Michael Gray, CPA's Tax and Business Insight
June 4, 2018
© 2018 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy Father's Day!
- It's time for cleanup and extensions.
- Only for serious marketers - The Gary Halbert Memorial Event
- Bill Glazer offers a LIVEA Outrageous Marketing event.
- June 15 is an estimated tax due date.
- Estimated fee payment due June 15 for some calendar year LLCs.
- Do you love travel?
- Do you love Disney?
- California Supreme Court ruling could create employee classification headaches.
- Deduction disallowed for non-cash charitable contributions.
- IRA payments to state unclaimed property are taxable.
- Partnership with two single-member LLC partners didn't qualify for TEFRA small partnership exception.
- Former university employee taxed for tuition.
- Race track "takeout" wasn't a separate gambling business expense.
- 2019 limits for Health Savings Accounts issued.
- Tax Court says a corporation wasn't tax exempt.
- Taxation of California income challenged for certain trusts.
- California will keep Schedule CA for 2018.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new article: Outrageous Multi-Step Marketing Campaigns Review
- 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
Nearly two and a half years after our home was destroyed by a fire, it's nearly restored. Happy Fathers' Day!
Fathers' Day will be celebrated on Sunday, June 17 this year. Remember to express your appreciation to your father and other fathers who have contributed to your life.
It's time for cleanup and extensions.
Maybe you have an issue for which you would like a second look on the income tax returns you just filed. Maybe you have extended income tax returns that you need to have prepared. Or maybe you have some planning issues for which you need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.
Only for serious marketers - The Gary Halbert Memorial Event.
Master copywriter and marketing teacher Gary Halbert passed away 12 years ago, and would have been age 80 this year. Gary's sons, Bond and Kevin, have assembled a group of master marketers for a landmark event in Las Vegas on June 12 and 13 with an additional optional mastermind on June 14. There are only a few tickets left. Here is a URL where you can get the details. https://www.halbertevent.com/halbert/
Bill Glazer offers a LIVE Outrageous Marketing event.
Bill Glazer is also a master marketer and marketing teacher. He has assembled a massive panel of great marketers to present examples of their successful multi-step marketing campaigns for a bargain price (only $297)! Proceeds benefit the Veterans Affairs Stroke Care Program. This event will be in San Diego on June 11 and 12. Again, there are only a few seats left. Here is a URL where you can get the details. http://www.outrageouscampaigns.com/live.
June 15 is an estimated tax due date.
The second estimated tax payment for most individuals and calendar year corporations and fiduciaries is June 15.
For individuals, federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2017 tax on your income tax return if your adjusted gross income exceeds $150,000. Alternatively, you can make payments based on your income and deductions for 2017.
The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2017 tax, unless your adjusted gross income is $1 million or more. In that case, your estimated tax payments should be based on your actual income and deductions for 2018.
For help computing your second quarter estimated tax payments, call Thi Nguyen at 408-286-7400, extension 206 to make an appointment for a consultation.
Estimated fee payment due June 15 for some calendar year LLCs.
California LLCs pay two items to the Franchise Tax Board: an annual tax of $800 and an annual fee based on the gross receipts of the LLC.
The estimated annual fee is paid with Form 3536 by June 15 of the taxable year for calendar year LLCs. There is no fee when the gross receipts for the LLC are less than $250,000. The estimated fee can be based on last year's income tax return when it is for twelve months.
Do you love travel?
I have created a Facebook travel group, called Travel Adventures, for members to share travel photos, experiences and tips. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/207423476536726/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a closed group, and I will approve your membership.
Do you love Disney?
I have created a Facebook group, called Disney Magic, for members to share Disney photos, experiences and tips. I am also posting developments for Disney films, television shows, and amusement parks there. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/2006739209578437/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a closed group, and I will approve your membership.
California Supreme Court ruling could create employee classification headaches.
Under a recent California Supreme Court ruling for the Dynamex case, many more workers currently treated as independent contractors could be reclassified to be employees.
According to the Court, a worker must meet three tests to qualify as an independent contractor:
- The worker must be free from the control and direction of the hiring entity in connection with the performance of the work.
- The worker performs work that is outside the usual course of the hiring entity's business.
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
The real problem is the second requirement. Under this requirement, an independent professional performing temporary work would be considered to be an employee. Many independent contractors that work for a single "customer" could be considered to be employees.
This case related to delivery drivers who claimed to be transportation industry employees.
The California Employment Development Department is probably sharpening its knives to apply this ruling.
San Francisco City Attorney has issued subpoenas to Uber and Lyft to examine whether their contract drivers are actually employees under the Dynamex ruling.
Watch for an appeal and more litigation on this issue, which is a critical one for the tech industry and many small businesses.
(Dynamex Operations West, Inc. v. Superior Court, County of Los Angeles, Supreme Court of California, No. BC332016, April 30, 2018. San Jose Mercury News May 31, 2108, p. C11, "Uber, Lyft subpoenaed on driver wages".)
Deduction disallowed for non-cash charitable contributions.
A married couple had a number of their deductions disallowed because of lack of substantiation, but one group that may be of interest to our readers is their deductions for non-cash donations to Goodwill and Dress for Success. The Tax Court found that receipts with no descriptions of the donated item and no other substantiation wasn't sufficient to support the deductions, which were disallowed for all three years at issue.
If you are planning on claiming tax deductions for non-cash items donated, be sure they are listed on the receipt. It's also a good idea to take photographs of the donated items and include the photos with your tax returns. Remember large donations of non-cash items with a value of $5,000 or more required an appraisal. See Form 8283 and instructions.
(Moore v. Commissioner, Tax Court Memorandum Decision 2018-58, April 30, 2018.)
IRA payments to state unclaimed property are taxable.
The IRS has ruled that a payment by an IRA trustee from an IRA to a state unclaimed property fund was subject to state tax withholding and information return reporting.
Keep an eye on your IRAs, especially when a bank is the custodian. If the account is inactive, the custodian may pay the account to the state unclaimed property fund. If you don't get the funds rolled over or returned within 60 days, the distribution will be taxable income and might be subject to early distribution penalties.
(Revenue Ruling 2018-17.)
Partnership with two single-member LLC partners didn't qualify for TEFRA small partnership exception.
Under TEFRA (Tax Equity and Fiscal Responsibility Act), the IRS has jurisdiction to make adjustments of partnership taxable income and assess penalties at the partnership level. There is a small partnership exception where adjustments can only be made for the individual partners. A requirement to qualify is the partners must be individuals.
The partners of Mellow Partners were two single-member LLCs. The IRS audited Mellow Partners and issued a Final Partnership Administrative Adjustment notice for the partnership.
Mellow Partners said the notice was invalid because it qualified for the small business exception. It claimed single member LLCs are disregarded entities, so the partnership only had individual partners.
The District of Columbia Circuit Court of Appeals upheld the IRS. The Court said the IRS's regulations that LLCs should be recognized in applying the requirements for the small business exception were valid.
(Mellow Partners v. Commissioner, D.C. Circuit Court of Appeals No. 16-454, May 22, 2018.)
Former university employee taxed for tuition.
John Voigt was terminated at Tulane University in June 1991. His severance package included a tuition waiver for his family. His daughter attended Tulane from 2012 through 2015. The university issued a Form W-2 for the waived tuition. Voigt claimed the tuition should be waived as a tax-exempt employee benefit.
The Tax Court upheld the IRS in finding that, since Voigt wasn't an employee when his daughter was a student at Tulane, he didn't qualify for the exemption.
It's hard (but not impossible) to fight whether an item reported on Form W-2 is taxable income. Occasionally there are errors that you can fight. In that case, ask the employer to issue a corrected Form W-2.
(Voigt v. Commissioner, Tax Court Summary Opinion 2018-25, May 14, 2018.)
Race track "takeout" wasn't a separate gambling business expense.
Shiraz Lakhani claimed losses from a separate business as a professional gambler and offset them against his accounting practice business income. The IRS disallowed his gambling losses, under the rule that deductions for gambling losses are limited to gambling winnings. Mr. Lakhani claimed the track "takeout" portion of wager costs should be treated separately as a business expense, and allowed as a tax deduction for the years at issue.
The Ninth Circuit Court of Appeals upheld the Tax Court in ruling the deduction for the "takeout" was subject to the limitation for gambling losses.
(Note that, under the Tax Cuts and Jobs Act of 2017, all business expenses of professional gamblers are subject to the gambling income limitation, so any net loss is disallowed as a deduction against other taxable income. This change is effective for tax years beginning after December 31, 2017 and before December 31, 2025.)
(Lakhani v. Commissioner, 9th Circuit Court of Appeals No. 14-72576, May 10, 2018.)
2019 limits for Health Savings Accounts issued.
The IRS has issued the 2019 inflation-adjusted amounts for health savings accounts (HSAs). The annual limit on deductions for an individual under a high-deductible health plan with self-only coverage is $3,500. The annual limit for an individual under a high-deductible health plans with family coverage is $7,000. A high deductible health plan will have an annual deductible not less than $1,350 for self-only coverage or $2,700 for family coverage, and the annual out of pocket expenses (excluding premiums) will not exceed $6,750 for self-only coverage or $13,500 for family coverage.
(Revenue Procedure 2018-30.)
Tax Court says a corporation wasn't tax exempt.
Dr. Emmanuel Okonkwo incorporated Abovo Foundation, Inc. as a Texas nonprofit corporation. The purpose of the corporation was to deliver management consulting services to medical providers and advance government programs through patient safety initiatives.
The Tax Court upheld the IRS in finding that Abovo was actually used for Dr. Okonkwo's commercial consulting practice, and didn't qualify as a tax-exempt corporation.
(Abovo Foundation, Inc. v. Commissioner, Tax Court Memorandum Decision 2018-57, April 30, 2018.)
Taxation of California income challenged for certain trusts.
A California superior court has ruled the allocation rules followed by the California Franchise Tax Board for the undistributed income of California trusts with at least one nonresident fiduciary or nonresident, noncontingent beneficiary is wrong. Under this rule, 100% of the California-source income (such as rental income or income from a California installment sale) is subject to California tax in the year the income is received. That is the rule that applies for nonresident individuals.
According to the court, that income should be apportioned like any other income of the trust, because the trust apportionment statutes make no reference to California source and non-California source income. That means the undistributed income attributable to non-California fiduciaries and non-California beneficiaries might not be subject to current tax, but might be subject to a throwback tax when it is ultimately distributed.
The Franchise Tax Board will appeal the ruling.
If your family has a trust with this situation, consider whether protective claims for refund should be filed to keep the statute of limitations open. At least watch for developments for the appeal.
The ruling creates another tax problem. Under the method currently followed by the Franchise Tax Board, the deduction for California tax can be "matched" against the income reported on the Federal tax return. If the tax is postponed as a throwback tax in a later year, the deduction won't be matched, and the family could pay more total taxes.
(Paula Trust et al. v. California Franchise Tax Board, San Francisco County Superior Court, Case No. CTC-16-55126, March 8, 2018.)
California will keep Schedule CA for 2018.
With the Tax Cuts and Jobs Act of 2017, there will be many differences for income tax reporting on the federal and California individual income tax returns for 2018. The Franchise Tax Board has said it will continue using Schedule CA to reconcile the differences, and doesn't plan to have separate California schedules for the 2018 tax year.
(Spidell's California Taxletter, June, 2018, p. 7. "FTB announces upcoming change to the Form 540.")
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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 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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