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Michael Gray, CPA's Tax and Business Insight

October 4, 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!

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Table of Contents

• Trick! The year is almost over already!
• Last chance for 2005 income tax returns for non-corporate taxpayers.
• Congratulations to Gia Nguyen!
• Hooray for James Gray!
• Happy birthday Janet!
• Seminar for restaurant owners and managers.
• Governor Schwarzenegger approves tax and business legislation.
• 2007 Medicare surcharge based on 2005 Adjusted Gross Income.
• Something to think about from a wise counselor.
• Questions and Answers
• Sale of principle residence answers.
• Are suspended losses on S corporation shares deductible?
• Can my daughter’s sponsors deduct their contributions?
• Can a business claim a deduction for forgiving part of a bill?
• Is interest expense for debt used to pay income taxes deductible?
• Do you have employee stock options?
• Do you have real estate tax issues?
• Visit our new articles!
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

Trick! The year is almost over already!

Halloween will be here soon, which also means it will soon be the holiday season! The stores are setting up their displays of decorations and gift ideas.

There are only three months left to prepare for the end of the year. What needs to be done for your tax situation? Now is the time to set up your year-end planning appointment. Call Dawn Siemer at 408-918-3162 today.

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Last chance for 2005 income tax returns for non-corporate taxpayers.

The extended due date for calendar year noncorporate taxpayers, including most individuals, partnerships, estates, and trusts is October 15. That is also the extended due date for making deductible employer payments to qualified retirement plans of these entities, including Keoghs, SEPs, defined benefit plans, profit sharing plans, ESOPs and 401(k) plans. The extended due date for 2005 gift tax returns is also October 15. This is a critically important due date, so please be sure your income tax returns are filed on time. In some situations, penalties can even be imposed when there is a tax overpayment. If we can be of service to you in this area, call Dawn Siemer at 408-918-3162 for an appointment.

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Congratulations to Gia Nguyen!

Gia is Thi Nguyen’s mother, who just became a United States citizen. Congratulations!

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Hooray for James Gray!

My son, James, is teaching two classes at San Jose State University – a logic class and an ethics class. His ambition is to earn his PhD in philosophy and become a university professor. Congratulations James! We are proud of you. (We parents always get excited to see our children earn some money.)

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Happy birthday Janet!

My wife, Janet Gray, is celebrating her birthday today! Happy birthday Janet!

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Seminar for restaurant owners and managers.

We are jointly presenting a seminar on payroll issues for restaurant owners and managers from 10 a.m. to noon on October 23. Would an audit of tip reporting for your restaurant result in a big bill for payroll taxes and penalties? What timekeeping system can minimize your payroll expense and protect you from claims of underpayment of wages by former employees? For a letter with the details, call Dawn Siemer at 408-918-3162 or email mgray@taxtrimmers.com.

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Governor Schwarzenegger approves tax and business legislation.

Here are some of the items of 2006 legislation just approved:

• AB2341 changes and simplifies termination procedures for corporations, LLC, LPs and LLPs. The legislation should allow an entity to avoid having to file an income tax return and pay minimum franchise taxes when the entity has stopped doing business and paperwork is being processed in the Secretary of State’s office. The above business entities will have one year from the filing of a timely, final tax return to file dissolution/cancellation paperwork with the Secretary of State. The requirement that corporations and LLCs get a Tax Clearance Certificate before dissolving has been eliminated.



• Effective for 2007, California registered domestic partners will file California income tax returns as married persons. This will be a major item of non-conformity with federal tax law, probably requiring that the income tax returns be processed on two sets of forms. All California registered domestic partners should have their income tax returns prepared by a professional tax return preparer for their 2007 income tax returns. (SB 1827.)



• The governor vetoed AB 1614, which would have required LLCs to apportion income to determine the LLC total income fee. The question of whether California’s current fee structure is constitutional remains to be determined by higher courts of appeal.



• Beginning January 1, 2007, California will allow real estate withholding based on an estimate of the tax due from the gain. The seller will have a choice to withhold tax at the maximum California rate (9.3% for individuals and 8.84% for corporations) on the estimated gain from the sale or 3.33% of the total sales price. (Stand by for new forms to be issued by the Franchise Tax Board.) (AB2962.)

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2007 Medicare surcharge based on 2005 Adjusted Gross Income.

Effective January 1, 2007, there will be a Medicare surcharge for any covered person whose 2005 modified adjusted gross income reported on his or her federal income tax return is more than $80,000 (single) or $160,000 (married, filing a joint return.) The surcharges will range from 13.3% to 73.3%, which means the $93.50 per month premium could be increased to as high as $162.10 per month. (Ouch!)

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Something to think about from a wise counselor.

Attorney John Hopkins of Hopkins and Carley was a co-speaker at the September meeting of the Santa Clara County Estate Planning Council. John talked about helping senior clients with the legacy process. In the final stage of life, an individual is often trying to integrate and find meaning in his or her life. Seniors often think about how they would like to be remembered, and for what. Many people find they can give some meaning to their lives by giving to their communities through service or through charitable giving.

What will your friends, children and grandchildren say about you at your funeral or memorial service? Chances are they won’t be talking much about what you did at work. (It would be nice to be remembered as a good employer and mentor.) What would you like them to say? How will what you are doing now inspire those warm memories and create a positive, enduring example of a life well lived?

Although charitable giving is admirable, it may be your richest legacy won’t cost a nickel.

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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?” (realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.

Question

Are suspended losses on S corporation shares deductible upon sale or if the stock becomes worthless?

Losses were suspended due to lack of basis and at risk rules.

Answer

Suspended losses from S corporations due to lack of basis are not like suspended passive activity losses. They are lost when the shares are sold or if the stock becomes worthless.

The at risk rules are so closely related to the basis rules that I hesitate to tell you at risk suspended losses can be used to offset gains from the sale of S corporation stock. The basis limitation "trumps" the at risk limitation.

The purpose of the basis limitation is to limit the losses claimed by an S corporation shareholder to the amount invested in the corporation, including reinvested earnings.

Question

My daughter is a figure skater. People want to sponsor her, but we don’t know how to get a non-profit account set up. Can sponsors deduct their sponsorship donations? She is getting to a high enough level that we don’t know if we can continue to afford the expenses of her skating. We also have a handicapped son.

Answer

The scope of your question goes beyond a newsletter q & a. Please consider consulting with a professional tax advisor. Your daughter can’t be a qualifying charity. There are some charitable organizations, such as the U.S. Figure Skaters’ Association, that are qualified charities for promotion of the sport and might be able to help – at least to offer valuable contacts and information. Contact them. Businesses can sponsor athletes and claim deductions as business advertising expenses. These business sponsorship payments would be taxable income to your daughter.

My niece, Michelle Davis, was a competitive skater, so I sympathize with your situation. This is an extremely expensive sport to participate in, and many quit or don’t get involved for that reason. By the way, if you’re looking for a great figure skating coach, that’s what Michelle is doing now in Sacramento.

Good luck!

Question

Can a business claim a tax deduction for forgiving part of a bill to a 501(c)(3) (charity)?

Answer

Yes. I’m not aware of any prohibition from claiming such a deduction. You should get an acknowledgement of the gift from the charity with a statement that no goods or services were given to you in exchange for the donation.

Question

Is interest expense for debt used to pay an individual’s income taxes for income from an S corporation or an LLC tax deductible?

Answer

No. Debt incurred to pay any income taxes is for a personal expense and is not tax deductible.

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?

To subscribe or review past issues, go to www.stockoptionadvisors.com/subscribe.shtml.

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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.

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Visit our new articles!

• Confessions of an Advertising Man book review
• "Key Your Promotions To Holidays"

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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 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.

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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.