Michael Gray, CPA's Tax and Business Insight

December 6, 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 checks out the Christmas Tree with Grandma Janet.
Minerva Siemer checks out the Christmas Tree with Grandma Janet.

Happy Holidays!

We wish you a joyous and safe holiday season!

We will be closed on December 24 and 25 and on New Year's Day.

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Make your year-end planning appointment now.

Michael Gray will have very limited availability for the rest of 2013, so make your year-end planning appointment now. Call Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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Congratulations to James Barrese!

Our client, James Barrese, was featured in an interview in the Business Section of the San Jose Mercury News (page B-6), on Saturday, November 30, 2013. James is the Chief Technology Officer at PayPal. The title of the article is "Wallet's Days Numbered?" You can check it out at the web site www.mercurynews.com. Here is a link to the article. Congratulations, James!

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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More of "the great ones" pass away.

I learned from Dan Kennedy that three great business and marketing leaders recently passed away. Michael Vance was the first dean of Disney University and creative thinking teacher to other leaders like Apple Computer co-founder Steve Jobs. Martin Edelsten was the founder of Boardroom Inc., publisher of the Bottom Line series of newsletters and self-help books on health improvement. (Boardroom Publications receives competitive entries of marketing pieces from some of the world's greatest copywriters. It is one of the biggest direct mail marketers in the world.) Jim Straw was one of the trail blazers in direct marketing. He wrote "home-spun" marketing pieces that appealed to regular folks, mostly about business opportunities.

These are individuals who made a difference, and touched most of our lives, even if we didn't know it.

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Attention tax professionals! Michael Gray will give a two-day LIVE seminar on January 9 and 10.

Michael Gray, CPA will give a two-day live seminar on Thursday and Friday, January 9 and 10, 2014. The seminar is "Secrets of Tax Planning For Employee Stock Options", celebrating an update of the book with the same name. The investment is $2,497 for the first person from a company and $1,247 for additional persons from the same company. The seminar will take place at the Marriott Courtyard hotel in Campbell, California. A copy of the book and lunch for each day will be included. Only nine seats are available. For details and to reserve your place, call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays no later than January 3, 2014.

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Attention employees with stock options! Michael Gray will give a LIVE lunchtime seminar on January 16.

Michael Gray, CPA will give a lunchtime seminar on Thursday, January 16, for employees with stock options. The title of the seminar is "Executive Tax Planning For Employee Stock Options". The investment is $97 per person, and includes a copy of the book by the same name. The seminar will be located at the Three Flames restaurant at 1547 Meridian Ave. in San Jose, California. Lunch is included. Reservations are required. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays no later than January 13, 2013.

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Attention employees with stock options! Michael Gray will give a LIVE telephone seminar on January 17.

For those who can't come to the in person seminar on January 16, Michael Gray will give a telephone seminar covering the same information, "Executive Tax Planning For Employee Stock Options", at 1 p.m. Pacific Time. The investment is $97 per person plus any telephone long distance charges (not a collect call nor 800#), and includes a copy of the book by the same name. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays for reservations no later than January 13, 2013.

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IRS issues final regulations for 3.8% net investment income surtax.

A 3.8% federal "Medicare" surtax on net investment income for high income (Modified AGI over $250,000 for married persons filing joint returns, $200,000 for singles) taxpayers was enacted as part of Health Care Reform legislation in 2010 and became effective January 1, 2013. Proposed regulations explaining the tax were issued during December 2012 and proposed Form 8814 has been issued by the IRS without instructions.

The IRS issued final regulations on November 26, 2013. The regulations aren't effective until January 1, 2014.

The details of the tax and the regulations are too complex for me to explain here. You really have to consult with a tax advisor to determine how the rules apply for your situation.

A highlight in the IRS's explanation is a "real estate professional" won't automatically qualify net rental income as business income exempt from the tax. The IRS has created a 500-hour safe harbor test to meet the trade or business requirement. See your advisor for details.

The IRS removed the rules for sale of an interest in a partnership or S corporation from the final regulations and issued new guidelines in proposed regulations. The new guidelines look to the passive activity rules for classifying gains. More details were added relating to liquidating distributions from partnerships, such as payments to retiring partners.

(T.D. 9644, November 26, 2013, REG-130843-13, December 2, 2013.)

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Payment of compensation to IRA owner by corporation owned by the IRA was a prohibited transaction.

The Tax Court, in a memorandum decision, recently made a ruling that may hurt a lot of people with self-directed IRAs. In this case, an individual made an investment using his IRA in a 98% ownership interest in an LLC doing business as a used car business. The LLC elected to be treated as a regular corporation. The LLC paid a small salary to the IRA owner for his services as general manager of the used car business.

The Tax Court ruled that the payment of compensation to the IRA owner was a prohibited transaction. The IRA owner was a fiduciary, ineligible to receive compensation from the IRA. Despite the separate status of the corporation for tax purposes, it was controlled by the IRA and by the owner of the IRA, and so its action of paying compensation was attributed to the IRA.

Since these were prohibited transactions, the IRA was treated as distributed at the beginning of the year that compensation was first paid and added to the IRA owner's taxable income. The 10% early distribution penalty and an accuracy-related penalty were also assessed.

A taxpayer in a situation like this should consider applying to the Department of Labor for a waiver from the prohibited transaction rules.

This ruling may not be the final word for this case. The taxpayer might appeal the ruling.

(Ellis v. Commissioner, T.C. Memo. 2013-245, October 29, 2013.)

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Sign up for health insurance by December 23, 2013 for coverage on January 1, 2014.

Although federal penalties won't apply provided you enroll by March 31, 2014, you must enroll by December 23, 2013 to be covered on January 1, 2014. If you change coverage after January 1, 2014, you might have two deductibles for 2014. See your health insurance consultant for details.

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Fourth-quarter calendar year corporate estimated tax payment is due December 16.

The final 2013 estimated tax payment for calendar-year corporations is due December 16, 2013. Not all corporations can base their federal estimated tax payments on the previous year's income tax return. For example, new corporations and corporations that had no tax liability for the previous year must compute their estimated tax using the current year's facts. See your tax advisor for assistance.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2014. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts. California passed a retroactive tax increase in the last election. There is no penalty for not paying the additional tax with your 2013 estimated tax payments, but you might want to do it for a deduction on your 2013 federal income tax return. Watch the alternative minimum tax. See your tax advisor.

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First property tax payment is due.

The first property tax payment for the 2012-2013 fiscal year in Santa Clara County is due December 10. Avoid a late payment penalty - mail your payment early!

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Watch FUTA adjustment on year-end report.

California, among other states, has a cutback in its state credit for federal unemployment taxes. That means additional payments of up to $63 per employee will be due with Form 940. Be sure this adjustment is done with your year-end report for 2013.

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Calendar year accrual basis corporations should pay related parties by December 31.

In order to currently deduct expenses due to certain related persons, accrual-basis corporations must pay them by the year-end. These include wages, bonuses, interest expense, rent, etc. Be sure to review the status of these items with your tax advisor by December 31.

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Do you have unrealized capital losses?

Since the stock market has done so well, fewer individuals are holding stock that has declined in value. If you do, consider selling it before the end of the year. The capital losses can offset any capital gains that you have plus an additional $3,000 can be used to offset other taxable income. Remember the wash sale rule. The loss is disallowed if you buy the same security during the period from 30 days before to 30 days after a sale at a loss.

This strategy is especially important for high income individuals who are subject to the 3.8% net investment income tax.

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Estates and trusts should plan distributions.

The increase in the maximum federal income tax rate to 39.6% and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed trust income exceeds $11,950. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, January 31, 2014) as distributed for a taxable year (for example 2013).

The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) and to avoid unpleasant surprises.

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Business retirement plans for calendar-year businesses should be in place by December 31.

In order to make contributions for 2013, business retirement plans such as 401(k) plans and profit sharing plans for calendar-year businesses must be in place by December 31. Employee contributions to a 401(k) plan must also be paid by December 31. If yours isn't in place yet, contact your retirement plan advisor immediately.

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Should you buy business equipment before December 31?

Remember the increased expense election and bonus depreciation are scheduled to expire after December 31, 2013. Congress might extend these incentives, but we don't know if they will. Consider making your business equipment purchases before the end of the year. See your tax advisor for details.

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Seniors, remember to take your required minimum distributions.

Generally when a participant in a retirement plan or an IRA reaches age 70 ½, minimum distributions are required to be made by December 31 each year. The distributions are also required to be made for inherited accounts. Roth accounts are excluded from this rule during the original owner's lifetime. See your tax advisor for details.

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Remember to take a physical inventory on January 1.

Calendar year businesses with inventories should take a physical count as of January 1. This creates a "clean" record for the income tax return.

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2013. Be sure you have installed those updates before processing your first payroll for 2013.

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Should you make additional tax payments before December 31?

State estimated tax payments and early property tax payments made by December 31 are generally tax deductible for the regular tax. However, many people are finding they are subject to the alternative minimum tax. Deductions for taxes (and miscellaneous itemized deductions) aren't allowed for the alternative minimum tax, so there could be no benefit for a tax prepayment. A tax advisor can project your tax picture to determine if the AMT will apply. Turbo Tax and other tax preparation software can also be used to make the computations.

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Should you donate appreciated publicly traded stock?

It's the season for giving. Many of us make extra donations during December to share our bounty with others. Appreciated publicly-traded stock that has been held for more than a year is an ideal asset for a donation. Under the Internal Revenue Code, the long-term capital gain is excluded from taxable income and the charitable contribution deduction is the fair market value of the stock, so there is a double tax benefit. Also, publicly traded stock isn't subject to the appraisal requirements that apply for other property. It's a win-win-win! Remember to get a good acknowledgement letter to document the donation, including a statement that "no goods or services were received in exchange for the donation".

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Donating a car to charity?

Remember that an appraisal is required for noncash contributions with a value exceeding $5,000. See Form 8283 and instructions as the IRS web site, www.irs.gov. (There is a Declaration of Appraiser on the form.) There is an exception to the rule for vehicles donated to a charity. If the charity sells the car, the taxpayer may rely on the sales price disclosed on Form 1098-C. The original Form 1098-C is submitted to the IRS with your income tax return (or otherwise sent to the IRS with Form 8453 if you efile).

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Remember de minimus election requirement applies January 1.

Final regulations for repair expenses and capitalization include a new election to currently deduct small expenditures when the taxpayer doesn't have an applicable (audited) financial statement. Items up to $500 may be currently deducted, effective for amounts paid or incurred for tangible property after January 1, 2014, for taxable years beginning on or after January 1, 2014. The election doesn't apply for inventoriable costs.

Among other requirements, in order to qualify for the current deduction: at the beginning of the taxable year, the taxpayer must have accounting procedures treating as an expense for non-tax purposes - (1) amounts paid for property costing less than a specified dollar amount; or (2) amounts paid for property with an economic useful life of 12 months or less. The taxpayer must also treat the amount paid for the property as an expense on its books and records in accordance with the accounting procedures. The amount paid for the property may not exceed $500 per invoice or per item, as substantiated by the invoice.

Note the de minimus election will be made each year on the income tax return for the business.

In order to be in position to make the election for 2014, you must have the accounting policy in place by December 31, 2013 and implement that policy in your accounting throughout 2014.

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Financial Insider Weekly broadcast schedule for December and January.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 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 December and January:

December 6, 2013, Greg Carpenter, BTI Group Mergers & Acquisitiions, "Preparing to sell a business"
December 13, 2013, Greg Carpenter, BTI Group Mergers & Acquisitions, "Buying a business"
December 20, 2013, attorney James V. Quillinan, Hopkins & Carley, "Should a family trust be terminated considering recent tax law changes?"
December 27, 2013, Peter Moss, Wymac Capital, Inc., "Mortgage market developments"
January 3, 2014, Don Pollard, CLU, Advanced Professionals, "How Health Care Reform is progressing for individuals"
January 10, 2014, Hilary Martin, CFP®, The Family Wealth Consulting Group, "Planned saving to reach your financial goals"
January 17, 2014, Lori Greymont, CEO, Summit Assets Group, "Residential real estate investing in Atlanta, Georgia and Birmingham, Alabama"
January 24, 2014, Lori Greymont, CEO, Summit Assets Group, "Different ways to invest in real estate"
January 31, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, "Charitable remainder trusts"

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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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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Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Want to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

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.

I'm also on Facebook, LinkedIn, and Google+.

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

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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 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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