Michael Gray, CPA's Tax and Business Insight

March 9, 2008

© 2008 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!

Route to _______   _______   _______   _______   _______

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Welcome baby Clive!

Clive Murray Baker, my third grandchild, was born on February 23. He was six pounds, nine ounces at birth. Mommy Holly Baker and Clive are home and in good health. We are thrilled with another addition to our family! Big brother Kyan is reciting the alphabet and numbers in English, Spanish and French to his little brother.

Clive Murray Baker
Here's Clive at one day old!

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Only 43 days left in tax season! Make your appointment now!

If we prepared your income tax returns last year, you should have already received instructions in the mail. If you haven’t, please call Dawn Siemer weekday afternoons at 408-918-3162.

To have us prepare your income tax returns, start with the online Tax Notebook organizer. Call Dawn Siemer at 408-918-3162 for instructions to get started. We also have a paper organizer, if you prefer. We still need your documents (W-2s, 1099s, receipts for donations, etc.) to prepare your income tax returns.

We can prepare most income tax returns using information provided online and by mail. If you wish a personal meeting, please call Dawn Siemer at 408-918-3162 to schedule an appointment. There are only a limited number of appointment slots available.

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Yes, we do prepare income tax returns!

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 or send an email to her at mgray@taxtrimmers.com.

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Deadline for calendar corporations is March 17.

Since March 15 falls on a weekend, the deadline for 2007 federal income tax returns for calendar year corporations is March 17. Be sure that at least an extension form is filed on time. The time for paying taxes is not extended.

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Use extra care for corporate estimated tax computations for 2008.

The IRS has issued new regulations for making corporate estimated tax computations. Annualized computations are now required "accrual basis"-type prorates. You can’t just rely on a quarterly financial statement when making the computations.

Corporate taxpayers may only base their estimated tax on the previous year’s income tax return when (1) the corporation hasn’t had taxable income, before carryovers and carrybacks for net operating losses and capital losses, of $1 million or more for any of the three preceding taxable years; (2) the corporation didn’t report assets of $1 billion or more as of the end of the preceding taxable year; (3) the income tax return for the previous year must have been for a full year; and (4) there must have been a tax on the previous year’s income tax return. (This means estimated taxes can’t be based on last year’s income tax return when there was no tax because the corporation had a loss!)

Annualization period elections are made using Form 8842, Election to Use Different Annualization Periods for Corporate Estimated Tax. The form is due by the 15th day of the fourth month of the tax year for which the election is to apply.

The first 2008 corporate estimated tax payment for calendar year corporations will be due April 15, 2008. I recommend that you consult with your tax advisors to avoid unnecessary penalties for underpayment of estimated taxes.

(T.D. 9347 issued 8/6/2007 and corrected 9/19/2007. See regulations for Internal Revenue Code Section 6655.)

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Hybrid credit reduced for Hondas.

Since Honda has sold more than 60,000 vehicles after 2005 that qualified for the tax credits for hybrid vehicles and advanced lean-burn technology, the credit for vehicles bought on or after January 1, 2008 until June 30, 2008 will be reduced to 50% of the otherwise allowable amount. For vehicles bought on or after July 1, 2008 to December 31, 2008, the credit will be reduced to 25% of the otherwise allowable amount. Vehicles bought after December 31, 2008 will not qualify for a credit. (IR 2008-23, 2/22/2008.)

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Minor personal use doesn’t disqualify tax-deferred exchange.

The IRS has issued a Revenue Procedure that will allow a tax deferred exchange for a rental residence when there was minor personal use of the unit. The revenue procedure is effective for exchanges of dwellings on or after March 10, 2008. I’ll explain the details in the next issue of Michael Gray, CPA’s Real Estate Tax Letter. For a free email subscription, go to realestatetaxletter.com. (Revenue Procedure 2008-16, 2008-10 IRB.)

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California loses in LLC appeal.

The First Appellate District of the (California) Court of Appeals has affirmed the trial court’s decision in favor of Northwest Energetic, LLC. Northwest Energetic, LLC was formed in Washington state, and didn’t do business in California. It registered as an LLC in California and paid the $800 annual tax each year, but not the LLC fee. Northwest Energetics contested the fee as an unconstitutional tax because there is no apportionment of income among the states when computing the fee.

The Franchise Tax Board will probably appeal this ruling to the California Supreme Court.

Effective for tax years beginning on or after January 1, 2007, California has since changed the computation of the fee to include apportionment.

(With thanks to Spidell’s California Taxletter®.)

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California IRA deduction instructions are in error.

The Franchise Tax Board has announced that its instructions for phase out of IRA deductions are in error. The correct phase out for California married filing joint and qualifying widows and widowers should be $80,000 to $100,000, not $75,000 to $85,000, as published. The federal phase out is $83,000 to $103,000. The phase out applies when a taxpayer is covered by an employer retirement plan.

Since California didn’t notify software developers of the error until February 22, 2008, the software was also probably in error. If you fit the above description and used tax return preparation software and already filed your income tax returns, you should download the latest software update to determine whether you want to change your deductible IRA contribution and file an amended income tax return.

This is an historic year for the number of errors on government forms. Meanwhile, everyone is in a hurry to file to qualify to receive federal tax rebates.

(With thanks to Spidell Publishing’s Flash Email.)

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Free Internet business training.

Ken McCarthy is offering a free preview of his "System" training for internet marketers. It will be a series of emailed lessons. Ken says there will be real content, not just sales pitches. If you are interested, you can register at www.thesystemseminar.com/pre.

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Questions and Answers

Question

Does using a margin loan to make a down payment on a house qualify as a "taxable investment", qualifying the annual payments of interest for the margin loan to be tax deductible as investment interest expense?

Answer

Assuming the house is a personal principal residence, margin loans to purchase the home would be a personal loan, and the related interest is not deductible. If the house is a rental, the related interest is deductible on Schedule E as a deduction against rental income and losses may be subject to the passive activity loss limitations.

Question

What can a small business owner do to limit the expense of funding retirement benefits of employees when contributing to a SEP?

Answer

A SEP has the most stringent nondiscrimination requirements of the retirement plan alternatives. All employees must be covered who (1) are at least age 21; (2) performed services for the employer during at least three of the immediately preceding five years; and (3) received at least $500 of compensation from the employer for 2007 or 2008.

Therefore, SEPs favor employers who have young employees and high turnover.

If you don’t fit that profile, consider hiring a pension consultant and implementing a different type of qualified retirement plan. You might find the reduction in contributions for employees justifies the fees.


Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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Visit our new article!

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml.

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Real estate investors, have you subscribed to Michael Gray, CPA’s Real Estate Tax Letter at no charge or obligation?

For details, visit www.realestatetaxletter.com.

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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.

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 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 taxtrimmers.com/directions.shtml.

They also have a second restaurant, AVA, at 636 San Anselmo Ave., San Anselmo, California. AVA serves food and drinks produced in California. For reservations, call 415-453-3407. The web site is avamarin.com.

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Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766
Hours: 8am - 5pm PDT Monday - Friday

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