Michael Gray, CPA's Tax and Business Insight

June 4, 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!

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Minerva Siemer in the driver's seat
Minerva Siemer takes a video game for a spin.

June 15 is Father's Day.

Now is the time to honor and express appreciation to your father and other fathers who have contributed to your life. Remember Father's Day on Sunday, June 15.

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Congratulations, graduates!

Some students have already graduated, but June is the traditional "graduation month," especially for high school seniors. For those who have graduated or will graduate this spring, congratulations. High school graduation is one of a few rites of passage to adulthood that remain in our society. Graduation is especially an accomplishment for parents, who graduates should also thank. This isn't an ending, but a beginning. Now the real work of becoming independent starts. Good luck!

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40 years in public accounting.

It's graduation time, which reminds me that 40 years ago I graduated with an accounting degree from San Jose State University. I was fortunate that Alex Berger, CPA gave me my first job in public accounting at Berger, Lewis and Company. Alex Berger and Griff Lewis were my first mentors in the profession, followed by Ken Wood, Ron Vlastelica and Ed Galus at KMG Main Hurdman. Rich Hubler invited me to join him to form our partnership, Hubler, Gray and Associates, in 1986. Rich and I split up in 1996 and I have had my own CPA firm ever since.

I still have some of the same clients that I started working with at KMG Main Hurdman in 1978.

I'm grateful to have had a career that has supported my family and allowed me to be of service to others for forty years. Many others aren't so fortunate.

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Second quarter 2014 estimated tax payment is due June 16.

The second 2014 estimated tax payment for individuals and calendar year corporations, estates and trusts is June 16. California requires some taxpayers to make estimated tax payments electronically, generally using Web Pay at www.ftb.ca.gov. The IRS also requires that businesses make their payments electronically, generally at www.eftps.gov.

Remember that California individuals who have gross income exceeding $1 million must compute their estimated tax based on current year taxable income.

The good news is the interest rates used to compute the penalties for underpayment of estimated tax are currently very low, so the penalty shouldn't be onerous if you do underpay the estimated tax.

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California LLC "fee" payment is due June 16.

California assesses a "fee" when LLCs doing business in California have at least $250,000 of gross income. The estimated fee payment for calendar year LLCs for 2013 is made for Form 3536 online using Web Pay at www.ftb.ca.gov and is due June 17. The fee payment is "protected" from penalties when it is for at least the fee amount on the last year's LLC income tax return.

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Foreign account report is due June 30.

The annual Foreign Bank Account Report (FBAR), FinCEN Form 114, for 2013 is due June 30, 2014. This is a new Form number to replace old TD F 90-22.1, but the information requested is basically the same. THE FORM MUST NOW BE EFILED, NOT MAILED. The form is required for foreign bank and brokerage accounts either owned by a U.S. citizen or resident or over which a U.S. citizen or resident has signature authority. It also can apply to foreign financial accounts such as life insurance policies that have cash surrender values. The report is required when the total balances for the accounts equal or exceed $10,000. This is a separate report from your income tax return, and no extension of time to file is allowed. The penalties for failure to report are severe, and the IRS is on the war path about enforcing this reporting requirement, even though no tax may be involved.

You can get the form at www.fincen.gov/forms.

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Michael Gray will be out of the office part of June.

Michael Gray will be out of the office for a conference from June 11 through June 13. Make your appointment now.

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Do you need help with your extended 2013 income tax returns?

The extended due date for calendar year business income tax returns is September 15 and the extended due date for calendar year individual income tax returns is October 15. We are already hard at work for these tax returns for many of our clients and we would welcome more. May we be of service with your extended returns? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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The earlier you do tax planning, the better.

Many people wait until the year-end for tax planning, but it's better to do it earlier in the year when it's easier to act on it. Why not make a tax planning appointment today? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Pre-publication offer for Secrets of Tax Planning For Employee Stock Options, 2014 Edition.

I just finished an update of my book, Secrets of Tax Planning For Employee Stock Options, 2014 Edition. You can get a copy for half price if you order it by July 10, 2014. You can request information or call your order to Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162, or here is a web page with some details www.employeestockoptionsecrets.com/prerelease.shtml.

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IRS changes position on California short sales and foreclosures.

The IRS sent a letter dated April 29, 2014 to Senator Barbara Boxer, updating previous advice in a letter dated September 19, 2013. The IRS has changed its position relating to "recourse" mortgage loans when there is a short sale or foreclosure. These are usually mortgages resulting from refinancing previous debt, not relating to the original purchase of a principal residence. Now the IRS says these mortgages are not eligible to be treated as nonrecourse debt. Cancellation of nonrecourse debt is treated as sale proceeds, and usually cancellation in a short sale or foreclosure will not result in cancellation of debt income.

Senator Boxer has asked for relief for taxpayers who relied on the IRS's letter of September 19, 2013.

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Trusts and estates must allocate "bundled fees."

The IRS has issued final regulations relating to whether deductions of estates and trusts are subject to the 2% of adjusted gross income floor. The most controversial item for the regulations is "bundled fees" - fees charged by banks and brokerage companies for acting as trustees or executors. The fees include an amount for managing investments that hasn't been stated separately.

The IRS, citing the Supreme Court ruling for Michael J. Knight, is requiring the fiduciary to allocate a portion of those fees to investment expenses, subject to the 2% floor. Under the regulations, any reasonable method may be used to allocate the fees.

Under the final regulations, tax return preparation fees to prepare the federal estate tax return, the decedent's final income tax return, and income tax returns for the estate or trust are not subject to the 2% floor as administration costs. Other tax return preparation, including catching up for back years' income tax returns and preparing gift tax returns are subject to the 2% floor.

Appraisal fees relating to tax return preparation for an estate or trust are not subject to the 2% floor as administration costs.

The final regulations are effective for tax years beginning after May 8, 2014.

(T.D. 9664, May 8, 2014.)

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Facilities upgrade incentives are taxable income.

Motor vehicle manufacturers have been offering incentives to franchised dealerships to upgrade their facilities. The dealerships have been accounting for these payments inconsistently, including excluding the payments from income as capital contributions and reducing the cost of the improvements for the amounts received as incentives.

The IRS Chief Counsel has issued an advice memorandum concluding the amounts should be reported as taxable income. The Chief Counsel cited John B. White, Inc. v. Commissioner, 55 T.C. 729 (1971), affirmed 458 F. 2d 989 (3d Circuit, 1972) as a case with a similar situation and conclusion. "Therefore, the dealerships have an accession to wealth over which they have complete dominion and control. Accordingly, the dealerships must recognize gross income at the time they receive Payments or appropriately accrue the right to receive Payments under their methods of accounting.

The IRS noted the dealerships will eventually recoup the income by depreciating the improvements.

(AM 2014-004, May 15, 2014.)

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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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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 June and July.

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 June and July.

June 6, 2014, attorney Michael Desmarais, "Estate planning for second marriages"
June 13, 2014, attorney Jann Besson of Law Offices of Besson & Yarbrough, "Medi-CAL benefits for Long-Term Care"
June 20, 2014, Hilary Martin Hendershott, CFP(r), The Family Wealth Consulting Group, "Why most people will never achieve their financial goals"
June 27, 2014, Mark Erickson, attorney at law, "How to choose a good divorce lawyer" (Note change from program scheduled in last month's newsletter.)
July 4, 2014, Mark Erickson, attorney at law, "How to work with a divorce attorney cost effectively"
July 11, 2014, Nancy J. Ross, divorce coach and mediator, Bauer, Shepherd & Ross and Associates, "How a collaborative approach can help make divorce a less painful process"
July 18, 2014, Bernard Vogel III, attorney at law, Silicon Valley Law Group, "Choices of forms for doing business"
July 25, 2014, Craig Martin, CFP(r), The Family Wealth Consulting Group, "The role of emotions in investing"

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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