Michael Gray, CPA's

Real Estate Tax Letter

Michael Gray, CPA's Real Estate Tax Letter

January 18, 2016

© 2016 by Michael C. Gray
ISSN 1930-0387

A monthly report focusing on tax issues for the homeowner and real estate investor.

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IRS loses a real estate professional case.

In a summary judgment, a U.S. District Court in Arkansas ruled against the IRS and in favor of the taxpayer in a real estate professional case. For the years at issue, Roy Stanley worked half time for a real estate management company, Lindsey Management Co., Inc. (LMC) and was also President of Lindsey Communications Inc., a company that provided telecommunication services to certain properties manages by LMC. He was a 10% shareholder of the company, which was an S corporation.

The corporation managed most of the entities that Mr. and Mrs. Stantley grouped together on their 2009 and 2010 income tax returns.

The court rejected the IRS's claim that Mr. Stanley's stock shouldn't be considered to be outstanding for a 5% ownership test, because he was obligated to relinquish the stock when he terminated employment with the company. Notably, Mr. Stanley reported Schedule K-1 income from the S corporation on his income tax returns and presented his stock certificate to the court, with supporting testimony from a corporate officer.

Since substantially all of the activity of the management company was managing the entities in which Mr. Stanley was an investor and he owned more than 5% of LMC, the court said all of the time that he spent working at the management company qualified for the material participation tests as performed in a real estate trade or business. Mr. Stanley proved that he performed more than one-half of his personal services in a real estate trade or business and that he performed more than 750 hours of services in real property trades or businesses in which he materially participated. He proved material participation of more than 500 hours in his real estate trades or businesses.

The Stanleys properly elected to treat all of their real estate activities as one activity and further elected to group other businesses with the real estate entities as part of an appropriate economic unit. The court rejected the IRS's argument that businesses that are not real estate businesses can't be grouped with real estate trade or businesses even if they are an appropriate economic unit. The court found the trade or business activity was insubstantial in relation to the rental activity.

The court disallowed including five entities from being grouped with the rest of the taxpayers' activities and said they should be considered separate activities generating passive income or losses.

This case illustrates that the IRS is aggressively pursuing real estate professional cases, but they can be defeated when the facts and documentation support the taxpayer's position.

(Stanley, 2015-2 U.S.T.C. 50,560, November 12, 2015.)

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Congress extends tax breaks.

Congress renewed the extensions for many expired tax breaks. We sent a separate notice with a few of the details. A correction for that notice is the rate for the alternative simplified method of computing the research credit was NOT increased from 14% to 20%. That provision was eliminated from the final legislation.

If you didn't receive our notice and would like to have it, please call Dawn Siemer at 408-918-3162 and she'll send it to you.

(Protecting Americans from Tax Hikes Act of 2015, part of the Consolidated Appropriations Act of 2015, P.L. 114-113, HR 2029, enacted December 18, 2015)

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REITs especially affected by the new legislation.

The PATH legislation mentioned above includes many provisions relating to real estate investment trusts (REITs). If you are involved in operating a REIT, consult with your tax advisor or study the legislation.

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Business standard mileage rate decreases.

The IRS has announced the standard mileage rate for 2016 decreased to 54¢ per mile from 57.5¢ per mile for 2015. The standard mileage rate for medical and moving expenses decreased to 19¢ per mile for 2016 from 23¢ per mile for 2015.

(Notice 2016-1, December 18, 2015)

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IRS increases expense allowance for materials and supplies.

The efforts of the American Institute of Certified Public Accountants and other tax practitioners have paid off.

Effective for taxable years beginning on or after January 1, 2016, the IRS has increased the amount that taxpayers who don't issue an "applicable financial statement" (usually audited financial statements) can deduct for most materials and supplies from $500 to $2,500 per item. This threshold should cover most tires and personal computers.

Some companies might have to change their capitalization policies to reflect the new limit and qualify for the deduction.

The advantage of this election is the deduction doesn't affect the limitation for the expense election under Internal Revenue Code Section 179, so more items can be currently deducted.

Remember a de minimus safe harbor election statement also has to be included on the taxpayer's income tax return to qualify for the deduction.

The IRS also said it won't make audit adjustments for materials and supplies within the threshold for years beginning after December 31, 2011 and ending before January 1, 2016, provided the item otherwise meets the requirements.

(Notice 2015-82, November 24, 2015.)

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Tax preparation materials will soon be on the way.

We are in the process of mailing instructions to our clients this week and next. If we prepared your tax returns last year and you haven't received instructions by January 20 or you would otherwise like to receive instructions, call Dawn Siemer at 408-918-3162.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2015 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 Dawn Siemer Monday, Tuesday or Thursday at 408-918-3162.

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

Remember that most 2015 annual information returns, such as W-2s and 1099s, should be issued to payees by February 1 and sent to the tax authorities by February 29.

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. Some taxpayers who weren't concerned about qualifying as real estate professionals will want to now to avoid the Medicare tax for investment income. 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 $105 per employee will be due with Form 940. Be sure this adjustment is done with your year-end report for 2015 using Form 940, Schedule A.

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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, 2016. Be sure you have installed those updates before processing your first payroll for 2016.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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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, siliconvalley.citysearch.com, and Google+.

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Financial Insider Weekly broadcast schedule for January and February.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 p.m., Pacific Time. 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 January and February:

January 15, 2016, Craig Martin, CFP®, The Family Wealth Consulting Group, "Investing in turbulent times"
January 22 and 29, 2016, Peggy Martin, ChFC, CLU, "Socially responsible and sustainable investing"
February 5, Mark Erickson, attorney at law, "How to choose a good divorce lawyer"
February 12, Mark Erickson, attorney at law, "Child custody in divorce"
February 19 and 26, Mark Erickson, attorney at law, "Spousal support for California divorces"

Financial Insider Weekly is also broadcast as follows:

Back episodes available at https://www.youtube.com/user/financialinsiderweek.

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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Questions and Answers

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

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

Many other questions relate to short sales and foreclosures. See our article on that subject at www.realestateinvestingtax.com/shortsale.shtml.

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Follow me on Twitter, Facebook, LinkedIn and Google+!

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.

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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Check out my blog.

I have also started a blog at michaelgraycpa.com. Check it out!

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Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA's Tax & Business Insight at taxtrimmers.com/subscribe2.shtml.

Have employee stock options? Subscribe to our free newsletter, Michael Gray, CPA's Option Alert! To learn more, visit stockoptionadvisors.com/subscribe.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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