Michael Gray, CPA's Tax and Business Insight

May 2, 2014

© 2014 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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Kara and Minerva at Henry Cowell park.
Kara and Minerva Siemer at Henry Cowell Park.

Happy Mother's Day!

Mother's Day is Sunday, May 11. Be sure to express your appreciation to the mothers in your life. Janet and I will be with our grandsons while Holly and Dan Baker serve Mother's Day dinners at Marché Aux Fleurs in Ross, California. Make your reservation now!

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Family celebrations.

My daughter, Holly Baker, and her husband Dan are celebrating their 15th wedding anniversary this month. Congratulations, Holly and Dan!

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Do you need help with your extended 2013 income tax returns?

The extended due date for calendar year business income tax returns is September 15 and the extended due date for calendar year individual income tax returns is October 15. We are already hard at work for these tax returns for many of our clients and we would welcome more. May we be of service with your extended returns? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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The earlier you do tax planning, the better.

Many people wait until the year-end for tax planning, but it's better to do it earlier in the year when it's easier to act on it. Why not make a tax planning appointment today? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Conciliation agreement didn't control dependency exemption.

An unmarried couple made a conciliation agreement for their child. The agreement didn't specify which parent would receive the dependency exemption. Both parents claimed the exemption for 2010 and 2011. Although the agreement seemed to imply the mother would be entitled to the exemption, the Tax Court found the child spent the night with the father the majority of the nights for those two years. Therefore, the Tax Court found the father was entitled to the dependency exemption for those years.

(Harris, T.C. Memo 2014-69.)

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Bad debt deductions disallowed for family loans.

According to the Tax Court, a taxpayer's transfers to two trusts weren't bona fide loans, so nonbusiness bad debt deductions were disallowed when the trusts didn't pay the loans. The trusts were originally created by the taxpayer for the benefit of his sons. Promissory notes were made for the loans, but there was no evidence of an attempt to collect the amounts due.

In addition, nonbusiness bad debt deductions were disallowed for amounts paid on behalf of the taxpayer's mother and disabled brother for a purported indemnification agreement. The agreement was oral, so there was no physical evidence of the agreement.

(Alpert, T.C. Memo 2014-70.)

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Guarantee by LLC member puts member at risk.

The IRS Chief Counsel has issued advice stating that when a member of an LLC guarantees a debt of the LLC and there is no right of contribution from members other than the LLC and the member isn't otherwise protected against loss, the member is considered to be at risk with respect to the debt. The conclusion is important, because the amount at risk gives the member an additional investment amount for which losses can be claimed.

If the debt for which a guarantee is given was previously qualified nonrecourse financing (usually nonrecourse financing secured using real estate), the other members of the LLC could be considered as having received distributions of cash, which could result in their having taxable income.

Business owners have to balance the tax benefits of getting deductible losses against the liability they accept, since the purpose of an LLC is to seek protection from liability.

(AM 2014-003.)

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Corrections issued from Net Investment Income Regulations.

The IRS has issued corrections to the final Net Investment Income Regulations that were issued during December 2013. The corrections clarify that foreign taxes for which a deduction instead of a tax credit is claimed for regular tax reporting are also deductible when computing the net investment income tax.

They also clarify that a 500 hour test applies to each rental property for exclusion from net investment income unless the taxpayer elects to aggregate all real estate activities as a real estate professional. (Some taxpayers were interpreting the regulations as previously stated to mean that if you qualify for one property, you qualify for all properties.)

(TD 9644.)

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FSA participant is eligible for HSA.

The IRS Chief Counsel has issued advice stating that a participant in a health flexible spending account (FSA) at work, even relating to a carryover to the account from a previous year, is ineligible to make contributions to a Health Savings Account (HSA) for that year. The employee can participate in an HSA if the carryover amount is transferred to a limited purpose HSA-compatible FSA. (The employee might find it easier to waive the carryover altogether if he or she wants to participate in an HSA in the following year.)

(CCA 201413005.)

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Football scholarships might be taxable.

The National Labor Relations Board for the Chicago region recently ruled the football players at Northwestern University were employees of the school and had the right to unionize. A scholarship isn't tax-free when the grant is conditioned on providing services to the school. Therefore, it appears football scholarships (an possibly other sports?) may be taxable.

(The Kiplinger Tax Letter, April 11, 2014, )

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California use tax on the Form 540 is a pill.

California's State Board of Equalization encourages California taxpayers to pay an amount for California use tax on their individual income tax returns. The amount is for California sales tax that wasn't collected for goods purchased on the internet from an out of state vendor or for goods brought into the state and consumed in California.

The problem is, if the Franchise Tax Board made any adjustment to your tax return, such as for a penalty for underpayment of estimated tax or for interest for late payment of tax, it applies the payment that you made for California use tax to their own bill. Then it forwards the use tax information to the State Board of Equalization, which then will bill you for the amount they didn't receive from the Franchise Tax Board.

This is a great way to discourage people from doing the right thing, especially when the amounts are small.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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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, siliconvalley.citysearch.com, and Google+.

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Broadcast times change for Financial Insider Weekly in Santa Cruz County, Watsonville & Capitola.

The broadcast days and times for Financial Insider Weekly have changed to Sunday at 1 p.m. and Tuesday at 10:30 a.m. The show is broadcast on Comcast channel 26 in Santa Cruz County and Charter Communications Channel 2 in Watsonville and Capitola.

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Financial Insider Weekly broadcast schedule for May and June.

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 May and June:

May 2, 2014, Judy Barber, Family Money Consultants, LLC, "The transfer of family wealth to the next generation: What's the money for?"
May 9, 2014, attorney Jeffrey B. Hare, P.C., "Legal due diligence for real estate transactions"
May 16, 2014, Phil Price, E.A., The Price Company, "Retirement plan alternatives for small businesses"
May 23, 2014, Mayuri Onerheim, "Money, Spirituality, Consciousness"
May 30, 2014, attorney Michael Desmarais, "Your rights as a beneficiary"
June 6, 2014, attorney Michael Desmarais, "Estate planning for second marriages"
June 13, 2014, attorney Jann Besson of Law Offices of Besson & Yarbrough, "Medi-CAL benefits for Long-Term Care"
June 20, 2014, Hilary Martin Hendershott, CFP®, The Family Wealth Consulting Group, "Why most people will never achieve their financial goals"
June 27, 2014, Craig Martin, CFP®, The Family Wealth Consulting Group, "The role of emotions in investing"

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 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 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
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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