Michael Gray, CPA's Tax and Business Insight

November 6, 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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Minnie in a pumpkin patch
My granddaughter, Minerva Siemer, at a pumpkin patch

Happy Thanksgiving!

Thanksgiving falls on November 22 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 birthdays this month. Thank goodness we are both healthy and enjoying spending time with our family.

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'Tis the season for year-end planning.

There are only two months remaining for 2018. Make your year-end planning appointment now. With the tax law changes enacted late last year, this is especially important. Call Thi Nguyen, CPA at 408-286-7400, extension 206.

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Jay Abraham updates resource site.

Marketing and business improvement teacher Jay Abraham has upgraded his web site, www.abraham.com. There is a wealth of free resources on the site, so I highly recommend that you check it out and bookmark it.

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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.

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New social security wage base announced.

The Social Security Administration has announced that the wage base for computing the Social Security tax will increase from $128,400 for 2018 to $132,900 for 2019.

For 2019, employees will pay 6.2% Social Security tax on the first $132,900 of wages, plus 1.45% Medicare tax on the first $200,000 of wages, plus 2.35% Medicare tax on wages in excess of $200,000.

For 2019, self-employed persons will pay 12.4% on the first $132,900 of self-employment income, plus 2.9% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), plus 3.8% Medicare tax on self employment income exceeding $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return.)

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Nanny tax threshold for 2019.

The Social Security Administration has announced that, for 2019, cash remuneration paid to an employee for domestic service in an employer's private home isn't FICA wages if the amount paid during the year is less than $2,100, the same as for 2018.

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Federal disaster areas.

Under the Tax Cuts and Jobs Act of 2017 enacted December 2017, casualty losses can only be claimed for losses in declared Federal disaster areas. There are many of them for 2018. You can consult with a tax advisor to find out if you qualify, or try searching online. In California, fires at Lake and Shasta Counties that began July 23, 2018 are a declared Federal disaster. If you experienced a loss in a Federal disaster area, you should consult with a tax advisor now. You might want to claim the loss on an amended 2017 federal income tax return.

There are filing and payment due date extensions available for taxpayers located in a Federal disaster area.

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IRS issues guidance on deducting business meals.

The IRS has issued preliminary guidance on deducting business meals under the Tax Cuts and Jobs Act of 2017. Under the new tax law, entertainment expenses aren't tax deductible. Business meals continue to be tax deductible, subject to a 50% limitation, similar to before tax law change. According to the IRS guidance, meals provided to a customer or client at an entertainment activity may still be tax deductible as a business expense, provided the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages are separately stated on an invoice or receipt. For example, if a business owner buys hot dogs and drinks when entertaining a customer at a baseball game, 50% of the cost of the hot dogs and drinks are tax deductible. If the cost of the food and drinks are included in the cost of the entertainment, such as for a suite where food and beverages are available, the food and drinks are not tax deductible.

The guidance includes a reminder that what are non-deductible entertainment expenses for one business may be a tax-deductible marketing or selling expense for another business. For example, if a clothing manufacturer has a fashion show for store buyers, that show would not be entertainment. If an appliance distributor has a fashion show for its retailers, that show would probably be entertainment.

(Notice 2018-76.)

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Proposed regulations issued for Qualified Opportunity Funds.

The IRS has issued proposed regulations for Qualified Opportunity Funds. A new tax benefit was enacted in the Tax Cuts and Jobs Act of 2017. Taxpayers who invest capital gains within 180 days into a Qualified Opportunity Zone investment can defer federal income tax on the gain for up to eight years, and if the investment is held for at least ten years, any additional gain relating to the appreciation of the investment may be tax free. I have written a summary about this. Here is a URL to see that summary. www.michaelgraycpa.com/posts/opportunity-zones-a-new-secret-tax-benefit/

The IRS also issued a Revenue Ruling relating to the rehabilitation of an existing building located in an Opportunity Zone and the qualification of the land as Zone Business Property.

Remember California has not adopted these rules, so no deferral or exclusion applies for California tax reporting.

(Proposed Regulations REG-115420-18, October 19, 2018. Rev Rul 2018-29.)

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Pastoral donations were taxable income.

The Tax Court ruled that pastoral donations made payable to the minister of congregation and tendered in specially marked envelopes were taxable income to him and not nontaxable gifts. The payments were made to keep the minister at his post, for services rendered.

(Felton v. Commissioner, TC Memorandum Decision 2018-168, October 10, 2018.)

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Integration of Health Reimbursement Arrangements with individual health coverage to be permitted.

The IRS has issued proposed regulations that would remove the current prohibition against integrating a Health Reimbursement Arrangement (HRA) with individual health insurance coverage. The proposed regulations provide guidelines for integrating the plans.

On October 12, 2017, President Trump signed an executive order that, among other things, encourages federal agencies to increase the usability of HRAs and expand the ability of employers to offer HRAs to their employees.

(REG-136724-17)

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S corporation split dollar benefit treated as a property distribution.

The Sixth Circuit Court of Appeals changed the result of a Tax Court ruling, reducing taxable income for a split-dollar life insurance arrangement. An S corporation paid a $100,000 life insurance premium for a policy on the life of a shareholder-employee, for which the corporation was not a beneficiary. The S corporation deducted the life insurance premium. The Tax Court upheld the IRS in disallowing the deduction. In addition, the Tax Court upheld the IRS in treating current economic benefits of the policy as taxable compensation income to the shareholder as a compensatory split dollar arrangement.

The Sixth Circuit Court of Appeals said that the treatment of the economic benefit for all split dollar arrangements of S corporations with shareholders, including compensatory arrangements, is governed by Treasury Regulation Section 1.301-1(q)(1)(i). Under that regulation, the economic benefit is treated as a property distribution to the shareholder. If the shareholder has enough tax basis in the shareholder's stock, no taxable income would result.

(Machachek, Jr. v. Commissioner, 122 AFTER 2d 2018-6269, October 12, 2018.)

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Religious exemption from individual mandate enacted.

On October 24, 2018, President Trump signed into law the Support for Patients and Communities Act (P.L. 1150-271). Effective for tax years beginning after December 31, 2018, the new law allows an exemption for the individual mandate to individuals who are members of a religious sect or division who rely solely on a religious method of healing and for whom the acceptance of medical health services would be inconsistent with their religious beliefs.

IRS says certain concrete foundation repairs paid during 2018 qualify for deduction in 2017.

IRS Commissioner Charles Rettig said in a letter to Rep. Joe Courtney (D-CT) that concrete foundation repairs relating to pyrrhotite failure in the northeast United States can still be deducted under tax reform. The deduction can be allowed as a casualty loss for 2017, provided the loss related to damage that occurred before 2018 and the repairs are paid before the last day for filing a timely amended tax return for 2017. (These losses wouldn't be allowed for 2018 - 2026 under the Tax Cuts and Jobs Act of 2017.)

If the casualty losses relate to a trade or business, they should also qualify for a net operating loss carryback (also repealed by the Tax Cuts and Jobs Act of 2017) because they relate to a tax year before 2018.

(Rev. Proc. 2017-60 and Rev. Proc. 2018-14.)

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Be sure your online tax payments are processed!

The California Office of Tax Appeals has denied reasonable cause abatement claims of two taxpayers, who submitted large tax payments electronically. The tax payments weren't processed, and the taxpayers didn't notice.

In one of the cases, the taxpayers didn't realize they were looking at a "payment review page" and didn't press the button to process the payment. The OTA said a prudent taxpayer would have notice that a $200,000 tax payment wasn't deducted from his or her account.

In another case, the taxpayer was relying on its tax return preparer to process an extension payment. The OTA said the payment of the tax was not an obligation that could be delegated.

The lesson? Don't wait until the last minute to make electronic payments. Make them well in advance and check your bank account to be sure they are processed.

(Appeal of Friedman, 2018-OTA-077 and Appeal of Donahoe, 2018-OTA-074.)

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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 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.

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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 articles!

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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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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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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
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