Michael Gray, CPA's Tax and Business Insight

August 5, 2009

© 2009 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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Celebrate National Smile Week!

Did you know the second week of August is National Smile Week? I can’t think of a more positive thing for us to do to brighten up our national doldrums. Be a "good finder" and think of reasons to smile!

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Summer is almost over!

It seems like it just started, but the kids will soon be back in school! I hope you have had an opportunity to take a vacation. But maybe you’re like us. . .

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Michael Gray, CPA suffers from a rash of summer vacations.

As things have developed, Dawn, Thi and I are going to have some overlap for our vacations. Janet and I will visit our family and take an Alaska cruise from August 12 to 25. Dawn and John will be visiting family in Washington state at the same time. Thi and Allen will be going to Vietnam and Thailand from August 20 and return September 9 (or maybe later).

That means there will be a "gone fishing" sign on our office door from August 20 to 25.

We’ll see you when we return!

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August family and firm celebrations.

Janet and I will celebrate our 38th wedding anniversary this Friday, August 7. I consider myself very fortunate that Janet has put up with me all of these years.

My sister, Virginia Allison, and her husband Wade will celebrate their 47th anniversary on August 4. We have some long marriages in my family!

My father in law, Wally Bowers, will celebrate his 83rd birthday on August 23.

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William Mahan, Attorney
William Mahan, attorney, will be interviewed about short sales and foreclosures on the August 19 and 26 broadcasts of Financial Insider Weekly.

Tune in for Financial Insider Weekly.

Most of you should have been notified that the premiere show for Financial Insider Weekly is being broadcast today, August 5 at 4:30 p.m. This is a series of interviews for which I will be the host on public access television station CreaTV.

The half-hour shows will be broadcast Wednesday afternoons at 4:30 p.m. Pacific Time. You can watch them on Comcast channel 15 in San Jose and Campbell, or as streaming video online at www.creatvsj.org. On the show, I will be interviewing some of the best attorneys, accountants, business professionals and financial advisors in the Silicon Valley.

Here are the guests and topics for August 2009: (The interviews have already been recorded.)

August 5 – Craig Martin, CFP of The Family Wealth Consulting Group, "Investing In Turbulent Times."
August 12 – Craig Martin, CFP of The Family Wealth Consulting Group, "Why Use A Fee-Only Financial Planner."
August 19 – William Mahan, Attorney, "The Mechanics Of Short Sales and Foreclosures."
August 26 – William Mahan, Attorney, "Tax Considerations For Short Sales and Foreclosures."

We will be posting the shows to YouTube and will sell them on DVDs for a small charge. The web site for the show is www.financialinsiderweekly.com. [Ed: We have the domain and website posted, but it won’t load on my computer yet. Sometimes it takes a few days. Hopefully, it will be accessible tomorrow.]

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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Extended calendar year corporate income tax returns are due September 15.

For those who need help with preparing their calendar year corporate income tax returns, it’s going to be very tight to finish them on time considering the vacations in August. Please give us your information immediately. To make an appointment, call Dawn Siemer at 408-918-3162 on Monday, Wednesday or Friday.

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Taxpayer wins! LLC interest isn’t the same as limited partnership interest for passive activity limitation.

The IRS disallowed deductions for losses from an LLC, claiming they were subject to limitation as passive activity losses. The taxpayer owned 99% of the LLC, and was the sole managing member.

The taxpayer filed for summary judgment that the IRS was wrong, and the Federal Court of Claims ruled in favor of the taxpayer.

The Court agreed with the taxpayer that 1) An LLC is not a partnership under state law, so a member of an LLC isn’t a limited partner; 2) LLCs are distinguished from limited partnerships because, in order to qualify for limited liability protection, a limited partner can’t be actively involved in the management of the business; 3) The passive activity loss rules were designed to limit losses for tax-sheltered investments in which the investor didn’t actively participate. LLC members are permitted to actively participate and so they weren’t intended "targets" of the loss limitation rules.

This probably isn’t the last word on this issue – especially for LLC members who are passive investors. Their losses would probably be limited under the tests for material participation anyway.

(Thompson v. U.S., U.S. Cout of Federal Claims, 2009-2 USTC ¶ 50,501. (July 20, 2009.))

The Tax Court made a similar summary judgment ruling in Garnett, 132 T.C. No. 19, June 30, 2009.

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Guidance issued to claim increased credits instead of bonus depreciation.

The IRS has issued guidance about an election to claim increased research credits and minimum tax credits instead of bonus depreciation for property placed in service before January 1, 2010.

The election was enacted as part of the American Recovery and Reinvestment Tax of 2009 on February 17, 2009.

Corporations that are finding it hard to use up these credits will find this to be an attractive election. They should review this revenue procedure with their tax advisors.

(Revenue Procedure 2009-33, I.R.B. 2009-29, June 30, 2009.)

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Cash for Clunkers is not a tax credit.

The federal Cash for Clunkers program is not a federal tax credit to be applied on an income tax return of the person who buys a vehicle. These are subsidy payments made directly to auto dealers and are taxable income for the auto dealer.

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Cash for Clunkers credit is taxable by California.

The California Franchise Tax Board has announced California does not conform to a federal exclusion of the federal subsidy. California taxpayers who receive the subsidy when they purchase cars during 2009 may be surprised to learn they have additional California taxable income. (Spidell’s California Taxletter, August 1, 2009.)

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California withholding and estimated tax will be messy.

As part of the shell game to balance California’s state budget, there will be changes in withholding and estimated tax payments.

Effective for payments on or after November 1, 2009:

For estimated tax payments of noncorporate taxpayers for 2010, 30% will be due for the first quarter, 40% will be due for the second quarter, 0% for the third quarter(!), and 30% for the fourth quarter.

Effective for payments on or after January 1, 2010, California will require that 7% backup withholding be made when a California taxpayer is subject to federal backup withholding. Backup withholding will apply for payments subject to California’s withholding at source statute, including rents, prizes, compensation for services and other fixed or determinable periodic income, but excluding interest and dividends and the release of loan funds by a financial institution in the normal course of business.

Businesses that have a local business license, have at least $100,000 of gross receipts from business operations, and do not collect sales taxes will also be required to register with the State Board of Equalization to report any use tax owed for purchases made during the preceding year. The initial use tax return will be due April 15, 2010.

(Spidell’s California Taxletter, August 1, 2009.)

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Offshore amnesty expires soon.

Taxpayers who failed to report offshore accounts in back years have until September 23, 2009 to take advantage of an IRS initiative waiving fraud penalties and other severe penalties for failure to file the form. Form TD F 90-22 with instructions is available at the IRS web site, www.irs.gov.

In particular, businesses with offshore affiliates should review the reporting requirements with their corporate counsel.

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Have a tax question?

Maybe we can answer it! Michael Gray answers 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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