Michael Gray, CPA's Tax and Business Insight

October 1, 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!

Route to _______   _______   _______   _______   _______

(If you find this information valuable, please pass it on to a friend!)

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Kyan Baker with his birthday cake.
Kyan Baker with his “Mississippi Mud” birthday cake that he and Grandma Janet made from scratch.

Happy Halloween!

With Halloween coming soon, we know we’re on the countdown to the end of the year. Better start getting ready now!

Did you know Halloween is the second most popular holiday in the U.S.? It’s a great time for business promotions and scary specials!

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Tax planning thoughts.

There are some tax plans that take time to implement, such as making a short sale before the end of the year or making a gift of a business interest requiring an appraisal. Now is the time to discuss what actions might be appropriate before the end of 2012.

This is the most difficult year for tax planning that I can remember. I have never seen so many changes that will happen if Congress doesn’t take action, and I can’t imagine that not happening. Nobody knows what the final answers will be, most of which may not be enacted until late next year.

Meanwhile, there are some significant tax benefits to exploit before the year end (like the 15% maximum tax rate for long-term capital gains and the $5 million exemption for gifts and generation-skipping tax) and to avoid for next year (like the Medicare tax on investment income.)

Call Dawn Siemer at 408-918-3162 on Wednesdays from 9 a.m. to 5 p.m. to schedule a tax planning meeting with Michael Gray before his calendar is full.

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October 15 is the end of the 2011 tax return filing season.

Hopefully your 2011 income tax returns were filed long ago. Hooray! Mine is done! There are only two weeks left to file individual income tax returns. If you still haven’t submitted your information to your tax return preparer, better do it immediately. There may not be enough time to get it done on time. Also, remember 2011 retirement plan contributions for sole proprietorships, including SEPs (simplified employee pensions) must be made by October 15, 2012 in order to deduct them for 2011.

If you would like our help, call Dawn Siemer on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. Pacific Time to make an appointment. Dawn’s telephone number is 408-918-3162.

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Dawn Siemer returns after maternity leave.

Dawn’s daughter, Minerva, was born two months ago and Dawn is returning to work part time as our web master and office manager. Grandma Janet will be watching Minerva in the mornings and Kara in the afternoons. Say a prayer this all works out smoothly.

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October celebrations.

My wife, Janet, is celebrating her birthday this month. I am very fortunate to have her in my life. She has been a great wife, mother and grandmother. Our firm depends on her to care for Dawn’s children while Dawn works in the firm.

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Introductory offer for How to use Roth & IRA accouts to provide a secure retirement expires October 15.

Our half-price offer for How to use Roth & IRA accounts to provide a secure retirement, - 2012 Edition expires October 15, 2012. For more information, go online to www.siliconvalleypublishingcompany.com/products/how-to-use-roth-and-ira-accounts-to-provide-a-secure-retirement. You can also call your order to Dawn Siemer at 408-918-3162.

The book is 76 pages, and is packed with insights, including Roth Conversions, a comparison of Roth to regular IRA accounts, self-directed accounts, alternative investments, prohibited transactions, when Roth and IRAs pay income taxes and much more.

After you read the book, please post a book review at Amazon.com and bn.com.

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Electronic formats offered for our new books.

You can get a Kindle version of or new books about Employee Stock Options and Roths and IRAs at Amazon.com. You can also get a Nook compatible version at bn.com. Search “Michael Gray CPA”.

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Joe Cossman course is available.

The Cossman Home Study Program is a classic course on building your own business. I haven’t been able to find it for a long time, but Mr. Cossman’s adult children are now offering a DVD version on the internet for only $150. The offer is at www.cossman.com. (I’m not being paid for this “plug.”)

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Gary Halbert’s ads analyzed.

If you are interested in copywriting (writing effective advertisements and sales letters), the late Gary Halbert really did deliver on being the “prince of print.” Bond and Kevin Halbert, who are Gary’s adult sons, are offering online video analyses of some of Gary’s classic pieces, including the Coat of Arms letter that is one of the most mailed pieces in history. (My family received one and bought!) To get details, go to www.halbertising.com. (I’m not being paid for this “plug”.)

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S corporation tax benefit may be expiring.

2012 may be the last chance for S corporations to pay out accumulated C corporation earnings at a low tax rate to secure other benefits later. See this blog post. michaelgraycpa.com/2012/09/12/last-chance-for-s-corporation-shareholders-to-pay-low-tax-now-for-avoiding-high-penalty-tax-later/.

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New IRS guidelines allow more taxpayers to reduce their tax debts.

The IRS has relaxed its requirements to qualify for an offer in compromise. See this blog post: michaelgraycpa.com/2012/09/06/can-your-unpaid-federal-tax-bill-be-reduced-or-cancelled/.

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California Appeals Court allows small business stock exclusion.

California has its own exclusion for gains from the sale of certain small business stock. Many of the provisions are tied into the federal rules. In order to qualify for the exclusion, California requires that (1) at least 80% of the corporation’s assets be used in California and (2) at least 80% of the corporation’s payroll must be attributable to payroll earned in California.

Some taxpayers have been challenging those percentage requirements as violating the Commerce Clause and the Equal Protection and Due Process Clauses of the 14th Amendment to the U.S. Constitution.

A California Court of Appeal recently upheld one of these challenges.

It’s likely the Franchise Tax Board will appeal the decision to the California Supreme Court.

Meanwhile, taxpayers should consider filing protective claims for refund to avoid having the statute of limitations run on their potential refunds.

(Cutler v. Franchise Tax Board (August 28, 2012) California Court of Appeal, Second Circuit, Case No. B233773.)

(Spidell’s California Taxletter®, October 1, 2012, page 14, “Taxpayer wins small business stock case: Consititutional issue”. )

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Severance benefits weren’t subject to FICA.

Quality Stores, Inc. paid severance benefits to its employee relating to closing its stores and eventually going out of business. Quality Stores and employees paid FICA tax relating to those benefits. Then claims for refund were filed to recover those taxes. The Sixth Circuit Court of Appeals upheld a bankruptcy court and federal district court in finding the payments were “supplemental unemployment benefits” (SUB) that weren’t subject to FICA taxes. Quality Stores and its employees recovered over $1 million.

Congress defined SUB payments in Internal Revenue Code Section 3402(o) as “amounts which are paid to an employee, pursuant to a plan to which the employer is a party, because of an employee’s involuntary separation form employment (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, but only to the extent such benefits are includible in the employee’s gross income.”

The Court concluded the requirements were met.

The IRS may try to appeal this decision to the Supreme Court.

(Quality Store, Inc., 2012-2 U.S.T.C. ¶ 50,551 (September 7, 2012).)

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Uniform capitalization rules changed.

The IRS has issued new proposed regulations for applying the uniform capitalization rules for determining inventory costs under Internal Revenue Code Section 263A. Under the new rules, negative adjustments wouldn’t be allowed. For example, if the book depreciation charged to inventory was more than the tax amount, a negative adjustment wouldn’t be allowed. In Notice 2007-29, the IRS said they would accept negative adjustments; now it’s reversing that position.

The proposed regulations would also prohibit treating cash or trade discounts as negative adjustments.

In the proposed regulations, the IRS has provided exceptions for small producers with average annual gross receipts of $10 million or less and retailers and wholesalers that use the simplified resale method. These taxpayers will still be permitted to make negative adjustments.

(NPRM REG-126770-06.)

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California enacts new private pension law.

Governor Jerry Brown signed into law S.B. 1234, the California Secure Choice Retirement Savings Trust Act on September 28, 2012. Under the Act, California employers would be required to withhold 3% of wages of employees who aren’t participating in an employer retirement plan. The wages would be deposited in an individual account in a Retirement Trust administered by the state of California. It is intended that the account will qualify as an individual retirement account (IRA) under the federal tax laws. Employers might alternatively be able to deposit the funds in a privately administered IRA for the employee.

Employees may opt out of having the withholding program. Union employees would be exempt from the program.

Employers won’t be required to implement the program until the details are worked out, including whether the Retirement Trust will qualify as an IRA.

Implementation will be staggered, so that employers with more than 100 eligible employees will implement first, more than 50 eligible employees three months later, and the rest of employers after another three months.

The employer will not be subject to the federal rules relating to retirement plans under the Employee Retirement Income Security Act (ERISA) because this is not an employer-sponsored plan.

Since employees can already participate in an IRA, time will tell what the impact of the legislation will be. Employees who are having trouble paying their bills will probably opt out of the program. Employers will suffer additional administration expenses to withhold and deposit the funds through their payroll procedures, educate employees about the program, and collect and retain opt-out forms.

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Community public access television needs our help.

As you can see below, public access television is a vital part of our educational outreach to various communities. These are usually nonprofit, charitable organizations, like public television stations. Unlike those stations, most of the programming for the public access stations comes from local producers.

This programming includes the local arts, productions by students at local schools, community outreach by churches, independent local producers discussing current social issues, educational programming by local providers like ourselves and much more. In other words, public access television makes a unique, important contribution to the communities it serves.

With the difficult times we are experiencing, many public access stations are facing severe financial challenges, and might not survive without more community financial support. I urge you to consider making a donation to your local public access television station. Here is a link for a list of public access television stations in California: www.communitymedia.se/cat/linksca.htm.

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Financial Insider Weekly broadcast schedule for October and November.

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 October and November:

October 5, 2012, Peter Moss, Wymac Capital, Inc., “Big picture strategies for the home mortgage marketplace”
October 12, 2012, Lori Greymont, CEO, Summit Assets Group, “Real estate investment opportunities in Atlanta”
October 19, 2012, Lori Greymont, CEO, Summit Assets Group, “Different ways to invest in real estate”
October 26, 2012, Naomi Comfort, attorney, Silicon Valley Elder Law P.C., “The role of financial capacity in elder law”
November 2, 2012, Naomi Comfort, attorney, Silicon Valley Elder Law P.C., “Using Powers of Appointment to provide asset protection and flexibility”
November 9, 2012, Kathleen Wright, attorney, American Red Cross, “Financial preparation for a disaster”
November 16, 2012, Emmett Carson, PhD, CEO, Silicon Valley Community Foundation, “How to promote community giving as a family value”
November 23, 2012, Phil Price, EA, The Price Company, “Qualified Retirement Plans for closely-held business”
November 30, 2012, William Mahan, attorney, of counsel to Gates Eisenhart Dawson, “Tax and financial considerations of title”

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.

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 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, 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 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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