Michael Gray, CPA's Real Estate Tax Letter

June 6, 2018

© 2018 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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It's time for cleanup and extensions.

Maybe you have an issue for which you would like a second look on the income tax returns you just filed. Maybe you have extended income tax returns that you need to have prepared. Or maybe you have some planning issues for which you need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.

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June 15 is an estimated tax due date.

The second estimated tax payment for most individuals and calendar year corporations and fiduciaries is June 15.

For individuals, federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2017 tax on your income tax return if your adjusted gross income exceeds $150,000. Alternatively, you can make payments based on your income and deductions for 2017.

The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2017 tax, unless your adjusted gross income is $1 million or more. In that case, your estimated tax payments should be based on your actual income and deductions for 2018.

For help computing your second quarter estimated tax payments, call Thi Nguyen at 408-286-7400, extension 206 to make an appointment for a consultation.

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Estimated fee payment due June 15 for some calendar year LLCs.

California LLCs pay two items to the Franchise Tax Board: an annual tax of $800 and an annual fee based on the gross receipts of the LLC.

The estimated annual fee is paid with Form 3536 by June 15 of the taxable year for calendar year LLCs. There is no fee when the gross receipts for the LLC are less than $250,000. The estimated fee can be based on last year's income tax return when it is for twelve months.

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Do you love travel?

I have created a Facebook travel group, called Travel Adventures, for members to share travel photos, experiences and tips. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/207423476536726/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a closed group, and I will approve your membership.

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Do you love Disney?

I have created a Facebook group, called Disney Magic, for members to share Disney photos, experiences and tips. I am also posting developments for Disney films, television shows, and amusement parks there. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/2006739209578437/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a closed group, and I will approve your membership.

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California Supreme Court ruling could create employee classification headaches.

Under a recent California Supreme Court ruling for the Dynamex case, many more workers currently treated as independent contractors could be reclassified to be employees.

According to the Court, a worker must meet three tests to qualify as an independent contractor:

  1. The worker must be free from the control and direction of the hiring entity in connection with the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity's business.
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

The real problem is the second requirement. Under this requirement, an independent professional performing temporary work would be considered to be an employee. Many independent contractors that work for a single "customer" could be considered to be employees.

This case related to delivery drivers who claimed to be transportation industry employees.

The California Employment Development Department is probably sharpening its knives to apply this ruling.

San Francisco City Attorney has issued subpoenas to Uber and Lyft to examine whether their contract drivers are actually employees under the Dynamex ruling.

Watch for an appeal and more litigation on this issue, which is a critical one for the tech industry and many small businesses.

(Dynamex Operations West, Inc. v. Superior Court, County of Los Angeles, Supreme Court of California, No. BC332016, April 30, 2018. San Jose Mercury News May 31, 2108, p. C11, "Uber, Lyft subpoenaed on driver wages".)

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Deduction for moving expenses disallowed.

The Tax Court upheld the IRS in disallowing a married couple's moving expenses. The taxpayers didn't substantiate the expenses and they didn't establish that the working spouse stayed and worked at a new location for 39 weeks, so they weren't eligible for the deduction. (The taxpayers did provide receipts to the IRS, but evidently the expenses were for moving equipment relating to the working spouse's employment, not for changing residences to be closer to changed employment.)

The Tax Court also disallowed the taxpayer's travel expenses relating to his employment. The Court said there was no evidence that the employment away from home was temporary. The tax home of a taxpayer is generally located where the taxpayer's employment is located.

(This was not a taxpayer-friendly case.)

(Rabadi v. Commissioner, T. C. Memorandum Decision 2018-70, May 22, 2018.)

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Charitable deduction disallowed for real estate developer.

A real estate developer transferred certain open land to a city, and claimed an $11 million charitable contribution deduction. The transfer was pursuant to an agreement that included a "no consideration" clause that expressly stated that the donation was voluntary and that nothing was received in exchange.

The transfer was actually required as a contingency in order to have a residential development plan approved by a city council.

The Tax Court agreed with the IRS that the developer received a substantial benefit in exchange for the transfer, so a current deduction for the charitable contribution was disallowed. (The developer should be able to add the cost of the donated land to the cost of the residential units.)

(Triumph Mixed Use Investments III, LLC v. Commissioner, T.C. Memorandum Decision 2018-65, May 15, 2018.)

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Partnership with two single-member LLC partners didn't qualify for TEFRA small partnership exception.

Under TEFRA (Tax Equity and Fiscal Responsibility Act), the IRS has jurisdiction to make adjustments of partnership taxable income and assess penalties at the partnership level. There is a small partnership exception where adjustments can only be made for the individual partners. A requirement to qualify is the partners must be individuals.

The partners of Mellow Partners were two single-member LLCs. The IRS audited Mellow Partners and issued a Final Partnership Administrative Adjustment notice for the partnership.

Mellow Partners said the notice was invalid because it qualified for the small business exception. It claimed single member LLCs are disregarded entities, so the partnership only had individual partners.

The District of Columbia Circuit Court of Appeals upheld the IRS. The Court said the IRS's regulations that LLCs should be recognized in applying the requirements for the small business exception were valid.

(Mellow Partners v. Commissioner, D.C. Circuit Court of Appeals No. 16-454, May 22, 2018.)

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Taxation of California income challenged for certain trusts.

A California superior court has ruled the allocation rules followed by the California Franchise Tax Board for the undistributed income of California trusts with at least one nonresident fiduciary or nonresident, noncontingent beneficiary is wrong. Under this rule, 100% of the California-source income (such as rental income or income from a California installment sale) is subject to California tax in the year the income is received. That is the rule that applies for nonresident individuals.

According to the court, that income should be apportioned like any other income of the trust, because the trust apportionment statutes make no reference to California source and non-California source income. That means the undistributed income attributable to non-California fiduciaries and non-California beneficiaries might not be subject to current tax, but might be subject to a throwback tax when it is ultimately distributed.

The Franchise Tax Board will appeal the ruling.

If your family has a trust with this situation, consider whether protective claims for refund should be filed to keep the statute of limitations open. At least watch for developments for the appeal.

The ruling creates another tax problem. Under the method currently followed by the Franchise Tax Board, the deduction for California tax can be "matched" against the income reported on the Federal tax return. If the tax is postponed as a throwback tax in a later year, the deduction won't be matched, and the family could pay more total taxes.

(Paula Trust et al. v. California Franchise Tax Board, San Francisco County Superior Court, Case No. CTC-16-55126, March 8, 2018.)

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

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

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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.

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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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