California Assembly Bill 5, also called AB 5, has many business owners wondering how compliance with the new law will affect their business. The bill will significantly limit employers’ ability to classify workers as independent contractors. Many workers will now need to be classified as employees of the company, and they will be entitled to the associated benefits, such as workers’ compensation, minimum wage, overtime, rest breaks and meal periods, protection from anti-discrimination and retaliation laws, and reimbursement for business expenses incurred during the course of their job. Employers will also be required to pay payroll taxes on the workers classified as employees. AB 5 takes effect on January 1, 2020, so employers only have a short period of time to make any changes necessary to stay compliant with the new law.

AB 5 Makes the California Supreme Court Decision Regarding Worker Classification State Law

In 2018, the California Supreme Court announced its decision regarding Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The landmark decision established a test called the “ABC test” for determining whether a worker is an independent contractor or an employee. Under the new rule, a worker can only be classified as an independent contractor if the hiring agency can establish each of the following criteria:

• The worker is not under the direction and control of the hiring agency with regard to the performance of the work.
• The worker performs duties that are outside the hiring agency’s typical course of business.
• The worker is engaged in an independently established occupation, trade, or business of the same nature as the work he or she does for the hiring agency.

California employers are already subject to the rules established by the Supreme Court Decision. The purpose of AB 5 is to clarify exactly how the ruling should be implemented in practice and identify industries that are exempt from the new rules. Doctors, psychologists, dentists, veterinarians, insurance agents, lawyers, accountants, architects, stockbrokers, real estate agents, state-licensed engineers, and private investigators will not be forced to comply with the new worker classification law. Newspaper delivery companies must comply, but they will be given an extra year before being required to classify their paper carriers as employees.

Making the decision to purchase an existing business can be an exciting and lucrative endeavor. Owning your own business allows you to have a great deal of independence and direction over how the business is run. Being your own boss and watching a business grow and develop can be especially rewarding. Of course, buying a business is not without risk. One of these risks is successor liability for any debts owed by the business, including tax debts.

Stock Purchase Versus Asset Purchase

When you buy an existing business, you have two options: an asset purchase or a stock purchase agreement. A stock purchase allows you to buy most of the seller’s shares, or in the case of an LLC purchase, the membership units. However, assets such as equipment and inventory are still owned by the entity. If you acquire a business through a stock purchase, you will most likely assume all of that company’s liabilities.

In an asset purchase agreement, you purchase the business’s assets, and the seller retains ownership of the actual business. In most asset purchases, the assets are transferred to the new owner without liabilities, but there can be exceptions. Most people buying an existing business choose to undergo an asset purchase transaction to avoid assuming debts accumulated by the previous owner. A qualified attorney can help you decide what type of business purchase agreement is right for you.

A recent U.S. Supreme Court case has prompted California legislators to change a state use tax law that affects out-of-state sellers. Under the new law, some retailers outside of California must register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax.

The law applies to remote sellers who have total sales of $500,000 in tangible personal property for delivery in California in the preceding or current calendar year. The law went into effect on April 1, 2019, so these sellers are required to collect and remit taxes on sales which occurred on or after this date. 

Examples of out-of-state sellers that may be affected by this change include online merchants, mail-order catalogs, or telephone salespeople. Retailers with a physical presence in California will continue to have the same registration and use tax obligations as before the new law was passed.

Property taxes are an issue that affects many taxpayers in California, and changes to these taxes may be coming in the near future. In the 2020 election, voters will be able to decide if Prop. 13 should continue to apply to businesses. The measure would increase property taxes that businesses have to pay the state of California.

What is Prop. 13?

Prop. 13 is a ballot measure approved by California residents in 1978 that placed a limit on real property tax reassessment on all types of properties allowing reassessment only on completion of construction or when properties are sold. This means that currently, property owners pay taxes that are based on the value of a property when it was purchased, regardless of the property’s current market value. In effect, Prop. 13 prevented increases in property tax rates on homes, businesses, and farms by about 57 percent. 

The proposed measure calls for businesses to have their properties reassessed to market values every three years or less. The reassessments would result in higher taxes on commercial properties. The laws regarding residential property taxes would remain unchanged. This setup is called a “split roll,” since commercial property would be treated differently than residential property.

As a business owner, the law requires that you take certain steps when you make large transactions. For cash transactions over $10,000, you must submit a form to the IRS reporting such a payment. Form 8300 is due 15 days after the transaction is completed. Entities who must file this form include individuals, companies, corporations, partnerships, associations, trusts, or estates.

How to File a Transaction Report

The IRS recommends that businesses electronically file cash transaction reports. Electronic filing has several benefits: it is fast and easy to do, and it costs the business nothing. Businesses also have the option to file Form 8300 on paper. To file electronically, a business needs to have an account with the Financial Crimes Enforcement Network’s BSA E-Filing System.

What Transactions Am I Not Required to Report?

It should be noted that not all transactions over $10,000 have to be reported. The law is concerned only with cash transactions, rather than transactions that have a paper trail. Thus, cashier's checks, bank drafts, traveler's checks, or money orders with face amounts of more than $10,000 do not have reporting requirements.