Dear Clients and Friends:

This is a reminder that if you are in the process of a foreclosure or short sale of your personal residence, you may be eligible for a tax break if your lender relieves the debt by December 31, 2012.

Cancellation of debt (COD) from a lender is generally income to the borrower.  This means that there is the potential for a tax bill relating to the COD from the lender, unless an exception applies.  One of the most favorable exceptions is under the Mortgage Forgiveness Debt Relief Act of 2007 which is set to expire.

For example, if the loan balance on your principal residence subject to foreclosure or short sale is $700,000 and the fair market value of your home has fallen to $500,000, there is potential COD income of $200,000.  Unless an exception applies, at a combined Federal and California tax rate of say 35%, the potential tax bill as a result of the COD income is $70,000.

However, pursuant to the exception under the Mortgage Forgiveness Debt Relief Act of 2007 which expires the end of 2012, there would be no tax due from the COD income related to the foreclosure or short sale.  The debt limit that qualifies for the exclusion is $2,000,000 for Federal tax purposes and $800,000 for California tax purposes.

There are other exceptions available to exclude COD income.  However, the provisions under the Mortgage Forgiveness Debt Relief Act of 2007 are some of the most favorable for taxpayers.

Here are some other considerations we analyze to plan for the tax implications of a foreclosure or short sale:

• Is there is any COD income from the foreclosure or short sale at all?  This depends on whether the debt is considered “recourse” or “non-recourse”.
• Was the debt used to buy, build or improve the property?
• What is the nature of the property (principal residence, vacation home or rental property)?  Rules for vacation, rental and investment properties are different.
• What is the effect of any second mortgage/line of credit secured by the property?
• If the taxpayer does not qualify for the provisions of the Mortgage Forgiveness Debt Relief Act of 2007, what other exceptions may be available to exclude the COD income?

This is just a brief introduction to the many tax issues that relate to foreclosures and short sales.  If you wish to discuss your specific needs in greater detail, please give us a call.

Very truly yours,

WRIGHT FORD YOUNG & CO.

Certified Public Accountants and Consultants, Inc.

Please note that any tax laws or regulations discussed in this memo may not necessarily be effective after the date of drafting this article.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

There are many benefits of operating a business as a corporation.  To fully realize these benefits a corporation should strive to have the appearance of a true and legitimate operating corporation separate and distinct from its shareholders.  There are two issues we would like to bring to your attention which, if not done properly, may bring into question the validity of the corporation and could cause undesirable consequences.  The two issues are 1) corporate minutes and 2) shareholder loans.

In order to maintain the appearance of a corporation, both small and large, there is the requirement to maintain corporate minutes. To ensure that a corporation is respected as a separate legal entity, a corporation’s officers/directors and shareholders must meet at least annually and corporate minutes must be maintained for those meetings, even if all of the above are only one person. Corporate minutes should at a minimum include information about when and where the meeting was held, who attended and the officers/directors that were elected. Please consult your attorney for further assistance relating to these matters.

From a tax perspective, there are some additional points that should be noted in the corporate minutes to ensure the corporation is respected as a separate entity for tax purposes and to reduce the chances that certain tax deductions are disallowed under audit from the IRS or other state agencies.  These include, but are not limited to:  approval of bonus accruals, approval of retirement plan contributions, approval of any shareholder loans and justification for officer compensation.

The other issue that, based on our experience, may be scrutinized under audit is shareholder loans. Any time a corporation loans funds to a shareholder, there is a risk that an auditor may attempt to characterize all or part of the loan as a taxable dividend to the shareholder. To avoid this disastrous result, all reasonable precautions should be taken to ensure that the loan between the corporation and the shareholder will meet the auditor’s definition of a loan. Listed below are a few steps that can be taken to ensure that shareholder loans will not be re-characterized as dividends or other distributions:

• There should be a written loan document evidencing the loan. This document should state the amount to be repaid, when it needs to be repaid and the interest rate at which the loan will be subject.
• The loan must bear a reasonable interest rate (at least the federal AFR).
• The loan should be documented in the corporate minutes.
• The loan should not have an unreasonably long maturity date.
• Evidence should be kept to show that the loan is being repaid according to the schedule established in the written loan document.

There are other important aspects to consider regarding maintaining corporate minutes and shareholder loan documentation.  Please contact our office if you have any questions and/or want to discuss this information in greater detail.

Very Truly Yours,

Wright Ford Young & Co.,

Certified Public Accountants and Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

With a new year comes a new tax filing requirement.  Under the 2010 HIRE Act, any individual who, during the 2011 tax year, held an interest in a “specified foreign financial asset” must attach to his or her income tax return Form 8938, Statement of Specified Foreign Financial Assets.  As with any other foreign reporting requirement non-compliance will be met with stiff penalties.  This form is in addition to the FBAR filing requirement (form TD F 90-22.1) and does not replace it.

The term “specified foreign financial asset” means:

• Any financial account maintained by a foreign financial institution.
• Any of the following assets that are not held in an account maintained by a financial institution:
  • Any stock or security issued by a person other than a U.S. person;
  • Any financial instrument or contract held for investment that has an issuer or counterparty that is other than a U.S. person; and
  • Any interest in a foreign entity.

The dollar threshold is as follows:

• Unmarried or married filing separate living in the U.S.:  More than $50,000 on the last day of the tax year or more than $100,000 at any time during the tax year.
• Married filing joint living in the U.S.:  More than $100,000 on the last day of the tax year or more than $200,000 at any time during the tax year.
• Unmarried or married filing separate living abroad:  More than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year.
• Married filing joint living abroad:  More than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

There are certain other guidelines regarding determination of the assets’ fair market value and jointly owning assets with someone else other than your spouse.  To discuss those guidelines or if you feel you have a filing requirement please contact our office so that we can assist you.

Very Truly Yours,

Wright Ford Young & Co.

Certified Public Accountants & Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

Year-end is a good time to engage in tax planning by carefully structuring your capital gains and losses which can result in significant tax savings. This tax planning strategy is sometimes referred to as “harvesting capital gains and losses”.

Let’s consider a situation where you have realized capital losses to date in 2011 and a situation where you have realized capital gains to date in 2011.

First, suppose you lost money in the stock market in 2011 and have other investment assets that have appreciated in value. You should consider the extent to which you should sell appreciated assets (if you think their value has peaked) and thereby offset the gains on these assets with the losses that you realized earlier in the year.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Remember you may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income or AGI each year.

Individuals are subject to tax at a rate as high as 35% on short-term capital gains and ordinary income. But long-term capital gains generally are taxed at a maximum rate of 15%.This means that you should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they are used to offset short-term capital gains or up to $3,000 per year of ordinary income. To do this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken.

In addition to the tax implications, you also need to consider investment factors. You wouldn’t want to defer recognizing gain until the following year if there’s too much risk that the property’s value will decline before it can be sold. Similarly, you wouldn’t want to risk increasing a loss on property that you expect will continue to decline in value by deferring its sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, you should take steps to prevent those losses from offsetting those gains.

If you have yet to realize net capital losses for 2011, but expect to realize net capital losses in 2012 well in excess of the $3,000 ceiling, you should consider shifting some of the excess losses into 2011. That way the losses can offset 2011 gains and up to $3,000 of any excess loss will become deductible against ordinary income in 2011.

On the other hand, you may have capital gains to date in 2011. You can use this same tax strategy to offset these gains by “harvesting” capital losses to a certain extent. For example, suppose you have $10,000 of capital gains from the sale of stocks earlier this year. You also have several losing positions, including shares in ABC Corp. The ABC shares currently show a loss of $15,000. Strictly from the tax viewpoint, you should consider selling enough of your ABC shares to recognize a $13,000 loss. Your capital gains will be offset entirely, and you will have a $3,000 loss to offset against a like amount of ordinary income

As we have shown above, careful handling of your capital gains and losses can save you a substantial amount in income taxes.  Please contact our office so that we can help you maximize your tax savings from this and other year-end planning strategies.

Very Truly Yours,

Wright Ford Young & Co.,

Certified Public Accountants and Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

 Dear Clients and Friends:

 The Mexican Constitution prohibits direct ownership of real estate by foreigners in the “restricted zone.” The restricted zone includes all land located near any Mexican border and coastline. However, in order to permit foreign investment in these areas, the Mexican government created the “fideicomiso,” a Mexican real estate trust.  A “fideicomiso” is a trust agreement created for the benefit of a foreign buyer, executed between a Mexican bank and the seller of property in the restricted zone. The bank acts on behalf of the foreign buyer, taking title to real property. The bank, as trustee, buys the property for the foreigner, then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary. The trust beneficiary retains and enjoys all the rights of ownership while the bank holds title to the property. The foreigner is entitled to use, enjoy, and even sell the property that is held in trust at its market value to any eligible buyer.

 Owning real property in Mexico within the restricted zone requires IRS Forms 3520 and 3520A.  (This is also true if you are a beneficiary or creator/owner of any foreign trust including a fideicomiso):

 Under US tax law the fideicomiso meets the definition of a “foreign trust.” That means you are required to file Form 3520 when you establish the fideicomiso or foreign trust and for each year thereafter. The Form 3520 must be filed by the extended due date of your personal tax return.

 In addition to Form 3520, Form 3520A is also required.  The trustee is supposed to file Form 3520A for each year of the fideicomiso’s existence but in Mexico does not. Therefore, under US tax law you as the owner of the trust must file the form to avoid penalties being assessed against you personally.  Form 3520A is due on March 15^th of each year for the previous calendar year. You can apply for an extension of time using Form 7004.  These forms must be filed for any foreign trust with a US owner. 

 If you fail to file these forms, the penalty is greater of $10,000 or 35% of the value of the property transferred to the trust or of any unreported distribution, or 5% of the trust’s gross asset value. 

 The US and Mexico have a tax treaty which allows them to conduct tax investigations and receive information on each other citizens in the other country.  The US passport information is record in the Mexican registry of foreign property ownership when a US citizen purchases a property in Mexico.  Therefore, should the IRS wish to discover which US citizens have Fideicomisos in Mexico, it would be easy.

 If you think you may have a filing requirement for a property you own in Mexico, please do not hesitate to contact our office. 

 Very Truly Yours,

 Wright Ford Young & Co.,

Certified Public Accountants and Consultants, Inc.

 To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

Tax reporting on the rental of a taxpayer’s residence or vacation home depends on how many days the property is used for rental purposes as opposed to personal purposes. A residence or dwelling is defined as a dwelling unit and includes a house, apartment, condominium, mobile home, boat, or similar property. Residences used personally by the taxpayer generally fall into one of three categories when determining their tax treatment.

1. Personal Residence with Very Limited Rental Use – A residence that is rented for fewer than 15 days during the year.

2. Vacation Home with Both Rental and Personal Use – Property with (a) personal use that exceeds the greater of 14 days or 10% of rental days and (b) rental use that exceeds 14 days.

3. Rental Property with Very Limited Personal Use – Property rented during the year and personal use that does not exceed the greater of 14 days or 10% of rental days.

The property’s designation for tax purposes can change yearly, depending on how the property is used. The property’s designation also impacts treatment for sale of the property.

Personal Residence with Very Limited Rental Use If such residence is rented for fewer than 15 days during the calendar year, it is considered solely a personal residence. The taxpayer is not entitled to a special deduction for any expenses associated with the rental of the property other than mortgage interest and property taxes, and any income received from the rental use is not taxable.

Vacation Home with Both Rental and Personal Use If property used as a residence is rented more than 14 days, deductions (other than interest, taxes, and casualty losses) are limited to the amount of the income from the property.

Rental Property with Very Limited Personal Use If the taxpayer’s dwelling is rented during the tax year and personal use does not exceed the greater of (1) 14 days, or (2) 10% of rental days, it is not considered a residence. Instead, it is considered a rental property.

Rental activities generally fall into the category of “passive” activities. This means that rental losses you incur can be deducted currently only against passive income from other rental properties for example and not against nonpassive income, such as your wages or investment income.

However, if you “actively participate” in the residential rental activity and your adjusted gross income is less than $150,000, you may be able to deduct a loss of up to $25,000 in a tax year against nonpassive income. You actively participate in the rental activity if you make key management decisions, such as approving new tenants, deciding on rental terms, approving capital expenditures. You also can show active participation by arranging for others to provide services. You need not have regular, continuous, and substantial involvement with the property.  Also, be sure to keep good records showing rental days and personal use days.

Losses that aren’t allowed because of the amount limitations don’t just disappear. They are carried forward and can be deducted against nonpassive income in future years if you continue to actively participate in the rental real estate activity that generated the losses, subject to the $25,000 limit.

The tax treatment of a rental property or a vacation home is not straight-forward and requires careful analysis and planning.  Please schedule an appointment with us to discuss the proper treatment and deductibility of losses from your rental or vacation home properties.

Very truly yours,

Wright Ford Young & Co.

Certified Public Accountants and Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

Beginning with the 2011 tax year, businesses other than those that are primarily engaged in agriculture, extractive business, savings and loans, or banking and financial activities, may make an irrevocable annual election to apportion income to California using a single sales factor apportionment formula.

Prior to 2011, California tax law states that a taxpayer doing business in more than one state must apportion its business income to California by applying an apportionment factor to its net income.  The apportionment factor is based on a three-factor formula consisting of property, payroll and sales.  Each factor is derived by taking the ratio of the amount in California to the amount everywhere.  The sales factor is double weighted, and the sum of all of the ratios is divided by four to determine an average combined ratio or apportionment percentage.

For tax years beginning on or after January 1, 2011, taxpayers may make a California annual irrevocable election to apportion their California business income using the single sales factor or they can continue to use the standard three-factor formula.

For businesses that elect to use a single sales factor apportionment formula, all business income is apportioned to California by multiplying the business income by the sales factor only. The election must be made on a timely filed original return and is irrevocable in the year for which it is made.

The fact that the election is made on an annual basis provides substantial opportunities for both in-state and out-of-state corporations.

So which apportionment formula should you choose?

For example, a California-based company with relatively high payroll and property may be able to substantially reduce its income apportioned to California by using a single sales factor in years they are profitable.  For a loss year, it may maximize its loss apportioned to California by electing the standard apportionment formula.  The reverse would generally be true for businesses based outside the state which have minimal property and payroll within California but have substantial sales to California.

According to the Franchise Tax Board, the new apportionment rules are expected to make California a more competitive place to do business, especially for businesses with significant out-of-state sales and substantial in-state payroll and property.

Please give us a call if you would like to discuss which method is advantageous for your company.

Very truly yours,

WRIGHT FORD YOUNG & CO.

Certified Public Accountants and Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

Dear Clients and Friends:

Unused Estate Tax Exemptions Can Be Left To a Surviving Spouse

The Tax Relief Act of 2010 provided a new estate tax benefit for married individuals – but it is currently only available in 2011 and 2012.  For the first time, a deceased spouse who doesn’t use up their entire estate tax exemption may be able to transfer their unused exemption amount to a surviving spouse.  In other words, unused exemptions of individuals who die in 2011 or 2012 (but not 2010) will be “portable.”  This allows both spouses’ exemptions to be utilized without having to set up a credit shelter trust or engage in other, more traditional, estate tax planning.

A major caveat to this new law is that both spouses must die in 2011 or 2012 to benefit as the new law is currently set to expire on December 31, 2012.  Other major caveats are that the portability rules do not apply to the generation-skipping transfer tax exemption, and an estate tax return must be timely filed to make the election even though an estate tax return may not otherwise be required.  The bottom line is, foregoing or delaying traditional estate planning in hopes of taking advantage of this new provision could have unintended and unfavorable estate tax consequences.

If you have any questions, please do not hesitate to contact us.

Very truly yours,

Wright Ford Young & Co.

Certified Public Accountants & Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

Generally, you must make estimated tax payments if you expect to owe at least $500 ($250 if married filing separate) in California tax for 2011 (after subtracting withholding and credits), and you expect your withholding and credit to be less than the smaller of:

1. 90% of your 2011 tax,
2. 100%  of your 2010 tax

Example: If your 2010 total tax was $10,000 and your 2011 total tax results $13,000, your 2011 CA estimated tax payments (including withholding and credits) should be at least $10,000;  smaller of $10,000 (2010 CA tax) or $11,700 (90% of 2011 tax) to be penalty proof.

If you are required to make estimated tax payments, and your 2010 California AGI is more than $150,000 (or $75,000 if married filing separate), you must figure your 2011 estimated tax based on the lesser of:

1. 90% of your 2011 tax,
2. 110% of your 2010 tax

Example: If your 2010 total tax was $15,000 and your 2011 total tax results $20,000, your 2011 CA estimated tax payments should be at least $16,500; smaller of $16,500 (110% of 2010 CA tax) or $18,000 (90% of 2011 tax) to be penalty proof.

If your 2011 California AGI is over $1,000,000 ($500,000 if married filing separate), you are required to pay 90% of your 2011 estimated tax to prevent an underpayment penalty in 2011.  In other words, paying California 2011 estimated tax payments based on your 2010 tax may no longer be penalty proof.

Please note that this only applies to California 2011 estimated tax payments.  The federal 2011 estimated tax payments are still based on the first two rules as mentioned above.

If you anticipate your 2011 California AGI will be over $1,000,000 (or $500,000 if married filing separate), please contact our office. We can assist you with your 2011 tax projection and provide you with California 4^th quarter estimate to be penalty proof.

Thank you for your business.

Very truly yours,

Wright Ford Young & Co.

Certified Public Accountants and Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.