Michael Gray, CPA's Tax and Business Insight
December 5, 2016
© 2016 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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Table of Contents
- Happy Holidays!
- 'Tis the season for year-end planning.
- Trump tax proposals make tax planning more uncertain.
- Fourth-quarter calendar year corporate estimated tax payment due.
- Fourth quarter estimated tax payment for non-corporate taxpayers due.
- First property tax payment is due.
- Calendar year accrual basis corporations should pay related parties.
- Do you have unrealized capital losses?
- Consider deferring income.
- Estates and trusts should plan distributions.
- Business retirement plans for calendar-year businesses should be in place by December 30.
- Should you buy business equipment before December 31?
- Seniors, remember to take your required minimum distributions.
- Remember to take a physical inventory on January 1.
- Remember to "reset" payroll on January 1.
- California sales tax rate to decrease January 1.
- California employers will have FUTA makeup payment.
- Should you make additional tax payments before December 31?
- Should you donate appreciated publicly traded stock?
- Donating a car to charity?
- Should you adopt an accounting policy for small equipment purchases by December 31, 2016?
- New California efiling and electronic deposit requirement.
- New Form I-9 issued.
- New California Security Choice Retirement Program.
- Does your group need a speaker?
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly broadcast schedule.
- Visit our new article: Speak to Sell.
- Follow me on social media!
- Do you have employee stock options?
- Do you have real estate tax issues?
- Check out my blog.
- PS Marché Aux Fleurs
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Clive Baker helps cut his family's first real Christmas tree. Happy Holidays!
This year, both Christmas Day and the beginning of Hanukkah will fall on Sunday, December 25. Our office will be closed December 23 and 26, and Dawn will be on vacation the weeks before and after Christmas. Hope 2016 has been a great year for you and 2017 will be even better. "God Bless us, every one!"
'Tis the season for year-end planning.
There is less than a month remaining for 2016. Make your year-end planning appointment now. Call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162.
Trump tax proposals make tax planning more uncertain.
We sent subscribers to this newsletter a summary of some of President-elect Trump's tax proposals. If you didn't receive it and would like to have it, call Dawn Siemer at 408-918-3162 or email her at dgsiemer@taxtrimmers.com.
A proposal that I didn't discuss is to repeal head of household filing status. That change could result in a tax increase for single-parent households. The Republican proposal in Congress doesn't include this change, and I think it will likely be eliminated as tax reform is negotiated.
As Yogi Berra said, "It ain't over 'til it's over!" Uncertainty reigns.
Fourth-quarter calendar year corporate estimated tax payment is due December 15.
The final 2016 estimated tax payment for calendar-year corporations is due December 15, 2016. 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.
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, 2017. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.
Consider making the payment by December 31, 2016 for a 2016 tax deduction. Watch the alternative minimum tax.
Depending on your situation, you might be better off waiting until 2017 to make the final California estimated tax payment. Under the Trump tax proposal, the alternative minimum tax would be repealed. Another proposal is to increase the standard deduction.
See your tax advisor.
First property tax payment is due.
The first property tax payment for the 2016-2017 fiscal year in Santa Clara County is due December 10. Avoid a late payment penalty - mail your payment now!
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.
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.
Consider deferring income.
Under the Trump tax proposals, most high-income individuals and businesses will have lower tax rates in 2017 than in 2016. That means it's better to wait to take long-term capital gains and to receive dividends and ordinary income (like bonuses) next year. See your tax advisor about whether this applies to you and any actions you should or shouldn't take.
Estates and trusts should plan distributions.
The maximum 39.6% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed estate or trust income exceeds $12,400. 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, 2017) as distributed for a taxable year (for example 2016).
In most cases, capital gains don't qualify for the distribution deduction. See your tax advisor.
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) to avoid unpleasant surprises.
Business retirement plans for calendar-year businesses should be in place by December 31.
In order to make contributions for 2016, 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.
Should you buy business equipment before December 31?
The expense election for business equipment purchases is now $500,000. This election is even available for some SUVs and heavy trucks with a $25,000 limit. The excess might be eligible for bonus depreciation. Remember the expensed amount is only deductible against business income. See your tax advisor.
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.
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.
Remember to "reset" payroll on January 1.
Software providers will issue updates including the new payroll tax tables as of January 1, 2017. Be sure you have installed those updates before processing your first payroll for 2017.
California sales tax rate to decrease January 1.
A temporary 0.25% increase to the California sales tax will expire on December 31, 2016. Meanwhile, some local communities have enacted sales tax increases. Find your local community's sales tax rates at www.boe.ca.gov/sutax/pam71.htm.
California employers will have FUTA makeup payment
California employers will have additional tax for a 1.8% credit reduction on their Federal Unemployment Tax return, Form 940, for 2016. The maximum amount is $126 per employee. The tax applies because California hasn't repaid its outstanding federal loans for five consecutive years.
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.
This situation has changed somewhat because of the 3.8% net investment income (NII) tax. Part of the state tax payment may be a "good" deduction for the NII tax even though there is no AMT benefit. See your tax advisor.
Under the Trump tax proposals, the alternative minimum tax would be repealed. In that case, it might be better to make your state tax payment next year.
Another proposal is to increase the standard deduction to $15,000 for singles and $30,000 for married persons filing joint returns. For some taxpayers, this will eliminate the deduction for state income taxes. Those taxpayers might be better off paying their state income taxes this year.
See your tax advisor.
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."
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).
Should you adopt an accounting policy for small equipment purchases by December 31, 2016?
An election is available to currently deduct small expenditures when the taxpayer doesn't have an applicable (audited) financial statement. Items up to $2,500 may be currently deducted, effective for amounts paid or incurred for tangible property on or after January 1, 2016, for taxable years beginning on or after January 1, 2016. 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 is made each year on the income tax return for the business.
In order to be in position to make the election for 2017, you must have the accounting policy in place by December 31, 2016 and implement that policy in your accounting throughout 2017. If you didn't have the policy for 2016, consider getting it in place by December 31, 2017. We recommend that the policy should be written.
New California efiling and electronic deposit requirement.
During 2016, California adopted new efiling and electronic payment requirements. Effective January 1, 2017, employers with 10 or more employees will be required to electronically submit employment tax returns, wage reports and payroll tax deposits to the Employment Development Department. All remaining employers will be subject to this requirement beginning January 1, 2018.
New Form I-9 issued.
Remember to complete Form I-9, Employment Eligibility Verification, for all new employees. Use the revision dated November 14, 2016. You can find the forms at www.uscis.gov or at an office supply store. You do not submit Form I-9 to a government agency, but keep it in the employee's personnel file.
New California Security Choice Retirement Program.
Governor Brown approved the California Security Choice Program on September 29, 2016. Under the new law, all California employers with five or more employees who do not offer their employees another retirement savings option will be required to to participate in the California Secure Choice Retirement Program. Initially beginning 12 months after the opening of enrollment, employers of 100 or more employees must arrange to allow employees to participate in the plan. Beginning 24 months after the opening of enrollment, employers of 50 or more employees must participate. Beginning 36 months after the opening of enrollment, the mandate applies to employers with 5 or more employees.
If this applies to your business, see your tax advisor for details.
(California SB 1234.)
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.
Please share your good experiences with Michael Gray, CPA.
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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 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 December and January:
- December 2 and 9, 2016, William D. Mahan, attorney at law, "Why you need a will"
- December 16, 2016, William D. Mahan, attorney at law, "Tax considerations of title"
- December 23 and 30, 2016, Phil Price, EA, The Price Company, "Qualified retirement plans for small businesses"
- January 6, Don Pollard, CLU, ChFC, Advanced Professionals, "Health Insurance Update for Individuals"
- January 13, Don Pollard, CLU, ChFC, Advanced Professionals, "Health Insurance Update for Small Businesses"
- January 20 and 27, Peter Moss, Wymac Capital, "Residential mortgage market update"
Financial Insider Weekly is also broadcast as follows:
- Sundays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Sundays at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Sundays at 10:00 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Mondays at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Mondays at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Mondays at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
- Mondays at 7:30 p.m. on Comcast channel 15 in Saratoga
- Tuesdays at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Tuesdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Tuesdays at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill Broadcast on the internet at the same time as streaming video at www.mhat.tv
- Wednesdays at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Thursdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Fridays at 11:00 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola.
- Fridays at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
- Fridays at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
- Fridays at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV"
- Fridays at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Saturdays at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Saturdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Saturdays at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
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!
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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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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