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The August 2016 newsletter focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.
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Michael Gray, CPA's Real Estate Tax Letter

January 20, 2017

© 2017 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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Tax preparation materials will soon be on the way.

We have sent instructions for assembling information to prepare income tax returns. If you haven't received instructions and would like to have them, call Dawn Siemer at 408-918-3162.

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Engagement letters will soon be mailed.

With Dawn's vacation the last two weeks of December and anticipating a tax cut for 2017, we haven't mailed our engagement letters yet. Your tax preparation materials have a higher priority, so expect to see engagement letters in a couple of weeks.

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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 Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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Taxpayers lose on real estate professional status.

A married couple failed to persuade the Tax Court that they qualified as real estate professionals. They claimed they had extensive management activities for properties in Massachusetts and Dolli, Egypt. The spreadsheets documenting their hours of work on the properties appeared to be inflated, duplicative and implausible. The spreadsheets showed both taxpayers spending the same number of hours on a task that could easily be performed by one person or spending entire days in alleged meetings with family members who co-owned the Dokki property. The Tax Court found the total hours reported were far below the 750 hours required to qualify as a real estate professional. Therefore, their rental real estate losses were subject to the passive activity rules.

(Makhlouf, TC Summary Opinion 2017-1, January 12, 2017.)

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IRS filing season starts January 23.

The IRS has announced that the 2017 filing season for individual income tax returns will start on January 23. Tax returns can't be processed before that date. The IRS also issued a reminder that Congress has enacted a delay for issuing refunds for income tax returns that include an earned income tax credit or an additional child tax credit. Those refunds can't be issued before February 15, and will probably not be issued until the week of February 27.

(IR-2017-01, January 5, 2017.)

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

Remember that most 2016 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 $126 per employee will be due with Form 940. Be sure this adjustment is done with your year-end report for 2016 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, 2017) as distributed for a taxable year (for example 2016). 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 $12,400 for 2016. (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, 2017. Be sure you have installed those updates before processing your first payroll for 2017.

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Business standard mileage rate decreases.

The IRS has announced the standard mileage rate for 2017 decreased to 53.5¢ per mile from 54¢ per mile for 2016. The standard mileage rate for medical and moving expenses decreased to 17¢ per mile for 2017 from 19¢ per mile for 2016.

(Notice 2016-79, December 13, 2016)

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Small corrections for information returns aren't required.

The IRS has issued a safe harbor where small corrections for information returns aren't required. The error must not have been intentional for the safe harbor to apply. The maximum errors for which the safe harbor applies are $100 for income and $25 for withholding.

(Notice 2017-9, January 4, 2017.)

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IRS warns tax practitioners about identity theft scam.

The IRS issued an alert to tax return preparers about a scam to hack the preparers' computers. The hackers send an email posing as a prospective client and then send PDF documents. When the PDF documents are opened, the preparers' computer is attacked. The internet is sure a blessing and a curse.

(IR-2017-03, January 11, 2017.)

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Syndicated conservation easements are listed transactions.

The IRS has announced that syndicated conservation easement transactions are listed transactions requiring special disclosure. The status as listed transactions applies for such investments after December 31, 2009. We recommend that you consult with your tax advisor before investing in one of these transactions.

(Notice 2017-10, January 11, 2017.)

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FTB loses case for out-of-state corporation.

A California appeals court has ruled that an out-of-state whose only connection with California was its 0.2% ownership interest in a California LLC was not "doing business" in California. Therefore, the corporation wasn't subject to the $800 minimum California franchise tax.(Swart Enterprises, Inc. v. California Franchise Tax Board, California Court of Appeal, Fifth District, Case No. F070922, January 12, 2017.)

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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 20 and 27, Peter Moss, Wymac Capital, "Residential mortgage market update"
February 3 and 10, Mark Erickson, attorney at law, "California divorce basics"
February 17, Mark Erickson, attorney at law, "California spousal and child support - Part 1 of 2"
February 24, Mark Erickson, attorney at law, "California spousal and child support - Part 2 of 2"

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Sunday at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Monday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Monday at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Monday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Tuesday at 10:30 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Tuesday at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Tuesday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill
  • Broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Wednesday at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Thursday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Friday at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
  • Friday at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
  • Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV"
  • Friday at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Saturday at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Saturday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Saturday at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County

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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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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The January 2017 issue of Michael Gray, CPA's Real Estate Taxletter, focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.
Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766