Michael Gray, CPA's Tax and Business Insight

November 4, 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!

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Kara Siemer's Halloween costume
Here is Kara Siemer, age 1 1/2, in her "Dormouse" Halloween costume.

Happy Thanksgiving!

This year, Thanksgiving is on November 27. We hope you are able to celebrate and enjoy the holiday with your family and/or friends.

For our clients, thank you for your business. The purpose of our business is to serve you, and our existence depends on you.

For our readers, thank you for subscribing to our newsletter. We hope you will continue to find reading it enjoyable and rewarding.

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Vote!

Today is election day. This is a critically important Presidential election, so if you are a registered voter, I urge you to participate by voting.

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Now is the time for year-end planning.

Now that Halloween is past, we know the year will soon be over. Michael Gray has jury duty the first week of December, and of course we will be closed on Thanksgiving and the day after and on Christmas Eve and Christmas Day. That means there will be a limited number of year-end planning appointments available. Make your reservation now by calling Dawn Siemer at 408-918-3162.

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Birthday reflections.

For my brother, Steve, and me, November 17 will be our 57th birthday. We are thankful for having good health and our family, including having both of our parents still living.

Some people would kill to have a business like I have, located an eight-minute drive from home, and to have great employees and clients to work with.

I have been fortunate to have a great marriage to a wonderful woman for over 37 years and I also see my children and grandchildren regularly.

I truly do have a lot to be thankful for.

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"Bailout" legislation includes tax legislation.

The "bailout" package passed by Congress and signed by President Bush on October 3 to stabilize the U.S. economy includes two tax acts: the Energy Improvement and Extension Act of 2008 and the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.

There are too many tax breaks for me to list here. I think the most significant item is alternative minimum tax relief highlighted in the "Extra" edition of this newsletter on October 9. Also see the article posted at www.stockoptionadvisors.com/refund.shtml. For the first time in years, we know what the alternative minimum tax exemptions are well before the end of the year, which will really help tax advisors do a better job with year-end tax planning.

See below about seminars that I will be leading.

Ask your tax advisor for information about how the Acts will affect you.

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Michael Gray gives pre-"bailout" 2008 tax legislation update.

Michael Gray will be giving a webcast for CPELink on November 19. The "bailout" will not be covered in this webcast. For details, go to this link: www.cpelink.com/product/detail.php?p=1057.

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Live AMT Relief seminar.

Michael Gray with guest speaker Jay Cena of Reform AMT will give a live lunchtime seminar about AMT Relief on Friday, November 7.

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Live "Bailout" Tax Legislation seminar.

Michael Gray will give a breakfast briefing on the Energy Improvement and Extension Act of 2008 and the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 on November 17, 2008. This event is for the Silicon Valley San Jose Chapter of the California Society of Certified Public Accountants and qualified for continuing education credits for CPAs and attorneys.

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Recording of AMT Relief telephone seminar available.

If you missed the telephone seminar on October 30 and can’t come to the live seminar on November 7, you can still get the details on a recording of the telephone seminar. You will want this information if you ever exercised an incentive stock option and (1) you have a federal minimum tax credit that you haven’t been able to recover, (2) you ever paid a penalty or interest before October 3, 2008 to the IRS relating to an alternative minimum tax (AMT) for exercising an incentive stock option, or (3) you have an unpaid amount due to the IRS relating to an alternative minimum tax for exercising an incentive stock option. An order form is included with this newsletter.

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Have you not received your federal tax refund?

The IRS is trying to locate taxpayers to claim 383,000 refund and economic stimulus payments totaling about $266 million. If you are wondering if you’re one of them, check the IRS web site at www.irs.gov (stimulus payment) and www.irs.gov/individuals/article/0,,id=96596,00.html (refund) or call 866-234-2942 (stimulus payment) or 800-829-1954 (refund).

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Remember documentation requirements for donations.

The holiday season is a popular time to make charitable contributions. Remember that no deduction is allowed for currency donations for which a receipt is not received, such as putting change in a Salvation Army drum.

Most small donations can be documented with a cancelled check or credit card statement.

Donations of $250 or more should be documented with a written receipt from the charity, including a statement that no goods or services were received in exchange for the gift.

Donations of goods to charities for which a donation is claimed should be in "good used" condition. No deduction is allowed for "worn out" items. Used underwear and used socks have been specifically listed as items for which no deduction will be allowed. Make a detailed list of the donated items. Having photographs of the donated items can be very helpful if you are ever audited. There is no "per bag" allowance.

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2009 qualified plan limits announced.

The IRS has announced cost of living adjustments for deductible contributions to retirement plans for 2009. The limit for elective deferral plans like 401(k)s is increasing from $15,500 to $16,500. The maximum contribution for defined contribution plans, including most profit sharing plans is increasing from $46,000 to $49,000. The maximum compensation limit for defined benefit plans is increasing from $185,000 to $195,000.

The catch-up contribution for individual taxpayers age 50 and above are $1,000 for IRAs, $5,500 for 401(k)s and SEPs, and $2,500 for SIMPLEs.

(IR 2008-118.)

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Social security wage base increased.

The maximum amount of earnings subject to Social Security tax will increase from $102,000 in 2008 to $106,800 in 2009.

Cash amounts paid for domestic services in an employer’s private home are not subject to Social Security taxes if they are less than $1,700 for 2009.

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S corporation rules released for loans from shareholders.

The IRS has issued final regulations about how shareholders of S corporations determine their tax basis for deducting losses relating to "open account" loans from shareholders. The regulations are effective for shareholder advances made on or after October 20, 2008.

The regulations treat open account debt exceeding $25,000 to be treated as a separate indebtedness, limiting the ability of shareholders to reloan funds to an S corporation to increase their basis and avoid income.

If you have an S corporation that is generating losses, you should discuss these rules with your tax advisor because they may effect your year-end planning.

(T.D. 9428.)

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IRS issues guidance on election to receive credits instead of bonus depreciation.

The Housing Assistance Tax Act of 2008 provides an election to receive refundable credits for unused research credits and minimum tax credits instead of bonus depreciation for certain new property acquired after March 31, 2008 and placed in service before January 1, 2009 (January 1, 2010 for certain aircraft and long production period property.)

The IRS has issued guidance about the election. You or your tax advisor should refer to that guidance if you are considering making the election for 2008.

(Revenue Procedure 2008-65.)

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Agent responsible for reporting cash payments received.

When a cash payment of more than $10,000 is received by a business, that payment must be reported to the IRS using Form 8300. A cemetery received cash payments as an agent for a burial insurance company, deposited the funds to its own bank account, and then wrote a check to the insurance company for the same amount.

The Office of Chief Counsel advised that the cemetery was responsible for filing Form 8300 for the cash received on behalf of the insurance company.

The Chief Counsel’s Office said that the cemetery would still be responsible for filing the form if it directly deposited the funds in the insurance company’s bank account. The insurance company would not be required to file Form 8300 for the funds received from the cemetery.

(CCM 200840044.)

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Questions and Answers

Question

A company holds a raffle for the United Way. Employees buy raffle tickets and win various prizes, such as cameras, beauty baskets and IPODs. Should the winnings be reported as taxable on the employee’s W-2 statement, or should they otherwise be reported on the employee’s income tax returns?

Answer

Prize winnings aren’t wages and so shouldn’t be reported on Form W-2.

Prizes with an aggregate value of $600 or more should be reported by the sponsoring organization on Form 1099-Misc.

Prizes are taxable income and should be reported as other income on Form 1040.

Question

  1. If an employee is reimbursed for gas or paid a monthly amount towards gas, is it considered an employee benefit? Should it be reported on the payroll?
  2. If a person is paid as a subcontractor and also as an employee, how should it be handled?

Answer

  1. If the employer has an "accountable plan" where the employee makes an expense report and any excess payment by the employer is refunded by the employee or only actual expenses are reimbursed (including auto expenses at the standard mileage rate – currently 58.5¢ per mile (after June 30, 2008), no amount needs to be included in payroll.

    If the payment is for a non-accountable plan, including a standard monthly allowance, the payment is treated as additional wages and included in payroll.
  2. I don’t recommend trying to treat some services as wages and others as nonemployee subcontract services. Where does one end and the other begin?

    If the services are being performed at the employer’s location or the employer otherwise exhibits signs of control, including dictating the working hours, providing tools and supplies, etc., the individual is probably an employee. Another indication the person is an employee is the individual only performs services for one "employer" instead of multiple "customers."

I would also recommend that an individual who is claiming to be a contract laborer should have a business license.

This is a very "hot" audit area with the tax authorities.


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 articles!

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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.

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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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