Michael Gray, CPA's Real Estate Tax Letter
November 8, 2018
© 2018 by Michael C. Gray
ISSN 1930-0387
A monthly report focusing on tax issues for the homeowner and real estate investor.
Table of Contents
- To our readers - Thanks and notice
- Attention, CPAs! Would you like to write this newsletter?
- Attention, CPA's! Let's keep in touch
- The year will soon be over. Will you be ready?
- Do you love Disney?
- Jay Abraham offers free business improvement training materials.
- New social security wage base announced.
- Federal disaster areas.
- IRS issues guidance on deducting business meals.
- Proposed regulations issued for Qualified Opportunity Funds.
- Expense election might be better than bonus depreciation.
- Retirement contribution limits increase for 2018.
- IRS says certain concrete foundation repairs paid during 2018 qualify for deduction in 2017.
- No increased valuation discount allowed for assignee partnership interest.
- Be sure your online tax payments are processed!
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes
- Follow me on Twitter, Facebook, LinkedIn and Google+!
- Do you know about our other newsletters?
- Check out my blog.
- Subscribe/Remove from Michael Gray, CPA's Real Estate Tax Letter
To our readers - Thanks and notice.
After more than 14 years, I am discontinuing writing this newsletter. I hope you have found it valuable. I will continue covering tax developments for real estate in my email newsletter, Michael Gray, CPA's Tax and Business Insight. To subscribe to that newsletter, go to www.taxtrimmers.com and use the Subscribe box at the top of the page.
Attention, CPAs! Would you like to write this newsletter?
Writing this newsletter is a great way to promote your tax practice for real estate investors. There is also a companion website at www.realestateinvestingtax.com. If you would like to pursue a licensing agreement with Michael Gray, please call him at 408-918-3161. (Note Michael Gray will not be available until Monday, November 12.)
Attention, CPAs! Let's keep in touch.
I intend to offer information that CPAs will find valuable. Please send your contact information to dgsiemer@taxtrimmers.com.
The year will soon be over. Will you be ready?
It's time for year end tax planning. With the holidays, Thi Nguyen's availability will be limited. Call her at 408-286-7400, extension 206 to schedule your year-end tax planning appointment now.
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.
Jay Abraham offers free business improvement training materials.
Marketing and business improvement guru Jay Abraham has made a wealth of training materials available at his updated website. It could take years to study all of it. The web site address is www.Abraham.com. Click the Knowledge Center button. Check it out!
New social security wage base announced.
The Social Security Administration has announced that the wage base for computing the Social Security tax will increase from $128,400 for 2018 to $132,900 for 2019.
For 2019, employees will pay 6.2% Social Security tax on the first $132,900 of wages, plus 1.45% Medicare tax on the first $200,000 of wages, plus 2.35% Medicare tax on wages in excess of $200,000.
For 2019, self-employed persons will pay 12.4% on the first $132,900 of self-employment income, plus 2.9% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), plus 3.8% Medicare tax on self employment income exceeding $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return.)
Federal disaster areas.
Under the Tax Cuts and Jobs Act of 2017 enacted December 2017, casualty losses can only be claimed for losses in declared Federal disaster areas. There are many of them for 2018. You can consult with a tax advisor to find out if you qualify, or try searching online. In California, fires at Lake and Shasta Counties that began July 23, 2018 are a declared Federal disaster. If you experienced a loss in a Federal disaster area, you should consult with a tax advisor now. You might want to claim the loss on an amended 2017 federal income tax return.
There are filing and payment due date extensions available for taxpayers located in a Federal disaster area.
IRS issues guidance on deducting business meals.
The IRS has issued preliminary guidance on deducting business meals under the Tax Cuts and Jobs Act of 2017. Under the new tax law, entertainment expenses aren't tax deductible. Business meals continue to be tax deductible, subject to a 50% limitation, similar to before tax law change. According to the IRS guidance, meals provided to a customer or client at an entertainment activity may still be tax deductible as a business expense, provided the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages are separately stated on an invoice or receipt. For example, if a business owner buys hot dogs and drinks when entertaining a customer at a baseball game, 50% of the cost of the hot dogs and drinks are tax deductible. If the cost of the food and drinks are included in the cost of the entertainment, such as for a suite where food and beverages are available, the food and drinks are not tax deductible.
The guidance includes a reminder that what are non-deductible entertainment expenses for one business may be a tax-deductible marketing or selling expense for another business. For example, if a clothing manufacturer has a fashion show for store buyers, that show would not be entertainment. If an appliance distributor has a fashion show for its retailers, that show would probably be entertainment.
(Notice 2018-76.)
Proposed regulations issued for Qualified Opportunity Funds.
The IRS has issued proposed regulations for Qualified Opportunity Funds. A new tax benefit was enacted in the Tax Cuts and Jobs Act of 2017. Taxpayers who invest capital gains within 180 days into a Qualified Opportunity Zone investment can defer federal income tax on the gain for up to eight years, and if the investment is held for at least ten years, any additional gain relating to the appreciation of the investment may be tax free. I have written a summary about this. Here is a URL to see that summary. www.michaelgraycpa.com/posts/opportunity-zones-a-new-secret-tax-benefit/
The IRS also issued a Revenue Ruling relating to the rehabilitation of an existing building located in an Opportunity Zone and the qualification of the land as Zone Business Property.
Remember California has not adopted these rules, so no deferral or exclusion applies for California tax reporting.
(Proposed Regulations REG-115420-18, October 19, 2018. Rev Rul 2018-29.)
Expense election might be better than bonus depreciation.
With the increase in the bonus depreciation rate to 100% and the addition of used equipment as qualifying property, many people might wonder whether the expense election under Internal Revenue Code Section 179 is still useful.
An advantage of the expense election is the deduction isn't required to be capitalized to inventory costs under the uniform capitalization rules.
Another advantage is that certain improvements to nonresidential real estate currently qualify for the expense election but not for bonus depreciation. Congress intended for some of those improvements, called qualified improvement property, to qualify, but made an error in the language of the legislation that might eventually fixed with a technical correction. The deduction can now be safely made with an expense election instead of bonus depreciation.
Some nonresidential real estate improvements, such as roofs, heating, ventilation, air conditioning, fire protection and alarm systems, and security system won't qualify for bonus depreciation if a technical correction is made, but do currently qualify for the expense election.
Retirement contribution limits increase for 2018.
The IRS has announced 2019 costs of living adjustments for retirement plan contributions. The employee elective deferral limit will increase from $18,500 to $19,000. The limitation for the annual benefit for a defined benefit plan will increase from $220,000 to $225,000. The maximum addition for a defined contribution plan, including profit sharing plans and simplified employee pension plans (SEPs) will increase from $55,000 to $56,000. The annual compensation limit for computing a deferred compensation contribution will increase from $275,000 to $280,000. The maximum contribution to an individual IRA or Roth IRA account will increase from $5,500 to $6,000.
(Notice 2018-83, November 1, 2018.)
IRS says certain concrete foundation repairs paid during 2018 qualify for deduction in 2017.
IRS Commissioner Charles Rettig said in a letter to Rep. Joe Courtney (D-CT) that concrete foundation repairs relating to pyrrhotite failure in the northeast United States can still be deducted under tax reform. The deduction can be allowed as a casualty loss for 2017, provided the loss related to damage that occurred before 2018 and the repairs are paid before the last day for filing a timely amended tax return for 2017. (These losses wouldn't be allowed for 2018 - 2026 under the Tax Cuts and Jobs Act of 2017.)
If the casualty losses relate to a trade or business, they should also qualify for a net operating loss carryback (also repealed by the Tax Cuts and Jobs Act of 2017) because they relate to a tax year before 2018.
(Rev. Proc. 2017-60 and Rev. Proc. 2018-14.)
No increased valuation discount allowed for assignee partnership interest.
An estate claimed a 13.4% discount for lack of control plus a 27.5% discount for lack of marketability relating to an 88.9% limited partnership interest for estate tax reporting. The estate claimed there should be a larger valuation discount because the interest was an assignee interest. The Tax Court ruled that no additional discount was allowable for an assignee interest (as far as the Court was concerned, there is no difference between an assignee interest and a limited partnership interest), disallowed the discount for lack of control and reduced the discount for lack of marketability to 18%.
(Estate of Streightoff, TC Memorandum decision 2018-178, October 24, 2018.)
Be sure your online tax payments are processed!
The California Office of Tax Appeals has denied reasonable cause abatement claims of two taxpayers, who submitted large tax payments electronically. The tax payments weren't processed, and the taxpayers didn't notice.
In one of the cases, the taxpayers didn't realize they were looking at a "payment review page" and didn't press the button to process the payment. The OTA said a prudent taxpayer would have notice that a $200,000 tax payment wasn't deducted from his or her account.
In another case, the taxpayer was relying on its tax return preparer to process an extension payment. The OTA said the payment of the tax was not an obligation that could be delegated.
The lesson? Don't wait until the last minute to make electronic payments. Make them well in advance and check your bank account to be sure they are processed.
(Appeal of Friedman, 2018-OTA-077 and Appeal of Donahoe, 2018-OTA-074.)
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+.
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.
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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