Michael Gray, CPA's Tax and Business Insight

January 13, 2012

© 2012 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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Janet Gray, Kara Siemer and Clive Baker
Grandma Janet, Kara Siemer and Clive Baker share a special moment on Christmas Eve.

Happy New Year!

The New Year is traditionally a time for setting personal and business goals. We hope we can play a part in that goal setting process, but more importantly in helping you achieve your goals. In any event, we hope 2012 will be a great year for you and your family!

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January celebrations.

My son in law, Dan Baker, is celebrating his 39th birthday this month. Hooray for Dan!

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Tax preparation materials will soon be on the way.

We are mailing instructions to our clients this week. If we prepared your tax returns last year and you haven’t received instructions by January 20 or you would otherwise like to receive instructions, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Make your tax preparation appointment now.

If you would like to schedule an appointment for a tax preparation interview, also please call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Final 2011 estimated tax payment is due January 17.

Remember the final estimated tax payment for calendar-year individuals, estates and trusts is due January 17. You might want to check with your tax advisor about reducing the payment if you had much lower capital gains in 2011 than in 2010, you are entitled to the increased federal refundable minimum tax credit, or your facts have otherwise changed.

Remember that California has a strange estimated tax deposit schedule. There was no payment due on September 15, but 30% of the estimated tax for 2011 is due on January 17, 2012.

In addition, if any California estimated tax deposit is $20,000 or more, the payments must be made electronically. Once a payment is made electronically, the taxpayer must continue to make future payments electronically. The payments are made at the Franchise Tax Board’s web site, www.ftb.ca.gov.

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W-2s, 1099s and DE 542 reminder.

Remember that most 2011 annual information returns, such as W-2s and 1099s, should be issued to payees by January 31 and sent to the tax authorities by February 29.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Requirements for real estate operators to issue Forms 1099 for services starting for 2011 were repealed. So was the requirement to issue 1099s to corporate payees. (1099s must still be issued for business payments of $600 or more to incorporated lawyers and doctors.)

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Filing deadline extended for some tax-exempt organizations.

The IRS has extended the filing deadline with regular filing deadlines in January and February 2012 to March 30, 2012. The deadline was extended because the modernized e-file system for processing the returns is off-line during January and February. The extension applies to Forms 990, 990-EZ, 990-PF, and 1120-POL.

A reasonable cause statement referencing Notice 2012-4 should be attached to the tax return.

(Notice 2012-4.)

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Payroll tax letter.

We have prepared a letter summarizing requirements for payroll tax withholding and annual information returns. If you would like a copy, please call Dawn Siemer at 408-918-3162.

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Time to update your payroll software.

Remember that, since new payroll limits and withholding tables apply for 2012, your payroll processing software has to be updated to incorporate that information.

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IRA charitable break expires.

The ability to avoid federal income tax on an IRA distribution of up to $100,000 by paying the money directly to a charity ended after 2011.

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Many tax provisions scheduled to expire after 2012.

The Bush tax cuts, including the 35% maximum tax rate on ordinary income and 15% tax rate on long-term capital gains is scheduled to expire after 2012. The $5 million lifetime exemption equivalent for gifts, estate tax and generation skipping tax is also scheduled to expire after 2012. A huge item scheduled to expire after 2012 is the exclusion from taxable income of cancellation of debt for a principal residence.

These changes will make it very difficult to plan for 2012. Many of these rules will probably be extended, but I don’t expect it to happen until after the 2012 Presidential election. Remember the old saying, nobody’s life, liberty or property is safe when Congress is in session.

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Payroll tax break extended.

On December 22, 2011, Congress passed and President Obama signed The Temporary Payroll Tax Cut Continuation Act of 2011 (HR 3765). Under the Act, the employee portion of the Social Security tax is reduced by 2% for the first two months of 2012. If employees have more than $18,350 of social security wages, they will have to repay the 2% tax on the excess with their income tax returns.

Most commenters believe that Congress will eventually extend the reduction for all of 2012, which would eliminate the repayment requirement.

Self-employed persons get the 2% reduction for up to $18,350, less any FICA wages received up to $18,350 for the first two months of 2012.

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Business mileage rate unchanged.

The IRS has announced the business standard mileage rate for 2012 is 55.5¢ per mile, the same as for the second half of 2011. The standard mileage rate for medical and moving expenses is 23¢ per mile, compared to 23.5¢ per mile for 2011. The mileage rate for donations is unchanged at 14¢ per mile.

(Notice 2012-1.)

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California construction contractors can now be LLCs.

Thanks to a change in the Business and Professions Code and Corporations Code enacted on September 30, 2010 in Senate Bill 392, construction contractors that are organized as LLCs can now receive a license from the Contractor State License Board, effective January 1, 2012.

(Tax News, January 2012, California Franchise Tax Board, page 24.)

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Accrual basis taxpayer couldn’t use recurring items exception.

An accrual basis corporation prepaid expenses for a business lease and for a service contract. The expenses for these items were prorated over the time they applied for financial statement reporting. The taxpayer asked the IRS whether it could deduct the expenses under the recurring item exception as immaterial. The IRS said that since the items were considered to be material enough to prorate them for financial reporting and prorating them resulted in a better matching of the expenses with income, they didn’t qualify for the recurring item exception.

(Revenue Ruling 2012-1.)

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Franchise Tax Board will require property tax parcel numbers for 2012.

The Franchise Tax Board has postponed requiring disclosing the parcel number for property tax deductions for 2011, but plans to require the information on 2012 income tax returns. There will also be a line on the form to indicate the portion of the payment that is not deductible. The requirement will only apply to property taxes deducted as itemized deductions on Schedule A. In order to be deductible, the tax must be based on the value of the property.

(Spidell’s California Taxletter, January 1, 2012, page 1.)

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FICA and FUTA exemptions apply to family members of disregarded entity owners (but not for California taxes).

The IRS has issued regulations extending the religious and family member exceptions to social security tax (FICA) and federal unemployment tax (FUTA) to persons related to owners of disregarded entities, such as single-member LLCs. (So payments to a child under age 18 of an owner of an LLC aren’t subject to FICA or FUTA taxes for the wages received from the LLC.)

The regulations may be relied on for wages paid after December 31, 2008, so some employers may file amended payroll tax returns to claim refunds for excess taxes paid.

(T.D. 9554; NRPM REG-136565-09.)

California hasn’t conformed to the regulations, so the wages will still be subject to SDI (state disability insurance) and CUI (California unemployment insurance) taxes.

(Spidell’s California Taxletter, January 1, 2012, page 6.)

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Financial Insider Weekly time and day changes for Hayward, Alameda and Fremont.

Effective January 18, 2012, the days and times that Financial Insider Weekly is broadcast in Hayward, Alameda and Fremont will change to Wednesdays and Fridays at 8 p.m. The show is broadcast on Comcast channel 28 and, in California, AT&T U-verse channel 99 (Hayward).

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Financial Insider Weekly broadcast schedule for January and February.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 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 January and February:

January 6, 2012, Scott Haislet, CPA and Attorney, “Real Estate Professionals and Passive Activity Losses”
January 13, 2012, Scott Haislet, CPA and Attorney, “1031 Tax Deferred Exchanges of Real Estate”
January 20, 2012, Bettie Baker Marshall, Attorney, “Caring for incapacitated family members and friends”
January 27, 2012, David Beck, CFP®, Bay Area Planners, “How a family can pay for a college education”
February 3, 2012, David Beck, CFP®, Bay Area Planners, “How tax benefits help finance a college education”
February 10, 2012, Hilary Martin, CFP®, The Family Wealth Consulting Group, “Planned saving to reach your financial goals”
February 17, 2012, Professor Patricia Cain, attorney, Santa Clara University, “Income tax problems of same-sex couples”
February 24, 2012, Professor Patricia Cain, attorney, Santa Clara University, “Estate and gift tax problems of same-sex couples”

Financial Insider Weekly is also broadcast as follows:

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!

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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Visit our new article!

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Follow me on Twitter!

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 and LinkedIn.

you can also follow me on other social media sites, Facebook and LinkedIn.

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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 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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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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