Michael Gray, CPA's Tax and Business Insight

March 7, 2011

© 2011 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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Clive Baker and his planets.
The "magnificent obsession" for my grandson, Clive Baker, is the Solar System. He can name all of the planets in order from the closest to the Sun to the farthest. Can you? (Mercury, Venus, Earth, Mars, Jupiter, Saturn, Uranus, Neptune, and (now dwarf-plant) Pluto.)

May you have the luck of the Irish!

Saint Patrick’s Day is March 17. Remember the wearin’ of the green! Did you know there are more Irish in America than in Ireland? They came in different waves, the biggest being the Great Potato Famine. Thanks to George M. Cohan (“Yankee Doodle Dandy", “You’re a Grand Old Flag", “Over There") and many other Irish artists and leaders, we have a very strong influence of Irish culture here in America. When Janet and I visited Ireland, they were very proud that “one of their own", John F. Kennedy, served as President of the United States.

Happy Saint Patrick’s Day, and God bless the Irish!

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March birthday celebrations

March birthday celebrations in my family include my sister, Arlene Gray McLean’s 69th birthday, brother in law Wade Allison’s 68th birthday, and brother in law Lane Johnston’s birthday. We are proud to have them all in our family and wish them happy birthdays!

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Tax season is here! Make your appointment now!

There is less than a month and half before April 18.

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) 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. Our calendar is filling up fast!

We expect to file for extensions when we receive clients’ tax information after March 15.

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Corporate due date for calendar year returns is March 15.

The due date for 2010 calendar year corporate income tax returns, including for S corporations, is March 15. Although many corporations will apply to extend the due date for their income tax returns, there is no extension for paying the tax. That means they need to have a pretty good estimate of what their income is before that due date. Now is the time to get those extension computations in process with your tax return preparer.

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Medical deduction allowed for breast feeding aids.

The IRS has reversed a previous position and will now allow a medical deduction (subject to the 7 ½% of adjusted gross income floor) for breast pumps and supplies relating to breast feeding. The IRS said the aids are medical expenses because they are “for the purpose of affecting a structure or function of the body of the lactating woman."

(Announcement 2011-14., 2011-19 IRB.)

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IRS disregards special allocation of partnership income.

A law partnership organized as a limited liability partnership allocated $1 million of $1.2 million total of partnership income to an S corporation and the rest to individual partners. As a result, the income allocated to the S corporation wouldn’t be subject to self-employment tax. The IRS proposed to disallow the allocation as lacking substantial economic effect and to allocate the income to the individual partners. The Tax Court upheld the IRS.

In addition, the majority of the interests held by the individual partners were LLP interest. The partners claimed the income allocated to those interests should be exempt from self-employment tax, like an interest as a limited partner. The Tax Court upheld the IRS in finding all of the personal service income was subject to self-employment tax.

The IRS views the use of S corporations to avoid employment or self-employment taxes on personal service income to be abusive. Taxpayers and their tax return preparers who are using this strategy to avoid these taxes should be aware that it is a high-risk strategy.

(Renkemeyer, Gose & Weaver, LLP v. Commissioner, 135 TC No. 7.)

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IRS offers new voluntary offshore disclosure initiative.

Taxpayers who failed in 2009 to “catch up" with their disclosure forms for offshore bank accounts, investment accounts and trusts have another opportunity to get in compliance with the disclosure requirements.

Taxpayers may catch up by filing the late forms for 2003 to 2010 no later than August 31, 2011. However, the penalties aren’t totally eliminated. Taxpayers must pay a penalty of 25% of the amount in the foreign bank account in the year with the highest aggregate account balance from 2003 through 2010. If the assets didn’t exceed $75,000 in any year, the taxpayer may qualify for a reduced 12.5% penalty.

There are also exclusions from penalties if there was no unreported income with respect to the assets.

Taxpayers who have undisclosed accounts should consult with their tax advisors now to get in compliance. The information now required on separate forms will eventually have to be reported directly on individual income tax returns, increasing risk of discipline for tax return preparers who fail to disclose the accounts. There are also potential criminal penalties, including prison penalties, for failure to comply. This is not a matter to be taken lightly.

(Look up the 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers at the IRS web site, www.irs.gov. IR-2011-14.)

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IRS allows Medicare Part B as SE medical deduction.

The IRS has changed a previous position and will allow Medicare Part B premiums as part of the self-employed health insurance deduction. The change of position was included in the instructions for Form 1040 for 2010. Spidell Publishing, which issues Spidell’s California Taxletter, confirmed the position with the IRS by email.

(Spidell’s Flash E-Mail, February 11, 2011.)

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Medical insurance exclusion for nondependents doesn’t apply for California.

Federal health care reform allows employers to provide medical insurance for nondependent children up to age 26. Employer payments for this benefit are excluded from federal W-2 income. California has not conformed to this change, so the benefit should be included in California W-2 wages for employees who are California residents or have California-source wages. If you are a resident of another state, you will need to check whether your state has conformed to the federal exclusion.

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Financial Insider Weekly broadcast schedule for March and April.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 7:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for the rest of March and April:

March 9, Lamarr Baxter, Entrust Administration, “Making alternative investments besides real estate using your IRA or Roth Account"
March 16, Professor Patricia Cain, Santa Clara University, “Income tax problems of same sex couples"
March 23, Professor Patricia Cain, Santa Clara University, “Estate and gift tax problems of same sex couples"
March 30, Don Pollard, Advanced Professionals, “Individual medical insurance."
April 6, Don Pollard, Advanced Professionals, “Business group medical insurance"
April 13, Tom Oviatt, Wymac Capital, “Home mortgage market developments"
April 20, Greg Carpenter, BTI Group M & A, “How to prepare to sell a business"
April 27, Phil Price, EA, The Price Company, “Qualified retirement plans for small businesses"

Financial Insider Weekly is also broadcast as follows:

Past episodes are available at https://www.youtube.com/user/financialinsiderweek.

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

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

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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Follow me on Twitter!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

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I'm also on Facebook and LinkedIn.

you can also follow me on other social media sites, Facebook and LinkedIn.

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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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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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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 www.taxtrimmers.com/directions.shtml.

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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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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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