Tax talk highlights: sales tax audits and an independent contractor case.

• Author: Williams, Len
• Position: CATax

Since the taxes on Schedule A of an individual income tax return aren't a deduction in computing AMT income on IRS Form 6151, the rule-of-thumb has been, for clients who are in the AMT, that it doesn't pay to pre-pay those taxes.

An important point about prepaying state and property taxes I gleaned from continuing education materials: Contrary to conventional wisdom that pre-paying state taxes produces no benefit when one is subject to the AMT, it seems that there can be a benefit for taxpayers with extraordinary gains.

The method involves offsetting other income to allow the lower 0 percent capital gain rate for 2008 to kick in. So, CPAs should continue to project it both ways, with and without pre-paying California income tax, to find out which is the best move.

Save Taxes by Electing Out of the Installment Method for State Taxes

This tactic is laid out in greater detail in Spidell's California Tax Letter (Aug. 8, Page 87). The gist is that if a non-California resident has a rental in California, he or she must file California Form 540-NR annually, and the sale will be reported on the California income tax return for the year of sale.

However, California allows a taxpayer to make a different election for California purposes to report the sale if the taxpayer was subject to California taxes in the year of the sale. If reporting via the installment method is available, it might result in lower total taxes going out the door if the taxpayer elects the installment sale method for federal purposes, but elects out of the installment sale for California purposes.

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A Good Guy Won

Many years ago, a CalCPA member asked the lender, on a property that he'd bought, for a copy of the appraisal, but was met with a refusal.

He then pointed out to the lender that the loan required him to insure the building and improvements only, and that his personal estimate was that $1,000 would cover that. He received a copy of the appraisal.

Sales Tax Audits

According to news reports, the California Board of Equalization is expanding its sales tax inspections of business premises.

The BOE customarily has made unannounced visits in one of two ways. First, they commonly have gone into the premises of businesses unannounced, watched to see that sales are rung up, sales taxes charged and observed the volume of transactions, etc. These visits most commonly have focused on restaurants, bars and gas stations.

They also have done sweeps of high-volume...