Michael Gray, CPA's Tax and Business Insight

January 5, 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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Thi Nguyen
Here's Thi Nguyen, CPA!

Happy New Year!

With a New Year and a new tax law, the Trump revolution has arrived! Hope you are having a great start for 2018, and that you have made positive goals for the new year.

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Changes for my CPA firm.

As of January 1, 2018, I have sold my CPA practice to Ms. Thi Nguyen, MST, CPA with Koehler & Associates, CPAs, Inc. I will continue to work with Koehler & Associates in serving clients, when they need me.

I will also continue sending my newsletters for this tax season.

Thi's telephone number is 408-286-7400, extension 206, and her email address is thi@koehlercpa.com. The address for Koehler & Associates is 1541 The Alameda, San Jose, CA 95126. The direct telephone numbers to Dawn and me are unchanged at 408-918-3162 and 408-918-3161. My new mailing address is 2482 Wooding Ct., San Jose, CA 95128.

This is a succession planning move, for the protection of my clients and my family. If you have a business, I hope you have a similar plan in place. I am doing this while I am still healthy to help ease the transition.

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January celebrations.

My son in law, Dan Baker, is celebrating his birthday this month. Happy birthday Dan!

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LIVE seminar on new tax law highlights.

The Silicon Valley, San Jose Chapter of the California Society of CPAs will have a live seminar on "Highlights of the Tax Cuts and Jobs Act." The speakers are Michael Gray, CPA, Thi Nguyen, CPA of Koehler & Associates, CPAs, Inc. and Yaron Katz, partner from the Washington National Tax Office of KPMG. The presentation will take place from 8 a.m. to noon on Friday, January 19 at Los Gatos Lodge. Breakfast is included. Space is limited to 50 participants. The investment is $45 for members and $85 for nonmembers. Here is a link for registration information http://www.calcpa.org/events-and-programs or call Susie Riffel at 650-436-7169.

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Tax preparation materials will soon be on the way.

For clients who have given their consent, Koehler & Associates is in the process of mailing instructions for sending their 2017 tax return preparation instructions. If you haven't received instructions by January 20 or you would otherwise like to receive instructions, call Thi Nguyen at 408-286-7400, extension 206.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2016 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Thi Nguyen at 408-286-7400, extension 206.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 16.

The final 2017 estimated tax payment for individuals and calendar-year estates and trusts is due January 16, 2018. (Thank Martin Luther King's birthday!) Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

If you miss the January 16 deadline, making a late estimated tax payment can stop penalties from accruing.

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W-2s, 1099s and DE 542 reminder.

Remember that most 2017 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by January 31, including electronically filed forms. (The new filing date applies to Form 1099-MISC for services.) Congress moved up the filing date to fight identity theft.

Amounts paid using a credit card should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that are real estate professionals should prepare them anyway. See your tax advisor for details.

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Watch FUTA adjustment on year-end report.

California, among other states, has a cutback in its state credit for federal unemployment taxes. That means additional payments of up to $147 per employee will be due with Form 940. Be sure this adjustment is done with your year-end report for 2017 using Form 940, Schedule A.

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Estates and trusts should plan distributions.

An election is also available to treat distributions made during the first 65 days of the following year (for example, March 6, 2018) as distributed for a taxable year (for example, 2017). The maximum federal income tax rate of 39.6% and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed trust income exceeds $12,500 for 2017. (The income of some trusts is automatically considered distributed. See your tax advisor.) The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) and to avoid unpleasant surprises.

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2018. Be sure you have installed those updates before processing your first payroll for 2018. Also, watch for updated tables to be released soon for the new rates under the tax legislation just passed.

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Standard mileage rate for 2018.

The standard business mileage rate for 2018 is 54.5¢ per mile, up from 53.5¢ for 2017. The medical mileage rate is 18¢ per mile for 2018, up from 17¢ for 2017. The mileage rate for moving. Which is also 18¢ per mile for 2018, up from 17¢ for 2017, now only applies for military personnel, because the deduction has been repealed for everyone else starting 2018. The charitable mileage rate is 14¢ per mile, unchanged.

(IR 2017-204, December 14, 2017.)

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Regular corporation tax rate reduced for tax years beginning after December 31, 2017.

The federal tax rate for regular "C" corporations has been reduced to 21% for tax years beginning after December 31, 2017. The tax rate applies to all corporations, including personal service corporations. Since the old tax rate schedule included a 15% rate for the first $50,000 of taxable income, some corporations will have a tax increase.

Some taxpayers will consider changing to a "C" corporation structure. In most cases, I would say to consult with a good tax consultant before going ahead. C corporations still have a double tax, once at the corporate level and again from dividends or gain or loss at liquidation. These corporations can also be subject to special taxes, such as the personal holding company tax and tax on excess accumulated earnings. It's harder to get cash or assets out of a corporation. A corporation's "inside" tax basis (cost for computing gain or loss) of its assets isn't eligible for an adjustment to fair market value at the death of an owner like those of a sole proprietor, partner, or owner of an LLC taxed as a partnership or sole proprietorship.

The tax rates of corporations will likely be the first target of change should the Democrats gain control of Congress and the Presidency at a later date.

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Tax deduction for non-corporate businesses is complex.

The new tax law includes a tax deduction for 20% of "pass-through business income." It is extraordinarily complex.

The deduction is effective for tax years beginning after December 31, 2017 and expires after December 31, 2025.

The deduction can apply when the taxpayer is a sole proprietor (including owning rental real estate) or an owner of an S corporation, real estate investment trust, partnership, or LLC taxed as a partnership or sole proprietorship.

This is a new deduction category, after computing adjusted gross income but before itemized deductions or the standard deduction.

The deduction is the lesser of (1) the "combined qualified business income amount" of the taxpayer, or (2) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, PLUS the lesser of (1) 20% of the aggregate amount of qualified cooperative dividends of the taxpayer for the tax year, or (2) taxable income, reduced by net capital gain of the taxpayer for the tax year.

(Confused, yet?)

The "combined qualified business income amount" for a tax year is (1) the deductible amount for each qualified trade or business of the taxpayer, PLUS (2) 20% of the aggregate amount of qualified real estate investment trust dividends and qualified publicly traded partnership income of the taxpayer.

Qualified business income includes items of income, gain, deduction and loss to the extent those items are effectively connected with the conduct of a trade or business within the United States. Any amount less than zero is treated as qualified business or loss for next tax year. Qualified business income does not include investment income, reasonable compensation paid by a qualified trade or business, or guaranteed payments to a partner or LLC owner for services to the business.

The deduction does not apply to specified service businesses, but it does apply to engineering and architectural businesses. A specified service trade or business is a trade or business performing services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of the trade or business is the reputation or skill of one or more of the employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests or commodities. The disqualification of income for specified service businesses doesn't apply when a married couple has taxable income of up to $315,000 and other taxpayers have taxable income up to $157,500. These thresholds will be indexed for inflation after 2018. The deduction is phased out for the taxpayers over these thresholds for the next $100,000 of taxable income for married persons filing joint returns and $50,000 for other taxpayers.

The deduction does not apply to "the business of being an employee."

The deductible amount for each qualified trade or business is the lesser of (1) 20% of the taxpayer's qualified business income for the trade or business, or (2) the greater of (i) 50% of the W-2 wages for the trade or business or (ii) the sum of 25% of the business's W-2 wages plus 2.5% of the unadjusted basis (cost before depreciation) of all qualified property as of the end of the taxable year.

So a business that leases all of its equipment and real estate and uses contract labor would not receive a tax deduction.

A sole proprietor consultant with no employees and little equipment would receive a very small tax deduction.

Now you understand why the nickname for this new tax law is "The Tax Return Preparer's Full Employment Act of 2017!"

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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 are now on our home page at www.financialinsiderweekly.com.

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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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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
Hours: 8am - 5pm PDT Monday - Friday

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