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Michael Gray, CPA's Tax and Business Insight
August 2, 2006
© 2006 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!)
Table of Contents
- Dawn Gray is married!
- Some August family celebrations.
- It’s time for tax planning.
- Dawn and Mike are going to Kennedy "Renegade Millionaire" retreat.
- Check this out for information on having a 7-figure business.
- Fewer estate tax audits ahead.
- IRS says single owner S corporations don’t get health insurance benefit.
- US tax proposal could cut share of tax for some states.
- Ponzi schemes still exist.
- Bank manager admits embezzling funds.
- Ninth Circuit says cash advance discounts aren’t current income.
- Filing date extended for change in U.S. residence form.
- Questions and Answers
- Do you have employee stock options?
- Do you have real estate tax issues?
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight
Dawn Gray is married!
Our webmaster and my daughter, Dawn, was married to John Siemer at the Cathedral Grove at Roaring Camp and Big Trees on July 9. Then John and Dawn enjoyed their two-week honeymoon on the Big Island of Hawaii. We are thrilled for Dawn.
For a wedding day shot of the Michael Gray, CPA team with spouses, go to http://www.taxtrimmers.com/staff.shtml. From left to right, Thi Nguyen’s husband, Alan Le, Thi, Michael and Janet Gray, and Dawn and John Siemer.
Some August family celebrations.
On August 23, my father in law, Wally, will be celebrating his 80th birthday. Janet’s sister, Gail will celebrate her birthday on August 15. Janet and I will be celebrating our 35th wedding anniversary on August 7. My sister and her husband, Virginia and Wade Allison, will celebrate their 44th anniversary on August 4. Their son (my nephew) and his wife, Matthew and Michelle Allison, will celebrate their 16th anniversary on August 10.
Whew! That’s a lot of celebrating!
It’s time for tax planning.
After August, the year will be two-thirds over. Now is the time for tax planning. Are you preparing for a major transaction? Do you need to get your estate plan in place or update it? Are you starting a new business or winding up an old one? These are all reasons to meet soon. Call Dawn Siemer at 408-918-3162 to make an appointment.
Dawn and Mike are going to Kennedy "Renegade Millionaire" retreat.
Dawn and Mike Gray will be out of town from August 16 – 18 to attend Dan Kennedy’s "Renegade Millionaire" retreat. These are valuable experiences to learn ways to help our clients and ourselves have better businesses.
Check this out for valuable COMPLEMENTARY information on having a 7-figure business.
Harlan Kilstein, Perry Marshall, John Carlton and David Garfinkel have teamed up to create a business success system called Tactic 7. Some of the audio conferences and transcripts have been posted online for FREE, and they are well worth studying. The mp3 files are at http://www.copywriting.tv/1948.html and the transcripts are at http://www.copywriting.tv/1953.html.
Fewer estate tax audits ahead.
The IRS has announced that it is eliminating nearly half of the estate tax lawyers that it employs. With the increases in the estate tax exemption under Bush tax reform, there are fewer estates subject to estate tax. After 2010, the estate tax is scheduled to be restored to its pre-reform status, but Congress is working on extending estate tax cutbacks.
IRS says single owner S corporations don’t get health insurance benefit.
The IRS has posted a "headliner" on its web site that says that health insurance for a single owner of an S corporation that has no other employees must be reported as a "below the line" itemized medical deduction, not as an "above the line" reduction of adjusted gross income. According to the IRS, the problem is the policy must be purchased under the shareholder’s individual name, not in the name of the company. Single owners of S corporations should discuss this issue with their tax return preparers, insurance agents and their representatives in Congress.
US tax proposal could cut share of tax for some states.
A proposal in Congress would change the rules for business "nexus" in a state. Under the proposal, a business would have to have employed at least one employee in a state for 21 days, or have leased or bought property in the state, to be considered as "doing business" in the state and thus required to pay the state’s business taxes. The Congressional Budget Office has estimated that 10 states – California, Florida, Illinois, Michigan, New Jersey, New York, Pennsylvania, Tennessee, Texas and Washington, would bear 70% of revenue losses of $1 billion in the first year up to $3 billion annually by 2011. The federal government would gain tax revenues because of lost state tax deductions.
The National Governors Association has opposed the proposed legislation.
Ponzi schemes still exist.
Michael Schneider has been charged with 27 counts of grand theft, embezzlement and forgery in Santa Clara County and 102 counts in Santa Cruz County. Scheider collected funds mostly from senior citizens through his business, California Plan, to reinvest in second mortgages. He allegedly used some of the investment funds received to pay the high interest for some of the mortgages. He also allegedly forged documents for the mortgages and deeds of trust.
Mr. Schneider was evidently very personable and endeared himself to his investors. Some of them had invested with him for over 20 years.
This is a very difficult situation. The moral is, "If it looks too good to be true, it probably isn’t true." Investigating these investments for "due diligence" would require confirming with the County Recorder’s office that the deeds of trust were actually recorded, inspecting the documents on file, and personally inspecting the properties and confirming the obligations. These procedures go beyond the capabilities of average investors.
Bank manager admits embezzling funds.
Rose Magpantay Valdez, a bank manager at Silicon Valley Bank, pleaded guilty in federal court. Over a 10-year period, she transferred about $706,000 to a side account at the bank in her name. She will be sentenced in October and could face up to 30 years in prison and a fine of up to $1 million.
Although we don’t audit financial statements, we highly recommend that our readers with businesses consider having audits or internal reviews specifically looking for fraud. We can help clients evaluate where they might be susceptible to fraud. The environment is ripe for abuse when NO ONE IS LOOKING! Your most likely fraud candidate? A person you really like and trust that is enjoying a lifestyle beyond what his or her income will support.
IRS loses! Ninth Circuit says cash advance discounts aren’t current income.
The Ninth Circuit court of appeals has reversed the Tax Court and ruled against the IRS, finding cash advances paid by manufacturers to a retailer for volume purchase commitments were not taxable income when received. The cash advances were advance payments of purchase discounts, and were refundable if the volume levels of purchases weren’t reached. The taxpayer conformed with generally accepted accounting principles in recording the amount received as a liability and then applied the payments as a reduction of cost of goods sold as the purchases were made. The Ninth Circuit said the taxpayer’s method of accounting was correct – the advance payments should be treated as loans "earned out" as purchases were made. (Westpac Pacific Foods v. Commissioner (9th Cir., 6/21/06.))
Filing date extended for change in U.S. residence form.
The IRS has postponed the due date for filing Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession for the years 2001 through 2005 to October 16, 2006. According to the instructions to the form, beginning with 2001, an individual with worldwide gross income of more than $75,000 must file Form 8898 for the tax year in which the individual becomes or ceases to be a bona fide resident of a U.S. possession.
Questions and Answers
Dear readers:
Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?" (http://realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.
Question
I am getting married next month, and I was wondering whether I will still be able to report as single on my W-4 (withholding) form. If so, can I file as a single person on my income tax returns, since I was single most of the year, or do we have to file as married?
Answer
There is a "married, but withhold at higher single rate" category on the W-4 form. The main issue is whether you will have enough tax withheld to pay your tax liability.
The status reported on your W-4 does not necessarily have to be the same as the status on your income tax return. Your marital status on your income tax return depends on your marital status at the end of the year. Therefore, you and your husband will have to file as married persons, so long as you are both living and still married at the end of the year.
Question
I own a very small business and receive wages and W-2s from my S corporation. After the year-end, there is some left over profit reported on Schedule K-1 to report on my individual income tax return. If I withdraw this amount, how is it reported?
Answer
You track accumulated S corporation profits on Schedule M-2, analysis of accumulated adjustment account. Distributions are reported in Box 16, under code D.
Since S corporation distributions that are not wages aren’t subject to social security tax, the IRS is claiming all distributions made to sole shareholder owners should be reported as wages.
S corporations are not simple to report on income tax returns. There are many issues that I can’t go into detail about here. Consider getting help from an income tax return preparer.
Question
I am trying to estimate my income taxes for the sale of a property. I sold it for $193,000. The capital gains are $165,000, depreciation is $52,000, and other annual income is $17,000. I am wondering if I will be subject to the alternative minimum tax.
How can I figure that out?
Answer
Download 2005 Form 1040, Schedule D and 2005 Form 6251 from the IRS web site at http://www.irs.gov. Part III of Form 6251 is for the computation of the AMT using maximum capital gains rates. Get the Qualified Dividends and Capital Gain Tax Worksheet at page 38 of the instructions for Form 1040. Remember that capital gains up to the amount of accumulated depreciation for real estate is subject to a 25% federal tax rate for regular tax and AMT.
If you need more detailed help in making the computation, you will need to pay consultation fees.
Question
- Please confirm that mileage for commuting to and from work isn’t deductible.
- Can a new car used mostly for work be deducted?
- Can I claim a tax deduction for dry cleaning for career apparel?
Answer
- Right. Mileage for commuting is non-deductible.
- Deductions for automobiles are severely restricted. There is an IRS publication on the subject. (See Publication 463 at the IRS web site, http://www.irs.gov.) If you’re just using the car for commuting and other personal use, no deduction is allowed.
- Dry cleaning is allowed if there is a special uniform for your career, like for police, firepersons, security guards, nurses and for medical doctors’ lab coats. Dry cleaning is not allowed for "street wear" career clothing, like suits for CPAs and attorneys.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.
If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?
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We are starting a newsletter devoted to real estate tax issues.
Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. The subscription rate is $19.95 per month. For a sample issue, visit www.realestatetaxletter.com.
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 http://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 http://www.taxtrimmers.com/directions.shtml.
P.P.S.
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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
2190 Stokes St., Suite 102 San Jose, California 95128-4512 (408) 918-3162 Fax (408) 998-2766 email: mgray@taxtrimmers.com |
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