Michael Gray, CPA's Tax and Business Insight

November 4, 2016

© 2016 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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Clive's martial arts belt promotion.
Clive Baker, my grandson, has a belt promotion.

Happy Thanksgiving!

Thanksgiving falls on November 24 this year. I hope you are able to spend the day with your family or friends. This is one holiday people of all faiths or no faith can share. Being thankful and counting your blessings is one of the best things you can do for your emotional health. Even when things aren't working out, you can still be thankful for past good memories. Drive carefully and enjoy the holiday.

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Family celebrations.

My brother, Steve, and I are celebrating our 65th birthdays this month. Thank goodness we are both healthy and enjoying spending time our family. I am also thankful to have a business located close to my home, making life much more pleasant, and to have my daughter, Dawn, working as my office manager and web master in my business.

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'Tis the season for year-end planning.

There are only two months remaining for 2016. Make your year-end planning appointment now. Call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162.

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Attention employees with stock options! Michael Gray will give a LIVE lunchtime seminar on December 8.

Michael Gray, CPA will give a lunchtime seminar on Thursday, December 8 for employees with stock options. The title of the seminar is "Executive Tax Planning For Employee Stock Options." The investment is $97 per person, and includes a copy of the book by the same name. The seminar will be located at Luigi's Pizza & Pasta, 2495 Winchester Blvd., in Campbell, California. Lunch is included. Reservations are required and there is limited seating. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays no later than December 6. Here is a link to more information: www.stockoptionadvisors.com/notwp/seminar16-12-8.pdf.

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Ceiling for Social Security wages increased.

The Social Security Administration has announced that the maximum earnings subject to Social Security tax will increase from $118,500 for 2016 to $127,200 for 2017.

The threshold where a household employee becomes subject to employment taxes (the "nanny tax") will remain at $2,000.

(SSA News Release, October 18, 2016.)

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Some retirement plan limits increased.

The IRS has announced the retirement plan limits for 2017. The maximum contribution to an IRA remains at $5,500 with a catch-up contribution limit for those age 50 and over of $1,000. The maximum contribution for 401(k) plans remains at $18,000 with a catch-up contribution limit for those age 50 and over of $6,000. The maximum contribution for defined contribution plans, including SEPs, is increased from $53,000 to $54,000. The maximum benefit for a defined benefit plan is increased from $210,000 to $215,000.

(IR-2016-141, Notice 2016-62.)

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LLC member was subject to self employment tax.

The IRS Chief Counsel has advised that the majority owner of an LLC restaurant franchise was subject to self-employment tax. This LLC was treated as a partnership for income tax reporting purposes. The other owner for the LLC was the taxpayer's wife and her irrevocable trust, and they were not actively involved in the business. The taxpayer was actively involved in operating the business. On the partnership's income tax return, only the guaranteed payments (salary) of the taxpayer was treated as subject to self employment tax. He was treated as a limited partner, not subject to self employment tax for his allocated share of the earnings of the LLC. The partnership claimed the other income should be treated as a return on the taxpayer's capital investment and shouldn't be subject to self-employment tax.

The IRS Chief Counsel said the taxpayer's active participation in the LLC precluded him from being considered a limited partner. He was not merely an investor in the business.

(Chief Counsel Advice 201640014, June 15, 2016.)

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Roadmap issued for disaster loss election.

A taxpayer may elect to deduct a disaster loss on the tax return for the tax year preceding the year of the loss. The IRS has issued a revenue procedure explaining how to make the election and how to revoke the election.

(Revenue Procedure 2016-53)

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Remember the new W-2 deadline.

The IRS reminds employers that 2016 Form W-2s must be filed by January 31, 2017. The same deadline applies when the forms are electronically filed.


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Partnership agreements possibly should be updated.

During 2015, the IRS issued final regulations relating to how to allocate income and deductions when there is a change in ownership of a partnership interest; such as a sale, inheritance or gift; during a tax year. The default rule is a cutoff method, but these items could also be prorated based on the days of ownership during the year. This creates a conflict between the owners of the interest at the beginning and the end of the year. The cutoff method could also be more expensive because it requires an interim closing for the partnership (including most LLCs).

The regulations are effective for tax years beginning on or after August 3, 2015.

We recommend you discuss with legal counsel whether your partnership agreement should be updated to address this issue in advance.

(T.D. 9728, August 3, 2015.)

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Regulations issued for partnership disguised sales.

When a partner contributes property to a partnership and then takes a cash distribution within two years, it is presumed that there was a disguised sale and the transaction must be recharacterized. The IRS has issued final, temporary and proposed regulations to clarify these rules. Under the regulations, almost all partnership debt is treated as nonrecourse debt for this purpose. There are also provisions to disregard "bottom dollar guarantees."

If you contemplate such a transaction or have participated in such a transaction, you should consult with your tax advisor about the implications of these new regulations.

(T.D. 9787, T.D. 9788, October 5, 2016.)

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Trust not allowed to deduct charitable contributions.

A trust created under a will made substantial charitable contributions and deducted them. (In 2009, $115,331 of cash and stock were donated to charities.) According to the terms of the trust, contributions weren't to be made until after the death of the last beneficiary for which annuities were provided. On December 27, 2013, the trustees applied for a modification of the trust to permit distributions for charitable purposes, and the probate court granted the request on April 2, 2014.

The Tax Court upheld the IRS in disallowing the deduction. The will didn't provide for charitable contributions by the trust until the last beneficiary died. Another Supreme Court case, Old Colony Tr. Co. v. Commissioner, provided language that would have worked, but it wasn't included in this will. The Tax Court refused to accept re-writing the will.

Moral: If you want your trust to be able to make and deduct charitable contributions, include specific provisions allowing it in your will. It appears the attorney who prepared the will in this case messed up.

(Harvey Hubbell Trust v. Commissioner, T.C. Summary Opinion 2016-67, October 13, 2016.)

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IRS guidance issued for partnership recourse debt.

The allocation of recourse debt is important because it is treated like a cash investment in a partnership for the limitation of deducting partnership losses. The IRS has issued re-proposed regulations relating to whether a debt qualifies as recourse and how it should be allocated. Taxpayers may optionally rely on these proposed regulations. If you are a partner in a partnership that generates losses, you should consult with you tax advisor about how these regulations might affect you. The proposed regulations also apply for single member disregarded entities (single member LLCs).

(REG-122855-15, October 5, 2016.)

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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 and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visitAngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly broadcast schedule for November and December.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 November and December:

November 11, Robert E. Temmerman, Jr., Esq., Temmerman, Cilley & Kohlmann, LLP, "I'm a trustee! Now what?"
November 18 and 25, Rebecca Dupras, Esq., Silicon Valley Community Foundation, "Why and how to promote charitable giving in your family"
December 2 and 9, 2016, William D. Mahan, attorney at law, "Why you need a will"
December 16, 2016, William D. Mahan, attorney at law, "Tax considerations of title"
December 23 and 30, 2016, Phil Price, EA, The Price Company, "Qualified retirement plans for small businesses"

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 www.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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