Michael Gray, CPA's Tax and Business Insight
October 2, 2018
© 2018 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
- Boo! The year is almost over!
- Family celebrations.
- Extended individual and C corporation income tax returns are due October 15.
- Florence victims might qualify to claim 2018 hurricane losses on their 2017 income tax returns.
- Companies can help employees recover from disaster losses.
- Last chance to "undo" a Roth conversion.
- Business owners can still set up a SEP-IRA for 2017.
- Check your 2018 withholding.
- The IRS has withdrawn the proposed W-4 form for 2019.
- For tax professionals and advisors--Live seminar about 20% Deduction For Business Income with Michael Gray, CPA.
- CPAs! Want help with your promotions, recruiting notices, newsletters, online articles, or books?
- Do you love Disney?
- House passes Tax Reform 2.0 legislation.
- Employer reimbursements during 2018 for 2017 moving expenses are tax free.
- Estates and trusts should plan for when administration payments should be made.
- Families with Dynasty Trusts should review their generation skipping tax planning.
- Spousal agreement doesn't save mortgage interest deduction.
- Payments under a state or local tax credit program by a business may be deductible as a business expense.
- Payment of ex-wife's student loan payments qualified as alimony.
- California Office of Tax Appeals says there is a threshold for applying market-based sourcing rules.
- Simplified dissolution for California corporations and LLCs that never did business.
- California adopts federal partnership audit rules.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new article: Ultimate Guide to Facebook Advertising 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
My grandson, Kyan Baker, ready to go to his first Homecoming Dance at San Rafael High School Boo! The year is almost over!
Halloween is already almost here! And after Halloween, the year roars to a close with the holiday season. Hope your year has been a good one.
Did you know Halloween is the second most popular holiday in the United States? It's a great one for business promotions and just having fun!
Family celebrations.
My wife, Janet Gray, celebrates her birthday during October. Janet is a great blessing to me and our family. Happy birthday!
Extended individual and C corporation income tax returns are due October 15.
Does your tax return preparer have your information to prepare your income tax returns yet? (Congratulations to those who have already filed their income tax returns!) Note that victims of Hurricane Florence have until January 31, 2019 to file their 2017 income tax returns, and make their estimated tax payments that otherwise have been due on September 17, 2018 and to file their payroll and excise tax returns.
(IR-2018-187, IR-2018-189.)
Florence victims might qualify to claim 2018 hurricane losses on their 2017 income tax returns.
There is a special rule allowing a tax deduction for casualty losses attributable to a federally-declared disaster on the previous year's income tax return. For Hurricane Florence, the amended income tax return to claim this loss is due October 15, 2019. I recommend that you consult with a tax professional when claiming this loss.
Companies can help employees recover from disaster losses.
When a company helps employees recover from a federally-declared disaster, the company is allowed to deduct the payments as a business deduction and the payments are tax-free to the employees. Please consult with your tax advisor about whether you qualify for this tax benefit.
Last chance to "undo" a Roth conversion.
You can still change your mind for a 2017 conversion of a regular IRA to a Roth IRA. The correction must be done by October 15, 2018. This procedure is no longer available for tax years after 2017. It was repealed by the Tax Cuts and Jobs Act of 2017.
Business owners can still set up a SEP-IRA for 2017.
Certain businesses that don't have other qualified plans and have extended the filing date for the income tax returns can still set up and fund a SEP-IRA plan and make a retirement plan contribution for 2017 up to October 15, 2018. See your tax advisor.
Check your 2018 withholding.
With the tax law changes for 2018, many taxpayers will find their payroll tax withholding isn't enough to protect them from penalties for underpayment of estimated tax. I recommend that you review your withholding with your tax advisor now to consider whether you should increase your federal tax withholding. The current interest rate for computing the penalty for underpayment of estimated tax is 5%. Also, since personal exemptions have been repealed for federal tax reporting but not for state tax reporting, you should probably give your employer separate state income tax withholding instructions. The California form is DE-4.
The IRS has withdrawn the proposed W-4 form for 2019.
Employers and tax professionals complained that it was too complicated.
For tax professionals and advisors -- Live seminar about 20% Deduction For Business Income with Michael Gray, CPA.
The tax deduction of 20% of qualified business income under Internal Revenue Code Section 199A is one of the most complex provisions of the Tax Cuts and Jobs Act enacted on December 22, 2017. The IRS has issued proposed regulations about how to apply the new rules.
At this lunchtime seminar, Michael Gray will explain the highlights of the proposed regulations to help tax professionals and financial planners work with clients to plan for and implement the new rules.
The seminar will be located at Abbott, Stringham & Lynch, 1530 Meridian Ave., San Jose on Tuesday, October 23. Registration will be at 11:45 a.m. and the program will start at noon and conclude at 1:30 p.m. The investment, which includes lunch, is $30 for CalCPA members and $70 for non-members.
Online registration is at www.calcpa.org/svsj. For phone reservations, call Regine Staufenberg at 650-436-7169.
CPAs! Want help with your promotions, recruiting notices, newsletters, online articles, or books?
Michael Gray, CPA is available for promotional and content writing assignments. In addition, some of our publications and articles are available for licensing (use for a fee). Want more information? Call Michael Gray weekdays at 408-918-3161.
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.
House passes Tax Reform 2.0 legislation.
Don't hold your breath for the Senate. The House of Representatives has passed tax legislation that would make the individual and noncorporate tax provisions that are currently scheduled to expire after 2025 permanent. At least 60 votes would be required to pass the legislation in the Senate, which now seems highly unlikely. The legislation probably won't pass in Congress this year.
Employer reimbursements during 2018 for 2017 moving expenses are tax-free.
The IRS issued a Notice clarifying that employer payments or reimbursements during 2018 for qualifying employee moving expenses incurred before 2018 are excluded from the employee's wages for income and employment tax purposes.
The change in the tax law making such reimbursements taxable applies for expenses incurred in tax years beginning after 2017 and before January 1, 2026, except for a member of the U.S. Armed Forces on active duty who moves pursuant to a military order and incident to a permanent change of station.
(Notice 2018-75, September 21, 2018.)
Estates and trusts should plan for when administration payments should be made.
The tax deduction for miscellaneous deductions previously subject to the 2% of adjusted gross income limitation was repealed in the Tax Cuts and Jobs Act of 2017. Estate and trust administration deductions, such as for most legal, trustee and executor fees were not subject to that limitation when claimed on the income tax return for the estate or trust. When an estate or trust files a final income tax return, the items of income and deduction on that income tax return are passed through to the beneficiaries of the estate or trust. Those deductions might be disallowed on the income tax returns of the beneficiaries.
Therefore, until the IRS issues guidance stating the beneficiaries are entitled to deduct those items on their individual income tax returns, it would usually be best to pay the administration expenses in a year before the final year of the estate or trust. If the estate or trust doesn't have much income to apply the deductions against, the tax benefit of the administration expenses could just be lost.
Trustees and executors should discuss this matter with their attorneys and tax advisors.
Families with Dynasty Trusts should review their generation skipping tax planning.
Under the Tax Cuts and Jobs Act of 2017, the generation skipping tax exemption for an individual has increased to $11,180,000 for 2018 from $5,490,000 for 2017. If individuals created a "dynasty trust" (an irrevocable trust designed to last several generations) before 2018, and those individuals are still living, they should consult with their tax advisors about whether they should take any actions now to use their additional generation skipping tax exemption before its scheduled expiration after 2025.
Spousal agreement doesn't save mortgage interest deduction.
Moshe and Chevy Frankel filed separate income tax returns for 2013. A second home located in Sullivan County, New York was purchased in 2005. Under the title of the property and the mortgage agreement, Moshe was sole owner. Moshe and Chevy made a "Spousal Marital Residence Agreement" under which Chevy assumed responsibility for the mortgage and agreed to be responsible for all expenses associated with the mortgage, property and school taxes, escrow, insurance and all maintenance expenses.
Moshe declared bankruptcy during 2009. No payments were made on the mortgage after July, 2011. The house was sold in a short sale for $84,000 and the remaining mortgage balance of over $204,000 was cancelled by the mortgagee in 2013. The mortgagee allocated $37,700 of the proceeds to accrued but unpaid interest.
Chevy deducted the interest on her separate 2013 income tax return.
The Tax Court upheld the IRS in disallowing the deduction on Chevy's 2013 income tax return. The Court said she did not qualify as an equitable owner of the property because the title of the home was in Moshe's name and she didn't make consistent payments for the property. Household expenses were paid from a joint account. The Court also said that, in New York, the mere fact of marriage does not entitle each spouse to a present vested ownership in marital property.
(Note that, since the interest was paid from the sale proceeds from the property, which was owned by Moshe, Chevy didn't in fact pay the interest.)
(Chevy Frankel v. Commissioner, T.C. Summary Opinion 2018-45, September 19, 2018.)
Payments under a state or local tax credit program by a business may be deductible as a business expense.
The IRS has clarified that a business taxpayer that makes a business-related payment to a charity or government entity and receives a state or local tax credit can still generally deduct the payment as an ordinary and necessary business expense as long as the payment was made with a business purpose. This is a different result from the announcement for most individuals discussed in our last newsletter.
Payment of Ex-Wife's student loan payments qualified as alimony.
The Tax Court held in favor of a taxpayer who made payments of his ex-wife's student loans under a divorce agreement. The agreement provided that transfers of property were intended to be tax-free transfers and not payments for alimony. The Court said nothing in the agreement designated the payments as nonalimony payments.
Since this decision makes these payments taxable to the taxpayer's ex-wife, it doesn't make sense to me. Usually payments have to be clearly designated in the divorce agreement as alimony to be tax deductible alimony. We might see another tax case initiated by the ex-wife soon.
(Jeremy Adam Vanderhaal v. Commissioner, T.C. Summary Decision 2018-41, September 5, 2018.)
California Office of Tax Appeals says there is a threshold for applying market-based sourcing rules.
In a ruling that can't be cited as precedent, California's Office of Tax Appeals has ruled against the Franchise Tax Board in a multiple-state tax case.
A taxpayer located in Idaho performed services in Idaho for California customers. He received Form 1099-MISC from the California customers for fees received for those services.
The Office of Tax Appeals ruled that, unless the taxpayer was actually conducting its business both inside and outside California, California's sourcing rules require the income to be sourced to where the service is performed, not to where the benefit was received.
Since the taxpayer performed all of the services in Idaho, the taxpayer did not have any California-source income and was not required to file a California income tax return.
(Appeal of Larsen, 2018-OTA-073, "Income in Idaho from California customer was not California-source", Spidells's California Taxletter®, October, 2018, p. 13.)
Simplified dissolution for California corporations and LLCs that never did business.
Governor Brown has signed AB 2503, which makes a domestic corporation or limited liability company subject to voluntary or involuntary administrative dissolution or administrative cancellation if:
- The entity either never did business or filed returns/paid tax when it was operating and has no remaining business assets; or
- The entity's powers are, and have been, suspended by the FTB for a specified period of time.
This should provide an avenue to clean up inactive corporations and LLCs.
(AB 2503, Spidell's Flash Email, September 24, 2018.)
California adopts federal partnership audit rules.
Governor Brown has signed SB 274, which generally conforms to the new federal centralized partnership audit regime.
(SB 274, Spidell's Flash Email, September 24, 2018.)
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.
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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.
Visit our new article!
- The Ultimate Guide to Facebook Advertising - Second Edition Book Review at www.profitadvisors.com/ultimatefb.shtml
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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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