Michael Gray, CPA's Tax and Business Insight

December 5, 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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Bakers at Thanksgiving Grays and Siemers at Thanksgiving
Here are the Grays, Bakers and Siemers enjoying Thanksgiving dinner. From our family to yours - Happy Holidays!

Happy Holidays!

2008 will soon be a memory. Many people will be glad to see this year end. Remember that anyone with health, family and friends has a lot to be thankful for.

We hope you enjoy a Happy Holiday season despite the scary economic news. If you are well-off financially, we hope you are able to give generously to help those who are less fortunate than you are. If you aren’t so well off this year, we hope next year will be a much better one for you.

Our office will be closed on Christmas Eve day, Christmas day and New Years day.

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Bon Voyage, Thi and Allen.

Thi Nguyen and her husband, Allen Le are on vacation touring and visiting relatives in Vietnam. We are looking forward to when they return on December 15.

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Now is the time for year-end planning.

There are 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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Real Estate Tax Handbook released.

The Real Estate Tax Handbook, 2008 Edition has just been released. As a reader of this newsletter, you are eligible for a a special introductory offer, expiring December 31, 2008. For details, go to Silicon Valley Publishing Company.

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Special planning concerns for mutual funds for 2008.

Many investors sold their shares in mutual funds because of the declining stock market. In order to get the cash to pay off those shares, the mutual funds were forced to sell their investments in securities, some of which they held for many years. As a result, the mutual funds realized capital gains that they now must distribute to the remaining shareholders by the end of 2008 in order to avoid a double tax.

This means that investors holding mutual fund shares that have lost value may also have taxable income from year-end capital gains dividends.

Those investors should consider selling their shares before the end of the year to generate capital losses to offset the capital gains dividends. In some cases, the capital gains dividends can be avoided by selling before the date of record that establishes who the dividend is payable to.

Consult with your tax advisor to find out if this makes sense for you.

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Should you "harvest losses"? Watch the wash sale rules!

With the declining stock market, taxpayers may choose to sell investments before the end of the year so they can deduct the losses. This is euphemistically called "harvesting losses." (Make the best of a bad situation.)

Remember, the deduction for capital losses for a tax year is limited to $3,000 plus capital gains. (For corporations, the deduction is limited to capital gains only. Any excess capital losses are carried forward indefinitely. (C corporations may carry capital losses back three years and forward five years.)

If you don’t have capital gains to apply the losses to, you won’t be receiving much of a current tax benefit from harvesting losses.

Also remember that losses aren’t deductible when identical securities or options to buy identical securities are acquired during the period 30 days before to 30 days after the sale. This is called a wash sale. Instead of identical securities, you can buy a similar security, including a different mutual fund in the same asset class. Again, find out whether a capital gain dividend is pending for a mutual fund, how much the dividend might be, and what the date of record is to identify who the dividends will be paid to. See your investment advisor for advice about your portfolio management.

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Remember to make your property tax payment.

The due date of the first installment of California real estate tax is December 10. There is a nasty penalty for making a late payment, so remember to make your payment on time.

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Calendar corporate estimated tax payment is due December 15.

The fourth quarter estimated tax payment for calendar-year corporations is December 15. The rules for how much needs to be paid in to avoid estimated tax penalties have become complex, depending on the facts for your corporation. See your tax advisor about how much you should deposit.

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IRS relaxes 36-month rule for cancellation of debt.

The IRS has issued new regulations that limit the automatic reporting of cancellation of debt income after a three-year period has passed without collection. This means that banks, credit unions, savings and loan associations and federal executive agencies won’t have to automatically issue a Form 1099-C when a customer is still trying to work out clearing up a loan (including credit card debts). If the loan is secured with adequate security, the lender shouldn’t issue a cancellation of debt report when payments on the loan are late.

These new rules will help many individuals during the current economic situation avoid having to report cancellation of debt income unnecessarily or to refute reports issued by their creditors.

(T.D. 9430.)

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2009 standard mileage allowance announced.

The IRS has announced the standard mileage allowance for employees, self-employed individuals or other taxpayers for claiming deductions for business, charitable, medical and moving expenses.

The business rate for 2009 is 55¢ per mile, and was 58.5¢ per mile for the second half of 2008. (Includes 21¢ per mile of depreciation, reducing the tax basis of the vehicle, for 2008 and 2009.)

The medical and moving rate is 24¢ per mile for 2009, and was 27¢ per mile for the second half of 2008.

The charitable rate is 14¢ per mile for 2009, the same as for 2008.

(Revenue Procedure 2008-72.)

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Single-member LLC owner couldn’t avoid payroll tax liability.

An owner of a "disregarded" single-member LLC claimed the IRS’s check-the-box regulations were unreasonable and invalid when fighting personal liability for the LLC’s employment taxes. The Ninth Circuit Court of appeals upheld a district court decision holding that the IRS rules were reasonable and the taxpayer was personally liable.

The IRS has issued new rules effective January 1, 2009 that even a single-member LLC must separately report its payroll information. However, the owner can still be held personally liable for the LLC’s taxes as a responsible person.

(Kandi, CA-9, September 25, 2008.)

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Be careful with the expense election for fiscal-year partnerships and S corporations.

The IRS has issued an explanation of how to claim the increased expense election for depreciable business property (mostly personal property) enacted in the Economic Stimulus Act of 2008. Under the Act, the maximum expense that can be claimed for 2008 is $250,000, increased from $128,000. The level of qualifying purchases where the expense election is phased out has also been increased for 2008 to $800,000 from $500,000.

The IRS explanation highlights a problem for fiscal-year passthrough entities like partnerships and S corporations. The limitations apply at both the passthrough entity level and the partner/member/shareholder level, which could result in lost deductions. For example, during ABC S corporation’s fiscal year ended June 30, 2009, the corporation acquired and elected to expense $250,000 of equipment on July 15, 2008. At the partnership level, the purchase qualifies. The information for that fiscal year will be reported on the sole shareholder’s income tax return for 2009. Since the increased expense election that applies for 2008 does not apply for 2009, the shareholder will be limited to about $128,000 of expense election for that year. The excess deduction of $122,000 would be lost and the tax basis of the S corporation stock is required to be reduced for the lost deduction.

Clearly this is an item that is begging for a technical correction from Congress. Meanwhile, fiscal year passthrough entities should consider limiting their expense elections based on the limitations that apply to their shareholders, partners and members.

(Also note: trusts and estates aren’t eligible to claim the expense election.)

(Revenue Procedure 2008-54, 2008-38 I.R.B. 722.)

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Last chance for expense election for large SUVs?

The expense election can now be claimed for up to $25,000 of the cost of a heavy SUV with a loaded weight over 6,000 pounds that is used 100% for business. Congress is considering cutting back on this deduction. If you are planning to buy one for business use anyway, consider doing it before the end of 2008. (Note – If the vehicle is used less than 50% for business, it isn’t eligible for the expense election.)

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IRS announces correction of due date for information returns.

The IRS has announced on its web site that the due date in its instructions for providing certain information returns to recipients for 2008 is in error. The correct due date for Form 1099-B, Proceeds from Broker and Barter Exchange Transactions and Form 1099-S, Proceeds For Real Estate Transactions, should be February 17, 2009, not March 1. The February 17 due date also applies to Form 1099-MISC, Miscellaneous Income, if substitute payments are reported in box 8 or gross proceeds paid to an attorney are reported in box 14. The due date to issue the form to recipients for other Forms 1099-MISC is February 2, 2009.

The changes were enacted in the Emergency Economic Stabilization Act of 2008.

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Depreciation limit doesn’t apply to employee vehicle leasing program.

The business depreciation deduction for passenger automobiles is generally limited. The limitation doesn’t apply to a trade or business regularly engaged in the business of leasing automobiles. An auto dealer employer set up a program to lease automobiles to its employees. During a tax examination, the IRS National Office was asked if the exemption from the depreciation limits applied to the dealer’s arrangement.

The IRS National Office said that the leasing program was sufficient to qualify as regularly engaged in the business of leasing automobiles, and the depreciation limits don’t apply.

(TAX 200841037.)

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Questions and Answers

Question

Does money paid into a margin account add to the basis of the stock?

Answer

A margin account is an amount borrowed from a brokerage company, usually to finance the purchase of securities. The basis in the stock is generally the amount paid for it, including any amounts financed using a margin account. Amounts paid into a margin account don’t add to the basis of the stock.


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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