whether a company is doing business in a state. States now have the potential to impose sales and use tax on remote sellers based solely upon their “economic presence” in a state.

AB 147 requires retailers located outside of California to register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax if, during the preceding or current calendar year, total combined sales of tangible personal property for delivery in California exceed $500,000. Thus, all companies selling into California need to look at the provisions of AB 147.

What is a piece of advice you give to all of your clients?

Don’t let the “tax tail” wag the dog. Sometimes, clients go through enormous effort and cost to defer tax, when they might be better off biting the bullet and paying it up front. Instead of deferring the income, look at ways to accelerate an offsetting deduction.

What is the biggest tax advantage most company clients can take advantage of right now?

There are extremely favorable provisions that allow immediate expensing of most types of business equipment. At the same time, over reliance on these provisions can result in lower tax efficiency. Tax projections are the best insurance for avoiding over or under use of a favorable tax law.

What is your strategy for finding new clients?

I develop and maintain relationships with potential referral sources, such as bankers, attorneys and financial planners. I am extremely grateful when satisfied clients refer new business.

Do you focus more on business development or retention?

Retention is always No. 1.

Robert Murphy

Senior tax manager

Frank, Rimerman + Co. LLP

899 Adams St., Suite E, St. Helena 94574

707-963-9222

www.frankrimerman.com

How have AB 91 and AB 147 changed how you advise clients?

On AB 91, now that California has selectively conformed to certain provisions of the 2017 federal tax reform known as the Tax Cuts and Jobs Act (TCJA), it is important to review taxpayer planning opportunities for both individual and businesses. From the removal of the technical terminations for partnerships to the new limited Section 1031 exchange rules for California, it is vital to ensure prior planning will not be impacted and to review opportunities presented under the new law.

Two areas we are paying close attention to include the expansion of businesses’ ability to report taxable income under the cash method of accounting, and the more restrictive California excess business loss limitations.

On AB 147, many states have been moving toward a position of taxing business activity on an economic nexus standard rather than a physical presence standard. In this new environment, businesses need to continuously review sales by jurisdiction to ensure they are in compliance with state law where sales cross economic nexus thresholds. The rules are complex and vary by state, meaning there is no “one size fits all” test to apply. It is now more important than ever to conduct an annual review of business activity and sales sourcing.

What is a piece of advice you give to all of your clients?

I always tell my clients that “Guess what I just did” is much less exciting for me to hear than, “What do you think of this?”

I encourage my clients to proactively reach out in advance of new deals or transactions so I can discuss and review before any terms are set. Being proactive and thoughtful is always preferred to reactive, and planning up front is almost always more efficient.

What is the biggest tax advantage most company clients can take advantage of right now?

Two of the biggest tax advantages for clients to consider are bonus depreciation and Section 179 expensing.

It is important to review both annually, especially in light of the new federal rules. In addition, the application of the cash method of accounting to a larger group of businesses allows for a simplification of tax reporting and an acceleration of deductions. Reviewing for both federal and California is important and reviewing with the new excess business loss limitations for planning of losses is imperative.

Another tax advantage that I find that many businesses are not aware of is the agricultural and manufacturing sales tax exemptions for equipment purchases. This exemption applies to many industries and is very simple to implement in order to lower sales tax paid on purchases.

What is your strategy for finding new clients?

Rather than focusing on finding new clients, my focus is on providing excellent service to my current clients.

The growth of the firm’s North Bay accounting practice has always been fueled by providing excellent customer service and building mutually beneficial relationships with other industry professionals. Building our business through referrals produces a mix of clients that fits the expertise of our practice and ensures our services are a good fit to provide value to our clients.

Do you focus more on business development or retention?

Building relationships with my current clients is more important to me than building new business. I feel fortunate to interact with my clients on a frequent basis to help them and their businesses with tax and operational planning. I believe through consistently providing excellent service and value, my clients will recommend Frank, Rimerman when they hear from others with new needs or transitions.

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