Michael Gray, CPA's Tax and Business Insight

May 16, 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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Birthday girls Eleanor Gray, Dawn Siemer and Kara Siemer
Here are three generations who all celebrated April birthdays: my mother, Eleanor Gray; my daughter, Dawn Siemer; and my granddaughter, Kara Siemer.

Happy Memorial Day.

Memorial Day traditionally kicks off the summer season. Congratulations, graduates! Hope you are making some great vacation plans. Watch out for those kamikaze kids, who will soon be out of school!

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Time for finishing extended returns, checking for errors and planning.

Now that April 18 has passed, we are focusing on finishing extended income tax returns and tax planning. We have also had a number of people come to us for a second look at their 2010 income tax returns. They are questioning whether there are errors, and we have found some that will reduce tax bills. To make an appointment, please call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Second estimated tax payment due June 15.

The second estimated tax deposit for individuals, most trusts and calendar year corporations is June 15. If you aren’t making your payments primarily through withholding from wages or making estimated tax payments based on your 2010 income tax returns (110% of last year’s tax liability if your adjusted gross income exceeds $150,000), you probably should make an annualized estimated tax payment based on this year’s income and deductions. We provide this service.

Remember that California taxpayers with gross income exceeding $1 million must base their estimated tax payments on current year income and deductions and don’t qualify for the exception based on last year’s tax return.

Also remember that many California taxpayers are now required to make their estimated tax payments electronically, usually using WebPay at www.ftb.ca.gov. The Franchise Tax Board is sending penalty bills to people who don’t make their payments electronically when they are required to. See your tax advisor to find out whether the requirement applies to you.

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Calendar year California LLC estimated fee payment due June 15.

California LLCs pay a fee based on their gross receipts in addition to an $800 tax. The current year (2011) fee, which may be based on the fee for the previous year (2010), is due on June 15, 2011. The payment is made using Form FTB 3536, or can be made online using Web Pay at the Franchise Tax Board’s web site, www.ftb.ca.gov.

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Foreign account report due June 30.

The due date for 2010 Form TD 90-22.1, the report of foreign bank accounts and brokerage accounts owned outside the United States, is due on June 30, 2011. The due date can’t be extended. The IRS is on a compliance rampage for this form. Be sure to file it if it applies to you. (The highest total balance of foreign accounts that you own or over which you have signature authority is $10,000 or more.)

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IRS voluntary compliance initiative for foreign accounts.

If you missed filing the forms for foreign bank and brokerage accounts and for foreign trusts (Form 3520) in the past, the IRS has an initiative for you to “catch up" without fear of criminal prosecution. You are required to file the forms and amended income tax returns for any unreported income for the last eight years and to pay penalties. The forms must be filed and at least arrangements made to pay taxes and penalties by August 31, 2011. If you have (or might have) this situation, I recommend that you consult with a tax attorney who is familiar with the rules. The branch of the IRS that enforces the requirements is the Criminal Investigations Division.

Here is a link for IRS questions and answers on the voluntary compliance initiative:

http://www.irs.gov/businesses/international/article/0,,id=235699,00.html

You can also find the questions and answers by going to the IRS website, www.irs.gov, and searching for “voluntary compliance initiative fbar".

A very serious consequence for not complying is your tax return preparer may not be able to prepare your income tax return. See Q & A 47.

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May family celebrations.

My daughter, Holly Baker, and her husband, Dan are celebrating their twelfth wedding anniversary. Congratulations!

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New IRS publication explains community property for registered domestic partners and same sex married couples.

The IRS has updated Publication 555, Community Property, to incorporate recent IRS announcements that the community property status for registered domestic partners and same-sex married couples who are domiciled in community property states. These rules generally apply to RDPs and same sex married couples in Nevada, Washington state and California.

The publication is helpful guidance for these taxpayers. You can get a copy at www.irs.gov under “forms and publications."

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CFO was a responsible person liable for withholding taxes.

The Chief Financial Officer of an auto body repair shop was found to be liable for unpaid withholding taxes as a “responsible person." The repair shop was a limited liability company. The CFO was responsible for paying bills and prepared the payroll and income tax forms for the business. The CFO claimed he shouldn’t be a responsible person because he didn’t set the priorities for making payments, but followed instructions from the Chief Operating Officer, who insisted that payments be made on a loan made by the COO to the business before tax payments. A federal district court found the CFO had sufficient authority to be held responsible for the tax payments.

The unfortunate lesson is it can be risky to be a “responsible person" for a company that is in financial difficulty. Be sure payroll taxes, especially the “trust fund" employee share, are paid first.

(United States v. Cooke, D.C. Ind., 2011-1 USTC ¶ 50,333.)

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Allowance of bundled fees for fiduciaries extended.

The IRS has extended an interim allowance of bundled fees for administration and asset management for any tax year beginning before the date final regulations are issued. This provision will benefit trusts where a bank or brokerage company is the trustee. If the fees are separately stated, the asset management fee is subject to the two percent floor for miscellaneous itemized deductions.

(Notice 2011-37.)

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Cancellation of debt for disregarded entities clarified.

The IRS has issued proposed regulations that clarify how the insolvency exclusion is determined when there is a debt cancellation for a disregarded entity, such as a grantor trust or a single-member LLC. The insolvency is not determined just for the disregarded entity, but for the taxpayer who is the owner for the entity.

(NPRM REG-1154159-09.)

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Carryover basis reporting postponed.

The IRS has postponed the filing date for Form 8939, Allocation of Increase in Basis for Property Acquired From A Decedent. The form applies when the executor elects to have estate tax repeal apply for a decedent who died during 2010. Form 8939 was supposed to be included with the decedent’s final income tax return, due on April 18, 2011.

The IRS still hasn’t issued the final version of Form 8939, and the estate tax was reinstated for most decedents who died during 2010.

Now they are saying to file the final income tax return without Form 8939 and stand by for further guidance.

(IR-2011-13.)

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Small employer reporting of health insurance benefits postponed.

The IRS has announced that it won’t require small employers to include information about health insurance paid for employees on their Form W-2 until 2013 for W-2s issued for 2012. A “small employer" is an employer required to file fewer than 250 W-2 forms for the previous taxable year.

The transitional relief postponement also applies to:

(IR-2011-31, Notice 2011-28.)

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California retroactively conforms to federal exclusion for medical benefits covering adult children.

On April 11, 2011, California enacted AB 36, which conforms California’s tax law to exclude from taxable income medical benefits for nondependent adult children under age 27. The exclusion was part of the Federal Health Care Act in 2010. Some taxpayers should file amended California income tax returns to exclude the income.

The Franchise Tax Board says employees who received a W-2 that included these medical benefits in California income should request that their employer issue Form W-2C, excluding the benefit from income. This will be a big headache for California employers. Alternatively, employees may use form FTB 3525 as a substitute for Form W-2C.

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Disregarded entity can result in being subject to California tax.

The California Franchise Tax Board issued Legal Ruling 2011-01 on January 11, 2011. Under the ruling, activities of a disregarded entity are attributed to its owner. This means that if a single member LLC or a qualified subchapter S subsidiary is doing business in California, so is the owner. For details, see your tax advisor.

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Financial Insider Weekly broadcast schedule for May and June.

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 May and June:

May 18, William Mahan, Attorney, “Why you need a will"
May 25, William Mahan, Attorney, “Income and estate considerations of how you hold title to property"
June 1, Naomi Comfort, Attorney, Hawks & Comfort, “How to handle retirement accounts after a death"
June 8, G. Scott Haislet, Attorney and CPA, “Selling your principal residence"
June 15, G. Scott Haislet, Attorney and CPA, “The short sale and foreclosure wars"
June 22, Greg Carpenter, BTI Group Mergers & Acquisitions, “How to buy a business"
June 29, David Howard, Attorney, Hoge, Fenton, Jones & Appel, “Reporting requirements for foreign bank and investment accounts"

Financial Insider Weekly is also broadcast as follows:

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "Past Episodes."

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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Questions and Answers

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.

Question

My father lives outside the United States. He made a gift to me of $50,000 cash. The money is deposited in a foreign bank account. I don’t intend to transfer this money to the United States. I am a US citizen. My father is a foreign citizen.

Do I have to let the IRS know about this money? Is the gift taxable?

Answer

Yes, you do need to let the IRS know about the foreign bank account. It is reported on Form TD F 90-22.1. You can get the form at the IRS web site, www.irs.gov. The form is informational, and no payment is due with the form. The 2010 form is due on June 30, 2011.

The interest for the bank account must be reported on your individual income tax return. US citizens are taxable on their worldwide income. If foreign tax is withheld on the interest, you may be eligible to claim a foreign tax credit. There is a box at the bottom of Schedule B where you must state that you have a foreign bank account with a balance of $10,000 or more.

A gift is not reported as taxable income. Foreign gifts of $100,000 or more must be reported on Form 3520. Form 3520 is due on the date your individual income tax return is due, including extensions.

Question

I'm computing the California fee for an LLC. I have two California LLCs owned by a third managing LLC. The gross receipts for the two subs are a total of $1.1 million. The managing LLC is only reporting the net income of the two subs. This creates the highest fee of $6,000 based on the attribution of the two subs gross receipts.

Isn’t that double taxation of the gross receipts for the two subs?

Answer

See the Limited Liability Company Income Worksheet. You subtract the amounts already subject to the LLC fee at line 3.d.


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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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 www.taxtrimmers.com/directions.shtml.

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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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