Michael Gray, CPA's Tax and Business Insight

Tax Season Progress Report.

Tax season is progressing. Many clients have brought in their information. March 15 is the corporate filing deadline, and we have the information for most of our corporate clients. Thanks to all of you who have made this effort. We have e-filed three tax returns so far, and completed others.

If you are a continuing client who has not received (or has misplaced) a tax organizer that includes last year’s tax information, please call Dawn at (408) 918-3162 immediately and we’ll send you one.

There are a limited number of March appointments available. If you need an interview, please call Dawn immediately at the same number.

Even if your information is incomplete, please send it so you will be "in the queue" for processing.

Thank you!

Thank you for your referrals.

Here are some of the referrals we have received during the past month. Robert Temmerman, Esq. referred Gaye Roper; James Parker of Kellmoore Investments referred Tokie Kawazawa; Glen Kolze referred Brian and Sally Rosencutter; Kaye Roozen referred Martha Stevens; and Jann Besson, Esq. referred Ken Dozier.

Thanks to all of you who referred friends, associates and clients to us, and welcome to those who decided to become clients.

We can still serve a few more people this tax season, so if you have a relation, friend or client who needs the kind of caring service that we provide, please tell them about us!

Mike Gray wows CPAs with S corporation presentation.

Mike Gray gave a presentation, "Secrets of S Corporations Revealed,"e; to the San Jose CPAs on February 17. Over 50 accountants packed the small restaurant. This was the most heavily attended technical luncheon in a long time for the San Jose CPAs.

SDI rate increases.

Effective April 1, 2000, the California SDI withholding rate will increase from 0.5% to 0.7%. The wage limit will remain at $46,327 per employee. New coupons will not be issued.

´Tis the season to exercise ISOs?

For many taxpayers who have incentive stock options, it can be advantageous to exercise them early in the year. Thanks to interest-rate hikes by the Federal Reserve, the stock market is a little "soft" right now, reducing the tax preference for some companies. In some cases, paying the tax for the exercise can be postponed until April 15, 2001. For details, call Mike Gray at (408) 918-3161.

Tax Court says, "There is no one-year rule."

U.S. Freightways amortized prepaid insurance expenses and vehicle licenses on its financial statements and deducted the insurance expenses when they were paid on its income tax returns. These expenses were prepaid for not more than a year. U.S. Freightways uses the accrual method of accounting.

The amounts involved were over $4 million for vehicle licenses and over $1 million in insurance premiums for policies covering a one-year period in 1993 and 1994.

The IRS required the expenses to be amortized. U.S. Freightways claimed that since the expenses were not for a period exceeding one year, they should be deductible when paid.

The Tax Court held there is no such "one year rule." The expenses must be amortized. (U.S. Freightways Corporation, 113 T.C. No. 23.)

Taxpayer avoids tax on interest portion of contingent fee paid directly to attorney.

There is currently a lot of confusion and disagreement about the taxability of lawsuit awards when a portion of the award is paid to an attorney as a contingent fee. In Clarks Estate v U.S. (CA-6 January 13, 2000), the Sixth Circuit Court of Appeals reversed the Federal District Court and found that, under Michigan law, the interest portion of a personal injury lawsuit that was paid directly to the attorney was excluded from taxable income for the taxpayer who was awarded the damages.

The Sixth Circuit distinguished Clarks Estate from a Federal Circuit case, Baylin v U.S. (Fed. Cir., 1995) because the taxpayer in Clarks Estate never actually received the interest portion of the funds paid to the attorney. In Baylin v U.S., the Federal Circuit disallowed the exclusion by finding it was an assignment of income constructively received by the taxpayer.

Deduction allowed to remove depreciable asset when replaced.

The IRS recently ruled that a telephone company may currently deduct the expense for removing old telephone poles when replacing them with new ones. This is a favorable ruling that taxpayers may rely upon to apply the accounting concept to similar asset replacement situations. A taxpayer who wishes to apply the ruling may be required to follow the procedure to apply for a change in accounting method in Rev Proc 99-49. (Rev Rul 2000-7.)

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