Michael Gray, CPA's Tax and Business Insight

September 4, 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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Happy Labor Day!

September 7 is Labor Day, the unofficial end of summer. In my neighborhood, the kids are already back in school. My grandson, "Panch" (Kyan) Baker is excited to be in kindergarten.

Have a happy and safe holiday! And drive carefully with those kamikaze kids out there!

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Michael and Janet Gray with family in Skagway, Alaska.
Here's "our gang" on the train in Skagway, Alaska. Janet and I are in the third row.

There's no place like home...

After our vacation to the Northwest, including a one-week Princess cruise to Alaska, Janet and I feel like we have returned from Oz. We saw glaciers, the trail where the prospectors of 1898 traveled during the Klondike Gold Rush, whales and American Eagles, and we ate like royalty. We had lots of company - 12 of a group of 35 were relatives.

It's hard to beat a cruise for getting value from your travel dollar. We highly recommend it.

Dawn Siemer and her family also traveled in the Northwest for their vacation. She came home to process over 4,000 emails.

Thi Nguyen and Allen Le are overseas in Vietnam, expected to return on August 9.

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September celebrations.

My daughter, Holly Baker is celebrating her thirty-fourth birthday on September 16 and her son and my grandson, "Panch" (Kyan) Baker will be age 5 on September 25.

Thi Nguyen and Allen Le will celebrate their fourth wedding anniversary on September 3.

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Third quarter estimated tax payments are due September 15.

Third quarter estimated tax payments for calendar year taxpayers, including most individuals, are due September 15. If your withholding won't be enough to avoid penalties for underpayment of estimated tax, you should be making estimated tax payments based on last year's tax liability or an annualized computation of this year's tax. Call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162 to make an appointment if you need help.

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Do you need help preparing extended income tax returns?

The extended due date for 2008 calendar year corporate, partnership and fiduciary income tax returns is September 15, 2009. (Note the change for partnerships and fiduciaries! The extended due date for calendar year returns used to be October 15!) The extended due date for 2008 calendar year individual income tax returns is October 15, 2009.

If your 2008 income tax returns aren't done yet and you are seeking help from a tax return preparer, call Dawn Siemer on Mondays, Wednesdays or Fridays for an appointment at 408-918-3162.

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CreaTV broadcasts rescheduled.

My new television show, Financial Insider Weekly, is broadcast on Wednesdays at 4:30 p.m., Pacific Time. You can watch it on Comcast channel 15 if you live in San Jose or Campbell, California. The show is broadcast as streaming video at the same time at www.creatvsj.org. We will also be posting the shows to YouTube. Check at www.financialinsiderweekly.com for when they are posted. Eventually we will offer DVDs of the interviews for sale.

Interviews about short sales and foreclosures with attorney William Mahan of Campbell, California will be broadcast on September 2 and 9. (They were supposed to be broadcast on August 19 and 26.)

The September 16 and 23 shows will feature attorney Robert Temmerman, Jr. The topics are: "I'm an executor. Now what?" and "I'm a trustee. Now what?"

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.

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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Time to revisit your home mortgage?

Although it's harder to qualify for refinancing, mortgage interest rates have been very low recently, so many people are refinancing. Through our strategic partner, Wymac Capital, Inc., we specialize in no-points, no-fees refinancing, so some clients are immediately applying to refinance again at closing. Some lenders are allowing immediate refinancing without a penalty. Some mortgages feature interest-only payments for a period of years. For more details, call Michael Gray at 408-918-3161.

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Deadline approaches for electing extended NOL carryback period.

The IRS has issued a reminder to small businesses that calendar-year corporations and individuals who already filed income tax returns before the enactment of the American Recovery and Reinvestment Act of 2009 on February 17, 2009 have until September 15, 2009 for corporations and October 15, 2009 for individuals to elect optional carryback periods of three, four or five years for net operating losses incurred during 2008. (IR-2009-72.)

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Foreign bank account reporting further extended.

The IRS has announced that taxpayers that only had signature authority over foreign accounts and taxpayers with foreign hedge funds or private equity accounts will have until June 30, 2010 to report accounts maintained in 2008 and earlier years using Form TD F 90-22. (Notice 2009-62.)

(Although California doesn't have some of the penalties that apply to failure to report this information to the federal government, California has not agreed to waive criminal prosecution for failure to report offshore income. Source - Spidell's California Taxletter, August 1, 2009.)

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Switzerland to disclose certain UBS account information with IRS.

The United States and Switzerland have negotiated a settlement for certain account information to be disclosed when a UBS bank account appears to potentially be related to tax fraud and the like. This is not a blanket agreement. It's believed about 4,450 accounts meet the criteria out of about 52,000 under scrutiny.

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Accountants' audit workpapers were not privileged.

The U.S. Court of Appeals for the First Circuit reviewed it's decision en banc (all of the judges reviewed a decision by panel of the court) and reversed the previous judgment of the panel and a federal district court.

The combined Court decided tax accrual workpapers prepared by a corporate taxpayer's auditors are not protected under the work product doctrine. The IRS can enforce a summons for those workpapers.

According to the Court, in order to be protected, the workpapers would have to be prepared for use in litigation instead of because of the prospect of litigation.

This decision may have a chilling effect on the cooperation of companies and their lawyers in providing information to auditors.

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Major change pending for small business financial reporting.

The American Institute of Certified Public Accountants (AICPA) has issued new proposed reporting standards for unaudited financial statements of companies that aren't publicly traded. These financial statement preparation services are called compilations and reviews.

A compilation means taking financial information provided by a company's management and presenting them in the form of financial statements. The CPA is providing no assurance about the reliability of this information.

A review means the CPA firm provides limited procedures, such as analytical review, of the information provided that is less than the scope of a financial audit. The CPA provides limited assurance that no material modifications of the financial statements are required to be in conformity with generally accepted accounting principles.

Professional standards for compilation and review engagements were issued back in 1978.

During the last 30 years, the definition of independence has expanded. At one time, independence primarily related to whether the CPA firm had a conflicting financial interest in the company for which services were being provided. Over the years, concerns have been raised about whether CPAs had a conflict of interest because of other services being provided to the client, such as management consulting work to design internal controls. CPAs could be essentially be reviewing their own work.

CPAs have been prohibited from preparing reviewed financial statements for a client unless the CPA was independent of the client.

This created an inconvenience for small business clients. They would need to hire two CPA firms - one for preparing reviewed financial statements and another for performing non-attest services.

The proposed standards resolve this issue by permitting CPA firms with impaired independence because of performing non-attest services to prepare compilation and reviewed financial statements, provided they disclose in the accountant's report the non-attest services provided by the CPA firm that result in impaired independence. The intention of the AICPA is to focus on reliability instead of independence.

This proposal is currently in the exposure draft stage for public comment. I expect it will eventually be adopted because it resolves a practical issue. What the long-term impact will be on the financial community (primarily banks) that relies on these financial statements will remain to be seen.

Our CPA firm does not currently prepare financial statements. We refer that work to other CPA firms.

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Questions and Answers

Question

Is there a limit on the amount an employer can give for their employees to clean and maintain their work-specific clothing? Can you point to an IRS Code that addresses this to employers?

Answer

Cleaning costs for employee uniforms are deductible as ordinary and necessary business expenses under Internal Revenue Code Section 162(a).

There is no specific Code section that specifies deductions for these expenses. The rules have been spelled out in rulings by the courts and the IRS over the years. No limit has been specified, but the amount should be reasonable for the employer's circumstances.

In order to be deductible, the clothing must be distinctively for the employee's work and not suitable for ordinary street wear. Examples of distinctive clothing are uniforms for police officers, firemen, letter carriers, nurses, bus drivers, and train conductors.

The cost of purchasing and maintaining clothing worn to protect the body from possible injury relating to the worker's employment is also tax deductible, even if the clothing would otherwise be suitable for street wear. (This item is challenged and can be hard to qualify for.)

It would probably be worthwhile to consult with a tax advisor about your particular situation.

Question

"A professor at a university transferred rights to a patent to the university, as required under his employment contract. The university paid royalties to the professor under a royalty distribution agreement for the transfer of the patent. The IRS National Office ruled that the payments were not compensation for services, but compensation for the transfer of the patent, qualifying as (long-term) capital gains. The right to continued receipt of the payments is not contingent on continued employment with the university, but on the use or value of licensing the patent." (TAM 200249002.)

I am in this situation but it is not clear to me how to report the royalty on my tax return? Which form and how to report.

Answer

Report the income as royalties for transfer of a patent at Schedule D, Part II (long-term capital gains).


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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