Michael Gray, CPA's Tax and Business Insight

December 5, 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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Thanksgiving centerpiece
This Thanksgiving centerpiece was created by my daugther, Holly Baker, with her son, Kyan

Happy Holidays!

This year, Hanukkah begins the evening of December 12. Of course Christmas Day will be Monday, December 25. Our office will be closed December 25. Hope 2017 has been a great year for you and 2018 will be even better. "God Bless us, every one!"

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'Tis the season for year-end planning.

There is less than a month remaining for 2017. Make your year-end planning appointment now. Michael Gray will have limited availability. Call Dawn Siemer weekday mornings at 408-918-3162.

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Fourth quarter calendar year corporate estimated tax payment is due December 15.

The final 2017 estimated tax payment for calendar-year corporations is due December 15, 2017. 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 16.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 16, 2018. (Martin Luther King Day will be observed on January 15.) 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, 2017 for a 2017 tax deduction. Watch the alternative minimum tax. If tax reform passes, paying by the year end will be even more important, because the deduction would be repealed for 2018.

See your tax advisor.

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First property tax payment is due.

The first property tax payment for the 2017-2018 fiscal year in Santa Clara County is due December 11. (December 10 falls on a Sunday.) Avoid a late payment penalty - mail your payment now!

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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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Consider deferring income.

Under tax reform, businesses and some individuals and businesses would have lower tax rates in 2018 than in 2017. That means it's better to wait to take 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.

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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 $12,500. 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, 2018) as distributed for a taxable year (for example 2017).

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.

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

In order to make contributions for 2017, 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?

The expense election for business equipment purchases is now $510,000. 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. (The depreciation and expensing rules would be even more generous under tax reform, but you'll probably have more tax savings by buying in 2017.) See your tax advisor.

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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, 2018. Be sure you have installed those updates before processing your first payroll for 2018.

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California employers will have FUTA makeup payment

California employers will have additional tax for a 2.1% credit reduction on their Federal Unemployment Tax return, Form 940, for 2017. The maximum amount is $147 per employee. The tax applies because California hasn't repaid its outstanding federal loans for two consecutive years.

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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.

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 tax reform, the deduction for state income tax would be repealed and the deduction for real estate taxes would be reduced or repealed.

See your tax advisor.

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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 to 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).

Should you accelerate tax deductions?

With a proposed increase in the standard deduction and proposed repeal of many tax deductions, including tax return preparation fees, it might be advantageous to accelerate tax deductions, such as medical expenses, mortgage interest, tax return preparation fees, asset management fees, and certain legal fees into 2017. The tax rate for the reduced income might also be lower next year under tax reform than the current tax rate for 2017.

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Should you adopt an accounting policy for small equipment purchases by December 31, 2017?

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 $2,500 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 2018, you must have the accounting policy in place by December 31, 2017 and implement that policy in your accounting throughout 2018. If you didn't have the policy for 2017, consider getting it in place by December 31, 2017. We recommend that the policy should be written.

Under tax reform, the tax benefit of making this election would be reduced because of more generous expense election limits and bonus depreciation.

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Status of Tax Reform legislation.

The House of Representatives has passed its version of the Tax Cuts and Jobs Act. The Senate Finance Committee has passed the Act, and the Senate passed its version on Saturday, December 2. Now that both houses of Congress have passed their versions, Tax Reform legislation is virtually certain to eventually pass. Congress may elect to reconcile the differences in the legislation or the House of Representatives could elect to simply accept the Senate version.

When the legislation passes, I'll issue a summary of the major provisions. Some of the provisions could still change.

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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 and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visitAngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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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. Back episodes are now on our home page at www.financialinsiderweekly.com.

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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 www.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
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