Victoria Majors Jones, CPA - Blog

Less than 24 hours after the budget was presented to Governor Brown by the Legislature, he vetoed it. The governor stated "Unfortunately, the budget I have received is not a balanced solution. It continues big deficits for years to come and adds billions of dollars of new debt. It also contains legally questionable maneuvers, costly borrowing and unrealistic savings."

The veto is not surprising, as it has been said that the budget was thrown together so the Legislature could continue to be paid.  An amendment to the state constitution approved by voters in November prevents lawmakers from getting paid unless they pass a balanced budget by a June 15 deadline. However, it's not clear whether the law requires the budget to be signed by the governor for the Legislature to continue getting their paychecks.

 

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In a recent Court of Appeals case for the Tenth Circuit, the court held that IRS properly determined that an overstatement of basis is an omission of gross income for purposes of the 6-year limitations period of Code Sec. 6501(e)(1)(A) under retroactively effective regs.   (Salman Ranch, LTD; Frances Koenig, Tax Matters Partner, (CA 10 05/31/2011 107 AFTR 2d) 

Although, basis has in the past been considered by the courts to be a deduction and not part of the definition of gross income, it appears that the Salaman Ranch case gives the IRS the power to apply the 6 year limitation period when a taxpayer overstates basis. 

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If your business pays club dues, they may or may not be deductible, depending on the type of organization and its purpose.

Your business generally cannot deduct dues paid to a club organized for business, pleasure, recreation or other social purposes. This disallowance rule takes in country clubs, golf clubs, business luncheon clubs, athletic clubs, and even airline and hotel clubs. However, you can deduct 50% of the cost of otherwise allowable business entertainment at a club, even if the dues you pay to the club are nondeductible. For example, if you have dinner with a client at your country club after a substantial and bona fide business discussion, 50% of the cost of the dinner is deductible as a business expense.

The club-dues disallowance rule generally doesn't affect dues paid to professional organizations including bar associations and medical associations, or civic or public-service-type organizations, such as the Lions, Kiwanis or Rotary clubs. The dues paid to local business leagues, chambers of commerce and boards of trade also aren't affected.

Finally, keep in mind that even if the general club-dues disallowance rule doesn't apply, there's no deduction for dues unless you can show that the amount you pay is an ordinary and necessary business expense.

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So you bought a house and negotiated well and convinced the seller to pay your points.  Can you deduct them even though you didn't pay for them?  The surprising answer in this case is yes! However, they are subject to some important limitations as described below.

Points—up-front fees charged by a mortgage lender, expressed as a percentage of the loan principal—are normally the buyer's obligation. But sellers will sometimes sweeten a deal by agreeing to pay the points on the buyer's mortgage loan.

In most cases, points the buyer pays are a deductible interest expense. And IRS says that seller-paid points may also be deductible.

Suppose, for example, that you bought a home for $600,000. In connection with a $500,000 mortgage loan, your bank charged two points, or $10,000. The seller agreed to pay the points in order to close the sale.

You can deduct the $10,000 in the year of sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more gain if and when you sell the home for more than that amount. But that may not happen until many years later, and the gain may not be taxable anyway. You may qualify for an exclusion for up to $250,000 ($500,000 for a husband and wife who file jointly) of gain on the sale of a principal residence.

There are some important limitations on the rule allowing a deduction for seller-paid points. The rule doesn't apply:

to points that are allocated to the part of a mortgage above $1 million;
to points on a loan used to improve (rather than buy) a home;
to points on a loan used to buy a vacation or second home, investment property, or business property; and
to points paid on a refinancing, home equity loan, or line of credit.

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Although most taxpayers  have already filed their 2010 income tax returns with the California Franchise Tax Board they may have to amend their 2010 returns to adjust taxable wages downward due to the impact of new legislation (A36) that conforms California law to federal law and now excludes health insurance premium payments and medical reimbursements for medical care expenses on behalf of nondependent adult children under the age to 27.  If your Form W-2 included an amount for nondependent adult children's medical coverage in your California wages, you should contact your employer to have them issue Form W-2C excluding the amount from your California wages.  Alternatively you can use Form FTB 3525 as a substitute for federal Form W-2C if your employer will not issue a Form W-2C.  You should file Form 540X to report the reduction in California wages; self-employed individuals who reported a California adjustment excluding the health insurance premium paid for nondependent adult children, should file Form 540X to report the allowed deduction for California.

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