Michael Gray, CPA's Tax and Business Insight

August 4, 2017

© 2017 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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Minerva Siemer celebrates her 5th birthday.
Minerva Siemer celebrates her 5th birthday.

School Days, School Days, dear old Golden Rule days …

It's hard to believe, but summer vacation is almost over and most children will be back in school by the end of August! Please drive carefully and enjoy your end of summer activities!

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Family celebrations.

August is a month with many celebrations for my family.

Minerva Siemer, who is Dawn's daughter and my granddaughter is celebrating her birthday (and starting kindergarten!) this month. My sister-in-law, Gail Johnston, is also celebrating a birthday.

Congratulations!

Janet and I are celebrating our 46th wedding anniversary during August. We consider ourselves blessed in sticking together through good times and bad times - mostly good.

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'Tis the season for extensions.

If you need help preparing your income tax returns for which you have filed an extension, call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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MyRA program to be discontinued.

The Treasury Department has announced the myRA program initiated under the Obama administration in 2015 to build retirement savings for low to middle income earners is being discontinued because of low demand.

(Treasury Department News Release TDNR SM-0135.)

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Out of town meals allowed as a de minimus fringe benefit.

The Boston Bruins provided pregame meals through hotels to team members and personnel when they were travelling for games away from the team's home location. The pregame meals were mandatory and the players used the time to meet with coaches, review game video, and discuss public relations. The team management, coaches and trainers met during the meals for planning and making roster adjustments.

The S corporation that owned the team deducted the full amount of the meals. Jeremy Jacobs was the owner of the S corporation.

The IRS claimed the meals deduction should be limited to 50% of the cost.

The Tax Court ruled in favor of the taxpayer, that the meals qualified as a fully deductible de minimis fringe benefit.

Under Internal Revenue Code Section 132(e), employee meals provided in a nondiscriminatory manner are a de minimis fringe benefit if:

(1) The eating facility is owned or leased by the employer; (2) the facility is operated by the employer; (3) the facility is located on or near the business premises of the employer; (4) the meals furnished at the facility are provided during, or immediately before or after, the employee's workday; and (5) the annual revenue derived from the facility normally equals or exceeds the operating cost of the facility.

The last requirement is waived if the employee is entitled to exclude the value of the meal provided from taxable income. This exclusion applies when meals are provided for the convenience of the employer "for a substantial noncompensatory business reason of the employer."

The Court found the arrangement with the hotels to provide the meals met the "leased" requirement and if an employer contracts with another company to operate an eating facility for its employees, the facility is considered to be operated by the employer for this purpose.

The case is significant, and employers should discuss it with their tax advisors and review the status of their deductions for employee meals, including segregating meals that are 100% deductible as an employee fringe benefit on their accounting records.

(Jacobs v. Commissioner, 148 TC No. 24, June 26, 2017.)

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California expands earned income tax credit.

In the past, California only allowed an earned income tax credit for wage income subject to California withholding. This excluded domestic workers whose income wasn't subject to state income tax withholding.

SB 106 expands the definition of "earned income" for the purposes of California's earned income tax credit to include self-employment income, effective for taxable years beginning on or after January 1, 2017.

(Spidell's California Taxletter®, August, 2017, p. 4, "Major changes made to California's Earned Income Tax Credit.")

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Other California tax changes.

Governor Brown has approved the 2017-2018 budget, which includes some California tax changes.

Effective for the 2017 tax year, the California automatic extension term for partnership income tax returns has been increased to seven months to adjust for changing the original due date to March 15. That means the extended due date for calendar year partnership income tax returns will be October 15. (The Franchise Tax Board says they will also give administrative relief for 2016 income tax returns filed by October 16, 2017, provided the taxpayer requests the relief.)

Effective July 1, 2017, the duties of the California Board of Equalization have been changed. The tax appeal duties have been transferred to a new Office of Tax Appeals. Beginning January 1, 2018, the Office of Tax Appeals will conduct all income and franchise tax appeals.

There are also some changes to the excise taxes and cultivation tax for marijuana, which are beyond the scope of this newsletter.

(Spidell's California Taxletter®, July, 2017, p. 1, "Laws allow seven-month extension for partners, dismantle BOE.")

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Cash basis landfill can deduct future clean up costs.

The Tax Court ruled against the IRS and in favor of a cash basis taxpayer that an election was available to currently deduct estimated future cleanup costs for a landfill under Internal Revenue Code Section 468, even when costs would be paid in the distant future. The IRS claimed the election is only available to accrual basis taxpayers.

(Gregory v. Commissioner, 149 T.C. No. 2, July 11, 2017.)

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Deduction disallowed for repayment of a loan.

A medical center made a loan to a surgeon as a recruiting incentive. The surgeon claimed a tax deduction for a partial repayment of the loan. The IRS disallowed the deduction.

The Tax Court ruled in favor of the IRS. The loan was legitimate, and evidenced by a promissory note. The surgeon didn't report taxable income for receiving the funds.

Repayments of principal on a note aren't tax deductible.

(Salloum v. Commissioner, Tax Court Memorandum 2017-127, June 29, 2017.)

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Refined coal credit not allowed for investors.

The IRS Chief Counsel found investors weren't producers with a meaningful financial interest in an underlying production facility, so they weren't entitled to refined coal credits that they purchased. The arrangement was structured so the investors would have small, limited losses on their capital contributions, which weren't attributable to the production of refined coal. The transaction was structured solely to generate tax benefits.

(TAM 201729020.)

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Trader must use first-in, first-out accounting for sales of investments.

The general rule is investors are considered to sell their securities according to the earliest acquisition date (first-in, first-out). Taxpayers can make an election by giving instructions to their broker that the last-acquired securities are sold first (last-in, first-out), or specifically identify which securities are sold.

A taxpayer, who was a day trader, tried to use the last-in, first out method, but wasn't able to prove he had given instructions to the broker. He wasn't able to give the instructions because of an error on the broker's web site, even though he followed up with telephone calls.

The Tax Court ruled against the taxpayer. The taxpayer didn't meet the objective burden of proof.

An accuracy-related penalty was also assessed, which could have been avoided if the taxpayer reported or sought a correction to the Form 1099-B issued by the broker using the first-in, first-out method.

(Turan v. Commissioner, Tax Court Memorandum 2017-141, July 17, 2017.)

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401(k) loan was taxable when payments were missed.

An individual borrowed a loan from her 401(k) plan. When she was on leave without pay, she failed to pay two of the installments on the loan. The Tax Court ruled that despite making up the payments later, the loan became taxable income as a distribution from the plan and was also subject to the early distribution penalty.

We generally discourage borrowing money from your 401(k) plan. It's just too easy to mess it up.

(Frias v. Commissioner, Tax Court Memorandum 2017-139, July 11, 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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Farewell to Financial Insider Weekly.

After eight years of production, I am discontinuing 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 catalogued under "past episodes" at www.financialinsiderweekly.com.

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Financial Insider Weekly broadcast schedule for August.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 p.m., Pacific Time, until August 11, 2017. The final episode will be broadcast in San Jose and Campbell at 6:30 p.m. on Thursday, August 24, 2017. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for August:

August 4, 2017, Greg Carpenter, BTI Mergers & Acquisitions, "Buying a business"
August 11, 2017, Greg Carpenter, BTI Mergers & Acquisitions, "Selling a business"
August 24, 2017, James O. Brown, ASA, CFP®, Perisho, Tombor & Brown, PC, "The role of the business valuation specialist"

Financial Insider Weekly is also broadcast as follows:

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "Past Episodes."

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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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
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766
Hours: 8am - 5pm PDT Monday - Friday

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