Michael Gray, CPA's Tax and Business Insight
November 3, 2017
© 2017 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 Thanksgiving!
- Family celebrations.
- 'Tis the season for year-end planning.
- Tax relief for Northern California and Orange County fire victims.
- E-Filing closes.
- Congress at work on tax reform.
- Bankruptcy act gives bankruptcy relief to family farms.
- Tax return preparers must renew PTIN registration.
- $1 million FBAR fine upheld.
- Ebay sales were taxable.
- Cost of living increases announced for retirement accounts.
- 2018 tax brackets announced.
- IRS changes requirements for partnership basis election.
- IRS kills proposed valuation regulations.
- Clergy housing exclusion ruled unconstitutional.
- In California, technical partnership or LLC termination can trigger additional tax.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new article: The Hypomanic Edge Review and more!
- 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
My granddaughter, Minerva Siemer, at Children's Fairyland in Oakland Happy Thanksgiving!
Thanksgiving falls on November 23 this year. I hope you are able to spend the day with your family or friends. This is one holiday people of all faiths or no faith can share. Being thankful and counting your blessings is one of the best things you can do for your emotional health. Even when things aren't working out, you can still be thankful for past good memories. Drive carefully and enjoy the holiday.
Family celebrations.
My brother, Steve, and I are celebrating our birthdays this month. Thank goodness we are both healthy and enjoying spending time with our family. I am also thankful to have a business located close to my home, making life much more pleasant, and to have my daughter, Dawn, working as my office manager and web master in my business.
'Tis the season for year-end planning.
There are only two months remaining for 2017. Make your year-end planning appointment now. Call Dawn Siemer on weekday mornings at 408-918-3162.
Tax relief for Northern California and Orange County fire victims.
Both the IRS and the California Franchise Tax Board have given victims of the Northern California and Orange County wildfires until January 31, 2018 to make various payments and file various tax returns, including tax returns for which the extended due date was October 16, 2017.
Here are affected tax returns:
- Income and franchise tax returns with a valid extended due date of October 16, 2017;
- FBARs with an extended due date of October 15, 2017;
- Quarterly estimated tax payments normally due on January 16, 2018;
- Quarterly payroll and excise tax returns normally due on October 31, 2017;
- Calendar-year tax-exempt returns with an extended due date of November 15, 2017.
Taxpayers eligible for relief include:
- Taxpayers located in the disaster areas;
- Firefighters and relief workers providing help in the disaster areas;
- Taxpayers whose tax preparers are located in the disaster areas.
The IRS will automatically provide relief for taxpayers with addresses in the disaster areas.
To contact the IRS for relief, call 866-562-5227.
(Spidell's California Taxletter, November, 2017, page 3, "Tax relief for Northern and Southern California wildfire victims")
E-Filing closes.
The IRS's efiling system will close down for updates to prepare for the 2018 filing system. This means 2016 tax returns can't be efiled after November 18, 2017 until the system reopens in 2018. Tax returns filed during the interim period will have to be paper filed.
(IR 2017-183.)
Congress at work on tax reform.
The House Ways and Means Committee and the Senate Finance Committee are both working on their versions of tax reform, following the framework issued by the Trump Administration. The House proposal was released yesterday. Michael Gray is busy reviewing it. After hinting at changes for 401(k) plans, that idea appears to have been abandoned. They all assure us the changes will be "good for the country" and "create jobs." I believe it was Mark Twain who said, "Nobody's life, liberty or property is safe while Congress is in session!"
Bankrupcy act gives bankruptcy relief to family farms.
President Trump signed the Family Farmer Bankruptcy Clarification Act of 2017 (Sen 1237) on October 26. Under the new law, family farms will be able to sell off part of their assets to fund Chapter 12 bankruptcy reorganizations without having to treat the resulting capital gain as a priority claim of the IRS.
Tax return preparers must renew PTIN registration.
The IRS is now accepting online renewal applications for Paid Preparer Tax Identification Numbers (PTINs.) Conforming with Steele, 2017-1 USTC 50,238, there is no fee for the renewal application.
$1 million FBAR fine upheld.
The Ninth Circuit Court of Appeals rejected a taxpayer's appeal of a $1 million fine for failing to disclose an overseas account. The taxpayer claimed the fine was unconstitutional as a "cruel and unusual punishment" or excessive fine. The taxpayer admitted she willfully failed to disclose the account, which reached a value exceeding $2 million.
(United States v. Letantia Bussell, 2-17-2 U.S.T.C. 50,384, October 25, 2017.)
Ebay sales were taxable.
The Tax Court upheld the IRS in taxing unreported sales on EBay by a taxpayer who was otherwise unemployed. PayPal issued Form 1099-K, Payment Card and Third Party Network Transactions, on which $37,013 of payments were reported. There were 399 transactions for 2013, mostly for collectible coins. The taxpayer didn't report the sales on Schedule C.
In addition to fees charged by EBay and PayPal, the Tax Court also allowed tax deductions for estimated postage, packaging and cost of sales, under the "Cohan" rule. After the estimated deductions, the Tax Court determined his taxable trade or business income was $20,583.
The Court upheld the IRS in assessing a 20% accuracy-related penalty.
What was significant to me about this case was the IRS determined a deficiency based on Form 1099-K, which is a relatively new information return. Taxpayers should be prepared to explain the differences for sales reported on their income tax returns and the amount reported on Form 1099-K. For example, restaurants would have differences for tips and sales taxes charged by customers to their credit cards.
(Huzella v. Commissioner, Tax Court Memorandum Decision 2017-210, October 23, 2017.)
Cost of living increases announced for retirement accounts.
The IRS has announced 2018 cost of living increases for retirement accounts. The maximum contribution to a 401(k) is increased from $18,000 to $18,500. The maximum contribution to a health flexible spending account is increased from $2,600 to $2,650. The maximum contribution to an IRA is increased from $5,000 to $5,500. The maximum contribution to defined contribution plans, such as simplified employee pensions (SEPs) and profit sharing plans, is increased from $54,000 to $55,000. The "catch up" contribution for 401(k)s and SEPs is unchanged at $6,000. The annual compensation limit for computing the contributions for defined contribution plans is increased from $270,000 to $275,000. The annual benefit limit for defined benefit plans is increased from $215,000 to $220,000.
Remember Congress might change these limits and the types of retirement plans available in tax reform legislation.
(Notice 2017-64. October 30, 2017.)
2018 tax brackets announced.
Congress has announced various cost of living adjustments for 2018. The personal exemption is increased from $4,050 to $4,150. The standard deduction is increased from $12,200 to $13,000 for married, joint filers, from $6,350 to $6,500 for singles, from $9,350 to $9,550 for heads of households.
(Note personal exemptions and head of household status would be repealed under the Trump tax reform proposals.)
The annual gift tax exemption is increased from $14,000 to $15,000.
The estate and gift applicable exclusion (lifetime exemption) will increase from $5,490,000 to $5,600,000. (The estate tax would be repealed under the Trump tax reform proposals.)
(Rev. Proc. 2017-58, October 20, 2017.)
IRS changes requirements for partnership basis election.
The IRS has issued proposed regulations changing the requirements for making a partnership basis election under Internal Revenue Code Section 754. The election allows a partnership to elect to adjust the basis of partnership property when the inside basis and outside basis are different. The proposed regulations eliminates the requirement that the election be signed by one of the partners. This is a good practical change considering most partnership income tax returns are now efiled.
The IRS has received many requests for extension of time to make the Section 754 election because of the lack of a signature.
Although the proposed regulations apply to tax years ending on or after the date of publication of the final regulations, the IRS says taxpayers may rely on the proposed regulations for the period preceding the proposed effective date. Even taxpayers who filed unsigned Section 754 elections years ago can rely on the proposed regulations for relief.
(NPRM REG-116256-17, October 12, 2017.)
IRS kills proposed valuation regulations.
On October 2, 2017, the Department of the Treasury issued its second report to the President on Identifying and Reducing Tax Regulatory Burdens. One of the recommendations was to abandon proposed regulations under Internal Revenue Code Section 2704, which would have severely curtailed valuation discounts for family transfers. Estate planning attorneys and other tax advisors are having a collective sigh of relief.
Clergy housing exclusion ruled unconstitutional.
A federal district court has ruled that the clergy housing exclusion is a tax preference that violates the clause against state establishment of a religion in the U.S. Constitution.
The exclusion was challenged by a special interest group.
The same judge made a similar ruling before and the decision was reversed by the Seventh Circuit Court of Appeals (Freedom from Religion Foundation, 2013-2, USTC 50,600).
(Gaylor v. Muuchin, DC Wisconsin, October 12, 2017.)
In California, technical partnership or LLC termination can trigger additional tax.
A partnership (or LLC taxed as a partnership), can technically terminate when there is a sale or exchange of 40% or more of the total interests in both partnership capital and profits in a 12-month period.
When there is a technical termination, short-period income tax returns are required to be filed for the "old" partnership and the "new" partnership. For LLCs and limited partnerships, separate $800 taxes plus LLC fees are separately computed for each "entity" and each short taxable year.
Partnerships commonly don't tell their tax return preparers about the change of ownership until they typically file their income tax returns. They not only owe additional taxes, but may incur late filing penalties. (The due date for partnership income tax returns is now the 15th day of the third month after the year-end.)
In two recently released cases, taxpayers tried to have late filing and late payment penalties relating to short years from technical terminations eliminated for reasonable cause. The State Board of Equalization rejected the taxpayers' arguments.
(Appeal of Epworth Apartments, LP, December 16, 2015, released August 22, 2017, California State Board of Equalization Case No. 839252; Appeal of Central Valley Investment Group, II, June 14, 2016, released September 18, 2017, California State Board of Equalization Case No. 810256.)
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Financial Insider Weekly past episodes
After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Past episodes are available at https://www.youtube.com/user/financialinsiderweek.
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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