Michael Gray, CPA's Tax and Business Insight
October 8, 2019
© 2019 by Michael C. Gray
ISSN 1539-395X
A monthly report to help you prepare for your financial future, keep more of what you earn by minimizing your taxes, and build an extraordinary business!
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Table of Contents
- Boo! The year is almost over!
- Family celebrations.
- Extended individual and C corporations income tax returns are due October 15.
- Business owners can still set up a SEP-IRA for 2018.
- It's time for cleanup and extensions.
- Want help with your promotions, web pages, newsletters, blog posts, emails or books?
- Do you love Disney?
- IRS finalizes safe harbor for treating rental real estate as a trade or business.
- District court upholds limit on federal tax deductions for state taxes.
- IRS issues proposed reliance regulations for bonus depreciation.
- IRS finalizes some bonus depreciation regulations.
- Surviving spouse allowed rollover of inherited retirement account.
- Car awarded to a teenager for good grades was taxable.
- Faxing a tax return doesn't qualify as filing it.
- Employers should continue using expired Form I-9.
- California issues guidelines for claiming new tax benefits.
- California adopts controversial new rules for classifying employees.
- Marketplace facilitators must collect California sales and use taxes.
- Alert to out-of-state businesses with California customers–Bindley case is precedential in California.
- If you're planning to leave your employer, don't make a Section 83(b) election for ISOs.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: What Should I Do With My Life?
- Follow me on social media!
- Check out my blog.
- PS Marché Aux Fleurs
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Kara Siemer, who is my granddaughter, hunts live fish at the local creek Boo! The year is almost over!
Halloween is already almost here! And after Halloween, the year roars to a close with the holiday season. Hope your year has been a good one.
Did you know Halloween is the second most popular holiday in the United States? It's a great one for business promotions and just having fun!
Family celebrations.
My wife, Janet Gray, celebrates her birthday during October. Janet is a great blessing to me and our family. Happy birthday!
Extended individual and C corporation income tax returns are due October 15.
Does your tax return preparer have your information to prepare your income tax returns yet? (Congratulations to those who have already filed their income tax returns!)
Business owners can still set up a SEP-IRA for 2018.
Certain businesses that don't have other qualified plans and have extended the filing date for the income tax returns can still set up and fund a SEP-IRA plan and make a retirement plan contribution for 2018 up to October 15, 2019. See your tax advisor.
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 already filed. Maybe you have extended income tax returns that you need to have prepared. Or maybe you have some planning issues for which need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.
Want help with your promotions, web pages, newsletters, blog posts, emails or books?
Michael Gray is available for promotional and content writing assignments. In addition, some of our publications and articles are available for licensing (use for a fee). Want more information? Call Michael Gray weekdays at 408-918-3161.
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 private group, and I will approve your membership.
IRS finalizes safe harbor for treating rental real estate as a trade or business.
Earlier this year, the IRS issued a proposed version of a revenue procedure prescribing a safe harbor for treating a rental real estate enterprise as a trade or business for the 20% qualified business income deduction. The IRS has finalized the revenue procedure. Note that properties rented under a triple-net lease don't qualify. A requirement under the revenue procedure is documenting the hours spent by the owner, employees and contractors working on the property. The contemporaneous records requirement doesn't apply to tax years beginning before January 1, 2020. For 2018 only, taxpayers may elect to use the safe harbor on an amended income tax return.
(Revenue Procedure 2019-38.)
District court upholds limit on federal tax deductions for state taxes.
U.S. District Court judge Paul Oetken in Manhattan, New York dismissed a lawsuit seeking to void the $10,000 limit on the deduction for state and local taxes in the Tax Cuts and Jobs Act of 2017. New York, Connecticut, Maryland and New Jersey asserted the limit was an effort to coerce the states into lowing their own taxes and cut services. The Judge didn't accept the argument and said that Congress was within its authority to adopt the limit.
(State of New York v. Mnuchin, DC NY 9/30/19, 124 AFTR ¶ 2019-5302.)
IRS issues proposed reliance regulations for bonus depreciation.
The rules for additional first year (bonus) depreciation were changed by the Tax Cuts and Jobs Act of 2017. The IRS has issued proposed regulations covering the changes. Although the regulations aren't effective until they are final, taxpayers may elect to rely on them for property acquired after September 27, 2017. See your tax advisor for details.
(REG-106808-19.)
IRS finalizes some bonus depreciation regulations.
The IRS has issued final regulations for some of the provisions relating to additional first year (bonus) depreciation in the Tax Cuts and Jobs Act of 2017. The regulations are effective when they are published in the Federal Register, but taxpayers may elect to rely on them for property acquired after September 27, 2017. See your tax advisor for details.
(T.D. 9874.)
Surviving spouse allowed rollover of inherited retirement account.
A decedent left a government retirement account with the decedent's estate being the sole beneficiary. The plan administrator wouldn't allow the decedent's spouse to roll over the account, since the spouse wasn't the named beneficiary. The surviving spouse was the executrix and sole beneficiary of the estate.
The IRS privately ruled that the surviving spouse qualified for a rollover of the account to her own IRA.
(PLR 201936009.)
Car awarded to a teenager for good grades was taxable.
A local car dealership awarded a car to a high school senior in its annual "Strive to Drive" promotion. The recipient claimed the car was a nontaxable gift. The Tax Court, in an unpublished designated order, said the car was taxable as a prize.
(Conyers v. IRS, Tax Court docket no. 13969-18.)
Faxing a tax return doesn't qualify as filing it.
On July 25, 2007, an IRS agent said the IRS never received the 2001 income tax returns of Seaview Trading, LLC. On September 23, 2005, Seaview's accountant faxed a copy of the tax return to the agent, together with a certified mail receipt indicating the tax return was initially sent to the IRS in July 2002.
The Tax Court upheld the IRS in finding Seaview never filed a tax return, so the statute of limitations wasn't closed and the IRS could assess additional taxes. The tax return had to be mailed or efiled to be properly filed.
The ruling doesn't address why the certified mail receipt was disregarded by the Tax Court. Seaview was involved in a tax shelter "listed transaction," so it appears the Tax Court might have been looking for a way to penalize the taxpayer. The certified mail receipt wasn't focused on in the discussion.
(Seaview Trading, LLC v. Commissioner, TC Memo 2019-122, September 16, 2019.)
Employers should continue using expired Form I-9.
The current version of Form I-9 (Employment Eligibility Verification) expired on August 31, 2019, and a new form hasn't been issued yet. The U.S. Citizenship and Immigration Service says that employers should continue using the old form until a new one is issued.
California issues guidelines for claiming new tax benefits.
California conformed with several federal tax benefits of the Tax Cuts and Jobs Act of 2017 in AB 91, Loophole Closure and Small Business and Working Families Tax Relief Act of 2019. Benefits include simplified methods of accounting for certain small businesses and avoiding technical termination for certain partnerships. The Franchise Tax Board has published some guidance on optionally making the elections on 2018 original or amended income tax returns. Under the guidance, the original or amended income tax returns must be paper filed with the Franchise Tax Board, even though electronic filing is usually required. See your tax advisor for details.
(Tax News, October, 2019, "How to file a Partnership Technical Termination Election" and "How to make an election regarding Small Business Method of Accounting.")
California adopts controversial new rules for classifying employees.
The State of California is targeting "sharing economy" companies like Uber, Lyft, and DoorDash that classify their workers as independent contractors. Governor Newsom has approved AB 5, which codifies the California Supreme Court's ruling in Dynamex. I've written a brief summary of the legislation on my blog. Here's a link to that blog post.
California business owners should consult with their employment law attorneys and tax consultants about how the new law affects them.
Marketplace facilitators must collect California sales and use taxes.
Effective October 1, 2019, marketplace facilitators with a California nexus are responsible for collecting California sales and use taxes on sales of tangible property to California customers for all of their sales and the sales made by marketplace sellers through their marketplace. Marketplace facilitators that come to mind are Amazon and EBay.
Sellers who sell through marketplace facilitators will no longer be considered to be the retailer of their sales through the marketplace facilitator. Sellers who sell exclusively through marketplace facilitators will no longer be required to register or remit sales and use taxes.
See your tax advisor for details.
(Spidell's California Taxletter, October, 2019, p. 6. "Marketplace facilitators must collect California sales and use taxes.")
Alert to out-of-state businesses with California customers–Bindley case is precedential in California.
Last month I wrote about a conflicting ruling, Bindley, issued by the California Office of Tax Appeals (OTA). Here's a link to that article.
http://taxtrimmers.com/bottomline/2019-09.shtml#nonresident
The OTA has issued the Bindley decision as precedential. The Franchise Tax Board has indicated it will aggressively tax the income of out-of-state business owners that serve California customers, based on Form 1099-MISC received from California businesses.
Life has become much more complex for out-of-state business owners, and other states could follow California's lead.
See your tax advisor if your business has customers outside your state of residence.
(Spidell's California Taxletter, October, 2019, p. 8. "Out-of-state sole proprietors with California customers beware.")
If you're planning to leave your employer, don't make a Section 83(b) election for ISOs
(This is a reminder of a tax planning issue that still applies for 2019.)
One of our readers asked for our guidance to his tax return preparer.
He made an early exercise of incentive stock options during 2014, but left his employer early in 2015. None of the stock was vested and he forfeited all shares back to the employer.
No Section 83(b) election was made.
Since the employer (correctly) issued Form 3921 for the exercise of incentive stock options during 2014, the tax return preparer believed that the exercise had to be reported as income on the alternative minimum tax form (Form 6251) for 2014.
I pointed out to the preparer that, according to Internal Revenue Code Section 56(b)(3), the rules for incentive stock options under Internal Revenue Code Section 422 don't apply for the alternative minimum tax. That means the rules for nonqualified stock options under Section 83 apply to incentive stock options for AMT reporting.
Since no Section 83(b) election was made, taxable income is reported based on the excess of the fair market value over the option price as the shares vest.
In this case, the shares never vested, so there was no taxable income for AMT reporting for 2014.
To make the situation clear for the tax return preparer and the IRS, I prepared a footnote disclosure for the taxpayer's income tax return. However, since this treatment is dictated by the Internal Revenue Code, no disclosure is really required.
If a Section 83(b) election was made, the shares would have been treated "as if" they were vested for AMT reporting when the ISO was exercised in 2014, which would have resulted in a big tax for that year.
Think carefully before making the election, especially if it seems likely you will soon be leaving your employer and will have to forfeit shares.
If your tax return preparer reported AMT income for an early exercise of ISOs and you didn't make a Section 83(b) election, and you want help amending your tax return to claim a refund, call Thi Nguyen for an appointment at 408-286-7400, extension 206.
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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.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.
For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.
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P.S.
My daughter and her husband, Holly and Dan Baker, have a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs and their website address is marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at www.taxtrimmers.com/directions.shtml.
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Michael Gray, CPA2482 Wooding Ct.San Jose, CA 95128(408) 918-3162FAX: (408) 938-0610email: mgray@taxtrimmers.comHours: 8am - 5pm PDT Monday - Friday
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