Michael Gray, CPA's Tax and Business Insight

January 31, 2014

© 2014 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!

Route to _______   _______   _______   _______   _______

(If you find this information valuable, please pass it on to a friend!)

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Clive Baker at the beach
My grandson, Clive Baker, will celebrate his sixth birthday in February.

The Olympics are coming!

This February, the media will be dominated with Winter Olympics fever. We're looking forward to the grace and beauty of freestyle ice skating and the traditional confrontation between the United States and Russian hockey teams.

Pray for peaceful, friendly competition to build international goodwill.

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Remember your Valentine!

February is also "romance month" and February 14 is Valentine's Day, so remember to let your sweetheart know you care.

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February celebrations.

My grandson, Clive Baker, is celebrating his sixth birthday this month. Happy birthday Clive!

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Tax season is here!

We have already started receiving tax projects from clients. Thanks for getting your information here early! If we sent you instructions for the Tax Notebook organizer and we prepared income tax returns for you last year, you should have information to log into the site. If you have any questions relating to this, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2013 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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Welcome Brooke and Hien!

Brooke Narin and Hien Nguyen are interns who have joined our firm for this tax season. Brooke just graduated as an accounting major at San Jose State University and Hien has one class to go. Welcome aboard!

I'll include photos of these two young ladies in our next newsletter. They will join us on February 3.

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Radio interview of Michael Gray will broadcast on February 6.

Lori Greymont interviewed Michael Gray, CPA on her "Real Estate 360" show. It will be broadcast in the San Francisco Bay Area on KDOW, AM 1220 from 3-4 p.m. Pacific Time on Thursday, February 6. The show will also be broadcast at the same time as streaming audio at KDOW.biz. Press the "Listen Live" button at the web site to listen to the show. The topic of the interview is "Opportunities and pitfalls of investing in real estate using a Roth or IRA account."

Hope you can listen in, and tell your friends!

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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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New creative "app" debuts.

Just in time for Valentine's Day, our client, David Lazarony, has developed an app for creating your own greeting cards. You can find it at www.elegancepresents.com. If you enjoy smart phones and tablets, give it a try. Tell your friends!

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IRS e-filing to start January 31.

The IRS processing season will start 10 days later than originally planned when it starts accepting most e-filed income tax returns on January 31. The delay was a result of the 16-day U.S. government shut down last fall.

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IRA owner not taxed on misappropriated distributions.

An IRA owner's spouse requested distributions from his IRA account without his knowledge. She didn't report the income on separate income tax returns for either of them during the tax year. The IRA owner and his spouse were later divorced. The Tax Court ruled that the distribution was taxable to the spouse, not the account owner. The account owner didn't request, receive or benefit from the distributions, even though they were deposited to a joint bank account. The 10% penalty for early distributions also didn't apply to the account owner, because the distribution wasn't taxable to him.

(Roberts, 141 TC No. 19.)

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IRS audit rate is way down.

The audit rate during 2013 fell to less than one percent of the tax returns filed. The rate for taxpayers with income of $1 million or more was much higher, 10.85%, down from 12.14% for 2012. The rate for taxpayers with incomes between $200,000 and $1,000,000 was 2.7%.

The lower rates are a reflection of reduced funding and staffing for the Internal Revenue Service, and the government shut down.

Things look worse for the IRS for 2014. The new federal budget just approved by President Obama on January 17, 2014 reduces the appropriation to the IRS from about $11.8 billion in 2013 to about $11.3 billion for 2014. Don't expect much personal help from the IRS with your tax questions this tax season. Fortunately, the IRS has an excellent web site where you can find answers to many questions.

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Captive insurance arrangement upheld.

The Tax Court upheld the deductibility of worker's compensation, automobile and general liability insurance premiums paid by subsidiaries of a parent company to a brother captive insurance corporation in the same controlled group. The Tax Court said the captive insurer was not a sham, but was established for legitimate nontax reasons, and the insurance arrangement met the two essential elements of insurance: risk shifting and risk distribution.

(Rent-A-Center, Inc., 142 TC no. 1.)

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IRS issues procedures for changes to new repair and capitalization rules.

The IRS issued new rules relating to the deductibility of certain repairs and when other repairs must be capitalized and accounting for materials, small equipment items and supplies in regulations issued last September (T.D. 9636.) The regulations are effective on January 1, 2014, but can be optionally adopted by taxpayers for 2012 or 2013.

Now procedures have been issued about how to change accounting methods for affected items. Although the changes will generally be automatically approved by the IRS, filing change of accounting forms will involved considerable effort and expense by taxpayers and their advisors to assemble the information. Unfortunately, the new regulations were not on a "go forward only" basis.

(Revenue Procedure 2014-16.)

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Some taxpayers get another chance at Estate and Gift Tax Portability election.

Taxpayers who failed to timely make an election to make the unused estate and gift tax exemption of a deceased spouse available to a surviving spouse, called a "portability election," have been granted an extension of time by the IRS to make the election. In order to qualify, the deceased spouse must have died after 2010 and before 2014, and no estate tax return could have been filed because the only reason for filing the return would be to make the portability election. See your tax advisor for details.

(Revenue Procedure 2014-18.)

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California adopts new Hiring Credit.

California has repealed Enterprise Zones, but has enacted certain incentives to replace some of their benefits. One of them is a new employment credit for businesses located in designated areas, effective January 1, 2014. The credit applies for hiring new employees who are long-term unemployed, some veterans, ex-felons, or recipients of the federal earned income credit, Cal Works, or general assistance. Employers may only claim the credit if they have created a net increase in jobs statewide.

The credit is 35% of wages paid in the first five years of employments, but only on the portion of wages paid in excess of 150% of California's minimum wage (or $10 per hour in designated pilot areas) and not greater than 350% of California's minimum wage (currently $12 to $28 per hour). The credit can only be taken on an original, timely filed return for qualified employees hired before January 1, 2021.

If the employer relocates to a qualified location, it must provide each employee at the previous location a written offer of employment at the new location. This requirement does not apply to a small business with aggregate gross receipts of less than $2 million in the previous taxable year.

Certain categories of businesses don't qualify for the credit.

The employer must request a tentative credit reservation from the Franchise Tax Board within 30 days of complying with the Employment Development Department's new hire reporting requirement.

Here is a link to an FTB web page for making the reservation, including a map application to find out if your business is in a qualified location.


When we discussed this credit in a California tax update class, the participants agreed that the instructor was probably the only person in California who would have clients applying for the credit. The requirements are just too onerous.

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Dodd-Frank law changes private mortgage requirements.

I'm not a lawyer. Individuals who participate in private mortgages, including lease-purchase arrangements, need to be aware that new federal requirements have been enacted for these transactions. The requirements are intended to protect consumers, but reduce the flexibility for these loans. I recommend that you seek legal counsel about how they apply to you. The rules apply to residential mortgages, not mortgages for commercial properties.

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New California LLC Act may require action.

California has enacted a new limited liability company (LLC) act that took effect January 1, 2014. As I understand it, certain provisions of the Act affect the rights of LLC members when the LLC is a California LLC and is not a single-member LLC or an LLC with only spouses as members. To avoid bad unintended results, these LLCs should have their operating agreements reviewed and updated. See your business attorney.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.

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Financial Insider Weekly broadcast schedule for February and March.

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 February and March:

February 7, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, "Estate tax planning for retirement accounts"
February 14, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, "Handling retirement accounts after a death"
February 21, 2014, Professor Patricia Cain, Santa Clara University School of Law, "Tax issues for same sex couples"
February 28, 2014, David Howard, attorney at law, Hoge, Fenton Jones & Appel, "Fixing IRS reporting problems for foreign assets"
March 7, 2014, David Howard, attorney at law, Hoge, Fenton, Jones & Appel, "Tax reporting of foreign bank and investment accounts for individuals"
March 14, 2014, Dick Blakeley, The Blakeley Group, "Setting family financial goals and reaching them"
March 21, 2014, Alan Nobler, attorney at law, "How a collaborative team can help preserve your legacy"
March 28, 2014, Stephen H. Salmeyer, attorney at law and psychologist, "Why emotions matter when resolving financial disputes"

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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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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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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