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Michael Gray, CPA's Tax and Business Insight
February 8, 2006
© 2006 by Michael C. Gray
ISSN 1539-395X
A monthly report to help you prepare for your financial future, keep more of what you earn by minimizing your taxes, and build an extraordinary business!
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Table of Contents
- A good start for 2006.
- Happy 65th anniversary, Mom and Dad!
- Happy Valentine’s Day!
- The beginning of the year is time for software updates.
- Welcome to Sharon Qin!
- Have you issued information returns for your business yet?
- Remember these forms for new employees and for independent contractors.
- Have you made arrangements to have your tax returns prepared yet?
- Two great new books by Dan Kennedy released.
- A special Valentine’s gift.
- IRS allows Schedule D attachments with efiling.
- IRS issues publication explaining hurricane relief.
- Hurricane victims can use substitute Form W-2 for early filing.
- IRS trumps taxpayer refund claim in Tax Court.
- Net operating loss carryover limited in a family business.
- No medical deduction allowed for sex change operation.
- Community property rights supercede innocent spouse relief.
- Employee reporting of "truck lease" on Schedule C disallowed.
- Partner taxable on disputed funds held in escrow.
- Questions and Answers
- Do you have employee stock options?
- Do you have real estate tax issues?
- Read our new article!
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight
A good start for 2006.
Janet and I started 2006 with a weekend getaway to the Ahwahnee Lodge in Yosemite.
We had forgotten how close Yosemite is to San Jose. The weather was gorgeous and the waterfalls were flowing full force. It was spectacular.
Happy 65th anniversary, Mom and Dad!
My parents have been dealing with health challenges. Dad was knocked for a loop when they lost their utilities for a week from the New Years Eve storm. He was in the hospital and rehabilitation for a month, but made it home in time to celebrate their 65th anniversary. Our family is very proud of their 65 years of devotion to each other, starting with a solo train journey by an 18-year old young woman from "paradise" in Glendale, California to live in snow and ice in Montreal to be married and to live with her sweetheart, an RCAF officer. Congratulations, Mom and Dad!
Happy Valentine’s Day!
Remember to express your affection and appreciation to your loved ones on February 14!
The beginning of the year is time for software updates – ugh!
When I load software updates on our network system, I always have trouble with my computers. Don’t you hate it? We had to reformat the hard drive on my notebook computer and reinstall the operating system and all of the software programs. It really burns a lot of time, and I wince whenever I load a new or updated piece of software.
Welcome to Sharon Qin!
Sharon, a student at San Jose State, has taken a semester off to work as an intern at our CPA firm during this tax season. We are delighted to have Sharon as a member of our team.
Have you issued information returns for your business yet?
Forms 1099 and W-2 should have been issued to payees by January 31. The government copies should be mailed or efiled by February 28.
Remember these forms for new employees and for independent contractors.
California employers should submit Form DE 34 to the Employment Development Department within 20 days after a new employee starts work. Form DE 542 should be submitted for independent contractors. The State of California uses the information on these forms to help collect child support payments, but all employees and independent contractors are required to be included on the report.
Federal Form I-9 should also be completed for new employees to document the individual is eligible to work in the United States. An updated Form W-4 is required each year to determine income tax withholding for payroll.
It’s tax season! Have you made arrangements to have your tax returns prepared yet?
Our calendar for appointments is rapidly filling up. With our free newsletters and the information we make available at no charge on the web, some people wonder how we make a living. We prepare income tax returns and provide tax and business consulting services. We are accepting selected new clients and are thrilled when our clients and friends refer their friends, associates and family members to us. To inquire about becoming a client of our firm, please call Dawn Siemer at 408-918-3162. We must receive your tax information by March 1 to guarantee delivery by April 15.
Two great new books by Dan Kennedy released.
Marketing and entrepreneurial guru Dan Kennedy has issued two great new books – No B.S. Wealth Attraction For Entrepreneurs and No B.S. Direct Marketing For NON-Direct Marketing Businesses. I have found Dan’s material to be enormously helpful for my own business and helping my daughter and her husband promote their restaurant. I have invested thousands of dollars to attend his seminars. Dan’s books are packed with practical methods to build businesses and build wealth, for a minimal investment of about $10 or less. Order your copies today at www.BN.com/dankennedy.
A special Valentine's gift - Dan Kennedy offers FREE telephone seminar series.
Marketing and entrepreneurial guru Dan Kennedy is offering a series of four one-hour telephone seminars on Wealth Attraction on February 13, creating Sales and Marketing Breakthroughs on February 20, The Ultimate Marketing Plan on March 13 and The Ultimate Sales Letter on March 20. He usually charges $97 for similar telephone seminars, but you can sign up for this series for FREE! The reason is Dan is promoting four new or updated books he is issuing this year. However, RESERVATIONS ARE REQUIRED and THE NUMBER OF TELEPHONE LINES IS LIMITED. Register today at www.nobsbooks.com.
IRS allows Schedule D attachments with efiling.
The IRS has "clarified" that each transaction is not required to be listed on Schedule D or Schedule D-1. Summary information may be reported and the supporting statement listing each transaction from the brokerage firm may then be included with the income tax return as an attachment. The details must be submitted and not merely provided on request. (IRS Notice January 9, 2006.)
The IRS subsequently announced that taxpayers may efile their tax returns with summary information on Schedule D, provided the detail information is mailed to the IRS as an attachment to Form 8453. California doesn’t appear to be requiring separate submission of the detail information when California income tax returns are efiled. (Spidell Flash E-mail #2006-4.)
IRS issues publication explaining hurricane relief.
The IRS has issued Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma. You can get a copy of the publication at www.irs.gov or by calling the IRS to request a copy.
Hurricane victims can use substitute Form W-2 for early filing.
The IRS has announced that it will accept Form 4852, Substitute for Form W-2 and 1099-R, before February 15, 2006 from taxpayers affected by Hurricanes Katrina, Rita or Wilma who cannot get these documents from their employers.
A taxpayer who worked for the same employer during 2004 and has all required wage information except for the employer identification number may contact the IRS disaster toll-free number at 1-866-562-5227 to request the EIN from the taxpayer’s previous year W-2.
A taxpayer who worked for a different employer during 2005 and doesn’t have access to the employer’s EIN may still file Form 4852 with the EIN box blank, but won’t be eligible to efile and so must file a paper income tax return. (Fact Sheet 2006-8.)
IRS trumps taxpayer refund claim in Tax Court.
The Tax Court ruled in favor of the IRS, finding it didn’t have jurisdiction when the IRS applied a subsequent year refund to a balance of tax due. The moral of the story is, when the IRS applies a subsequent year refund to a balance due, litigation for the refund must be in another federal court, like a Federal District Court or the Federal Court of Claims. (Greene-Thapedi, 126 T.C. No. 1.)
Net operating loss carryover limited when one brother buys out another in a family business.
The Fifth Circuit Court of Appeals has ruled that two brothers were not "family members" in testing whether a net operating loss could be carried over without limitation after a change of ownership. (The brother who owned a minority share in a business bought out the other brother, who previously owned a majority share.) According to the Court, the only way the brothers would have been found to be related is if one of their parents or grandparents was still living and owned an interest in the corporation. (Garber Industeries, Inc., CA-5, January 9, 2006.)
No medical deduction allowed for sex change operation.
The IRS Office of Chief Counsel ruled that a sex change operation was a cosmetic procedure, not for a congenital abnormality, an accident or trauma, or a disfiguring disease as required to qualify for a medical deduction. The taxpayer was diagnosed as suffering from Gender Identity Disorder and had a doctor’s recommendation to undergo the surgery. (CCM 200603025.)
Community property rights supercede innocent spouse relief.
The Tax Court ruled that an otherwise innocent spouse was not entitled to a refund with respect to community property assets used to pay the other spouse’s understatements on a joint income tax return. Since eight of 18 judges disagreed with the decision, the taxpayer will probably appeal the ruling. (Ordlock v. Commissioner, 126 T.C. No. 4 (1/19/2006).)
Employee reporting of "truck lease" on Schedule C disallowed.
An employer had an unwritten, informal arrangement to reimburse employees $25 per day for the use of a personal vehicle while driving on corporate business. An employee reported the reimbursement as "truck lease" income on Schedule C, with expenses exceeding the reimbursement amount. The Tax Court rules the arrangement did not constitute a trade or business and the net expenses for the truck should have been reported as employee business expenses. (Alley v. Commissioner, T.C. Summary 2006-4 (1/19/06).)
Partner taxable on disputed funds held in escrow.
The Tax Court ruled that a dispute between partners about the amount of income allocable to each was not sufficient to postpone the taxability of the income to a partner, despite the fact his disputed share was held in an escrow account and wasn’t distributed to him, pending the outcome of litigation. (Burke v. Commissioner, T.C. Memo. 2005-297.)
Questions and Answers
Dear readers:
Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?" (http://www.taxtrimmers.com/residence.shtml) where you should be able to find the answers to most of these questions.
Question
My mother is in a nursing home. The nursing home provides and dispenses her medications and the cost is passed along to us in her monthly bill. Are the medications tax deductible in this situation or an any way partially reimbursable? Should the nursing home be providing information about the medications dispensed for the entire year?
Answer
The medications should be tax deductible, provided they are prescription medications. Since the nursing home is itemizing the amount on monthly bills, I don’t think they are required to provide the total for the year. They might if you asked them.
Whether the medication expense is reimbursable depends on what medical insurance your mother has. Have you looked into the new Medicare prescription coverage?
I suggest that you consult with a local tax advisor about the nursing home expenses. Depending on your mother’s condition, the entire amount paid for nursing home care could be tax deductible as a medical expense, subject to the 7.5% of adjusted gross income limitation.
Question
Are the expenses of filing for divorce tax deductible?
Answer
No.
Question
I always thought that filing as a head of household and qualifying to claim a dependent were different.
Answer
The requirements used to be different. Effective for 2005 the rules to qualify to claim an exemption deduction for a dependent and to file as a head of household have been dramatically changed. As a result, many people who were eligible to file as a head of household in the past will no longer qualify when preparing their 2005 individual income tax returns. These rules are too complex to explain here. The taxpayer must maintain as his home a household which, for more than one-half of the tax year, is the principal place of abode of (1) a qualifying child of the taxpayer (usually requires relationship, meeting age and income requirements) or (2) any other person who is a dependent of the taxpayer, provided they are entitled to claim a dependency deduction for that person. You can still qualify to file as a head of household if you maintain a residence for your parents.
With the changes for a "qualifying child" focusing more on relationship and place of residence instead of financial support, some unmarried couples will find the dependent falls on the wrong tax return.
In addition, many single parents who provide housing for adult children will find they no longer qualify to file as a head of household.
If you’re unhappy with this situation, write your representatives in Congress!
Question
If I use my personal car for work as a sales representative and my employer pays for my gasoline expenses, can I still claim the full mileage deduction on my federal tax return?
Answer
You can compute the standard mileage deduction, then subtract the reimbursement from your employer to compute the employee business expense.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.
If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?
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We are starting a newsletter devoted to real estate tax issues.
Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. The subscription rate is $19.95 per month. For a sample issue, visit www.realestatetaxletter.com.
Visit our new article!
- Family Wealth – Keeping It in the Family book review
P.S.
My daughter and her husband, Holly and Dan Baker, have a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs and their website address is http://marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at http://www.taxtrimmers.com/directions.shtml.
P.P.S.
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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.
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Michael Gray, CPA
2190 Stokes St., Suite 102 San Jose, California 95128-4512 (408) 918-3162 Fax (408) 998-2766 email: mgray@taxtrimmers.com |
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