Michael Gray, CPA's Tax and Business Insight

August 14, 2013

© 2013 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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Minerva Siemer at her birthday party.
Minerva Siemer, celebrating her first birthday, enjoys a birthday present!

Back to school days.

Summer is almost over. Most of the children will be headed back to school in the next couple of weeks. Hope your summer has been a good one. Be careful driving with kamekaze kids walking to and from school.

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Family celebrations.

Janet and I celebrated our 42nd wedding anniversary this month. I am so grateful that we have had a good marriage and a great family!

My granddaughter, Minerva Siemer, celebrated her first birthday this month. She is now an official walker, so I guess she has graduated to being a toddler! And, of course, running closely follows walking!

My sister in law, Gail Johnston, is celebrating her birthday this month. Happy birthday Gail!

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Extension season is here.

There are only about two months left to finish 2012 individual income tax returns (extended due date October 15) and only about one month left to finish 2012 calendar year business tax returns (extended due date September 16). If you would like us to prepare your extended 2012 income tax returns, please call Dawn Siemer Mondays, Wednesdays or Fridays from 9 a.m. to 5 p.m. at (408) 918-3162.

We can also prepare amended income tax returns to clean up tax returns that were previously filed.

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Third quarter estimated tax payment date approaches.

The federal estimated tax payment for the third quarter is due September 16. If you are making your payments based on this year’s tax information, it’s time to get in touch with your tax advisor. California doesn’t have a third quarter payment for individuals, because the payments for the first two quarters are “front loaded.”

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Now is the time for tax planning.

With many tax changes this year, especially for taxpayers with high incomes or high net worths, now is a good time for income and estate tax planning. To make an appointment, call Dawn Siemer Mondays, Wednesdays or Fridays from 9 a.m. to 5 p.m.

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New reporting requirements for credit card receipts might mean IRS headaches for small business owners.

Business owners who accept credit cards and payments through services like PayPal are receiving an information report, Form 1099-K, for the total amounts processed during a calendar year. These reports are sent by the merchant companies to the IRS.

The IRS has initiated a matching program using the forms, including a sequence of letters asking business owners to explain why the sales reported on the income tax return is less than the amount expected based on the amounts reported on Forms 1099-K. If the taxpayers doesn’t provide a satisfactory response, the IRS may adjust the income reported and send a bill to the taxpayers.

Tax return preparers should compare the amounts reported on Form 1099-K with the amounts recorded in the taxpayer/client’s records and discuss any apparent discrepancies.

There are a variety of reasons that the amount reported on Form 1099-K may be higher than the sales reported on the income tax return. For example, sales tax collected often isn’t included in gross receipts. For restaurants, employee tips aren’t included in gross receipts. The IRS may use this information to discover unreported tip income for employees.

Be aware and be prepared for this new audit tool for the IRS.

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Unrealized partnership receivables aren’t eligible for installment sale reporting.

A taxpayer was a partner in a management consulting business that was sold to a third party in 2001. She sold her partnership interest in the business. $126,000 of the value of the interest was attributable to her interest in partnership unrealized receivables.

She reported the sale of the partnership interest as an installment sale.

She didn’t have any principal collections for five years, and only reported interest income. After five years, the note was converted to stock, and she reported long-term capital gain from the sale of the stock.

The Tax Court upheld the IRS in finding that the part of the income from the sale of the partnership interest attributable to the unrealized receivables was ordinary income, not eligible for installment sale reporting and therefore taxable in the year of the sale.

(Mingo v. Commissioner, T.C. Memo. 2013-149.)

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S corporations aren’t subject to expense election limit for controlled groups.

The IRS has said in an information letter that S corporations are excluded members of controlled groups of corporations (under Internal Revenue Code Section 1563(a)) for the purpose of computing the limitation for the expense elections for equipment purchases under Internal Revenue Code Section 179. Therefore, S corporations can compute their own expense limitation notwithstanding the expense election deductions claimed by other members of the controlled group.

(INFO 2013-00016.)

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Lump sum alimony payment wasn’t deductible.

The Tax Court ruled that a lump-sum payment made in lieu of monthly alimony payments didn’t qualify as alimony and wasn’t deductible by the payor taxpayer.

For a payment to qualify as alimony, the liability must be extinguished by the death of the recipient ex-spouse. In this case, the Tax Court found that under state law the ex-husband would still be obligated to make the payment whether or not the ex-spouse was alive.

(Nye, TC Memo. 2013-166.)

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California terminates some economic development incentives, enacts others.

California has terminated enterprise zones, targeted tax areas, manufacturing enhancement areas and local military base recovery areas, effective January 1, 2014.

Taxpayers who hired qualified employees will continue to receive hiring credits provided under prior legislation for 60 months.

New economic incentives were also enacted, including a sales tax exemption for manufacturing and R & D equipment. The exemption only applies to the state share of sales taxes, 4.19%. In order to receive the exemption, the taxpayer must receive an exemption certificate from the State Board of Equalization. The sales tax exemption will be available from 7/1/2014 – 6/30/2022.

Another new incentive is a hiring credit. It will apply for economic development areas, including former enterprise zones and former local agency military base recovery areas, and designated areas of high unemployment. The credit will only apply to a net increase in jobs, not for replacement of current employees, and will only be able to be claimed on an original tax return. Not all employees will be eligible for the credit. The credit will be 35% of wages paid in 2014. Unused credits will have a 10-year carryover. The credit will be available from 1/1/2014 – 12/31/20.

Businesses investing in impoverished areas may also qualify for a new GO-Biz Investment Tax Credit. Businesses will compete with each other from a pool of available tax credits. The credit will apply for taxable years 1/1/2014 – 12/31/2024.

For more details, see your tax advisor.

(SB 90 (Ch 13-70) and AB 93 (Ch 13-69), Spidell’s California Taxletter, “Enterprise zone and other credits end this year,” August 1, 2013, page 3.)

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New time for Financial Insider Weekly in San Jose and Campbell, and online.

The broadcast time for Financial Insider Weekly in San Jose and Campbell is changing to 9:30 p.m. Pacific Time, effective this Friday, August 16. The program is broadcast as streaming video at www.creatvsj.org at the same time.

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Financial Insider Weekly broadcast schedule for August and September.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 August and September:

August 16, 2013, Craig Martin, CFP®, The Family Wealth Consulting Group, “How to make sure your retirement portfolio outlives you”
August 23, 2013, David Beck, CFP®, Bay Area Planners, “Funding For A College Education Using Federal Tax Benefits”
August 30, 2013, David Beck, CFP®, Bay Area Planners, “Government financial help for families of deceased veterans”
September 6, 2013, attorney Naomi Comfort, Silicon Valley Elder Law, PC, “Tax planning for elders and their caregivers”
September 13, 2013, attorney Naomi Comfort, Silicon Valley Elder Law, PC, “Retirement and long-term care planning”
September 20, 2013, attorney Ray Sheffield, “Estate planning for retirement benefits”
September 27, 2013, Richard Lambie, professional fiduciary, “Selection and compensation of a professional fiduciary”

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.

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Visit our new article!

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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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For details, visit www.realestatetaxletter.com

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Check out my blog.

I have also started a blog at 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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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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