Michael Gray, CPA's Tax and Business Insight

December 6, 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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Mike Gray and his wife Janet in Santa hats.
Janet and I wish you and yours a very Merry Christmas and Happy Holidays!

Happy Holidays!

This year, Hanukkah begins the evening of December 2. Of course Christmas Day will be Wednesday, December 25. Our office will be closed December 24 and 25 and January 1. Hope 2019 has been a great year for you and 2020 will be even better. "God Bless us, every one!"

Michael Gray will be away from the office starting December 13, returning December 23. Dawn Siemer won't be available starting December 23, returning January 6.

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'Tis the season for year-end planning.

There is less than a month remaining for 2017. Make your year-end planning appointment now. Thi Nguyen, CPA will have limited availability. To make an appointment with her, call 408-286-7400, extension 206.

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Fourth quarter calendar year corporate estimated tax payment is due December 16.

The final 2019 estimated tax payment for calendar-year corporations is due December 16, 2019. Not all corporations can base their federal estimated tax payments on the previous year's income tax return. For example, new corporations and corporations that had no tax liability for the previous year must compute their estimated tax using the current year's facts. See your tax advisor for assistance.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2020. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

Consider making the California or state payment by December 31, 2019 for a 2019 tax deduction. Watch the alternative minimum tax. Also, remember the total tax deduction for state income tax payments and real estate tax is limited to $10,000 and the standard deduction has been increased to $24,400 for married filing joint and $12,200 for singles and married filing separate.

See your tax advisor.

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First property tax payment is due.

The first property tax payment for the 2019-2020 fiscal year in Santa Clara County is due December 10. Avoid a late payment penalty - mail your payment now!

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Calendar year accrual basis corporations should pay related parties by December 31.

In order to currently deduct expenses due to certain related persons, accrual-basis corporations must pay them by the year-end. These include wages, bonuses, interest expense, rent, etc. Be sure to review the status of these items with your tax advisor by December 31.

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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.

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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 private group, and I will approve your membership.

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Check out my new blog.

I have started a new blog with business improvement ideas. Please check it out and consider subscribing. Here's a link to the blog. http://www.profitadvisors.com/business-building-blog/.

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Michael Gray to speak about coming retirement plan changes.

Michael Gray will speak for the Santa Clara County Estate Planning Council on Monday, January 13, 2020 at David's Restaurant in Santa Clara, California. The subject is the Retirement Enhancement and Savings Act of 2019. This is proposed legislation passed by the House of Representatives that is expected to be enacted. Registration is at 5:30 p.m. and dinner starts at 6:15 p.m. Here is a link for details and registration. https://www.sccepc.org/events/event/18139.

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IRS issues proposed regulations for retirement account distributions.

The IRS has issued proposed regulations relating to required minimum distributions from retirement accounts. Under the new regulations, the amount of required minimum distributions will be reduced, but the "stretch out" of distributions for inherited accounts will be eliminated for many accounts. See my blog post about this subject. http://www.michaelgraycpa.com/posts/irs-proposed-regulations-will-keep-more-in-retirement-accounts/

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Final regulations eliminate "clawback" of gifts under tax reform.

Under the Tax Cuts and Jobs Act of 2017, the lifetime exemption equivalent for gifts and bequests was increased from $5 million, indexed for inflation, to $10 million, indexed for inflation. The increase will expire on January 1, 2026. The IRS has finalized proposed regulations that were issued on November 23, 2018 that state gifts made under the exemption for Tax Reform won't be subject to the lower exemption for a death after December 31, 2025.

(TD 9884, November 26, 2019.)

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IRS issues audit guidelines for partial dispositions of a building.

Taxpayers may elect to report a loss for a partial disposition of a building. A disposition occurs when ownership of an asset is transferred or when the asset is permanently withdrawn from use in the taxpayer's trade or business or income producing activity. The IRS has issued a Process Unit explaining how an auditor should review whether the amount claimed for the deduction was proper. Tax advisors should study the Process Unit to assure they are meeting the IRS's standards when claiming the deduction.

Here's a link to the IRS Process Unit. https://www.irs.gov/pub/irs-utl/dce_p_252_04_03.pdf

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Casualty gain for home destroyed by fire and gain from later sale of land both qualified for sale of residence exclusion.

A married couple owned lived in a home as their principal residence. They moved to another home and converted the residence to a rental. The home was destroyed by a fire. The couple received fire insurance for the value of the building. Two years later, they sold the vacant land. The IRS ruled the insurance proceeds for the building and the sale of the land should be treated as one sale, qualifying for the $500,000 exclusion for sale of a principal residence. The IRS also ruled the taxpayers had converted the property to an investment property qualifying for a Section 1031 exchange to defer the gain for any amount exceeding the $500,000 exclusion.

(Private Letter Ruling 201944006, July 31, 2019.)

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Some retirement plan limits increase for 2020.

The IRS has announced cost of living adjustments for retirement plan contributions for 2020.

(Notice 2019-59, November 6, 2019.)

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Services to a California business aren't necessarily California-source income.

The California Office of Tax Administration ruled, in a nonprecedential decision, that a sole proprietor located in Texas wasn't subject to California tax on income from his services purchased by a California LLC. In this case, the sole proprietor's services were used by the California LLC's customer, located in Canada. Since the benefit of the services was received in Canada, not California, the income isn't sourced to California.

The Franchise Tax Board made its initial assessment based on a Form 1099-MISC received from the California LLC for $48,000.

"Market-based sourcing" is resulting in a lot more confusion than anyone expected.

(Appeal of Wood, 2019-OTA-264, July 8, 2019.)

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If you exercised an incentive stock option and haven't sold the stock, consider using the "escape hatch."

I explained the details in the November 2018 edition of Michael Gray, CPA's Option Alert, now available at http://www.stockoptionadvisors.com/stock/optionalert/2018-11/. When you sell the stock during the same year as the year of exercise, the alternative minimum tax adjustment is eliminated. If the stock is replaced with a wash sale (buying back the stock during the period from 30 days before the sale to 30 days after the sale) or the sale is to a related person, the strategy doesn't work. This strategy generally only works for vested publicly traded stock.

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Consider accelerating or deferring income.

Personal tax rates are low right now, so many high-income taxpayers would actually benefit from accelerating income to 2019. Usually we would be thinking about deferring income at the year end. See your tax advisor about what makes sense for you.

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Estates and trusts should plan distributions.

The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed estate or trust income exceeds $12,751. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, January 31, 2020) as distributed for a taxable year (for example 2019).

In most cases, capital gains don't qualify for the distribution deduction. See your tax advisor.

The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) to avoid unpleasant surprises.

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Business retirement plans for calendar-year businesses should be in place by December 31.

In order to make contributions for 2019, business retirement plans such as 401(k) plans and profit sharing plans for calendar-year businesses must be in place by December 31. Employee contributions to a 401(k) plan must also be paid by December 31. If yours isn't in place yet, contact your retirement plan advisor immediately.

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Should you buy business equipment before December 31?

The expense election for business equipment purchases is now $1 million. This election is even available for some SUVs and heavy trucks with a $25,000 limit, and some trucks and cargo vans don't have a limit. The excess might be eligible for bonus depreciation. See your tax advisor for details. Remember the expensed amount is only deductible against business income.

100% bonus depreciation also now applies to used property. Although Congress intended to simplify and expand bonus depreciation for some building improvements, they made errors in the legislation that need to be corrected.

See your tax advisor.

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Seniors, remember to take your required minimum distributions.

Generally, when a participant in a retirement plan or an IRA reaches age 70 , minimum distributions are required to be made by December 31 each year. The distributions are also required to be made for inherited accounts. Roth accounts are excluded from this rule during the original owner's lifetime. See your tax advisor for details.

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Remember to take a physical inventory on January 1.

Calendar year businesses with inventories should take a physical count as of January 1. This creates a "clean" record for the income tax return.

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2020. Be sure you have installed those updates before processing your first payroll for 2019.

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No California FUTA makeup payment for 2019.

California employers will NOT have an additional tax for a credit reduction on their Federal Unemployment Tax Return, Form 940, for 2019.

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Should you make additional tax payments before December 31?

State estimated tax payments and early property tax payments made by December 31 are generally tax deductible for the regular tax. However, many people are finding they are subject to the alternative minimum tax. Deductions for taxes (and miscellaneous itemized deductions) aren't allowed for the alternative minimum tax, so there could be no benefit for a tax prepayment. A tax advisor can project your tax picture to determine if the AMT will apply. Turbo Tax and other tax preparation software can also be used to make the computations.

This situation has changed somewhat because of the 3.8% net investment income (NII) tax. Part of the state tax payment may be a "good" deduction for the NII tax even though there is no AMT benefit. See your tax advisor.

This decision has been more complicated by the new federal limit of $10,000 for the total of state and local income taxes and real estate taxes.

See your tax advisor.

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Should you donate appreciated publicly traded stock?

It's the season for giving. Many of us make extra donations during December to share our bounty with others. Appreciated publicly-traded stock that has been held for more than a year is an ideal asset for a donation. Under the Internal Revenue Code, the long-term capital gain is excluded from taxable income and the charitable contribution deduction is the fair market value of the stock, so there is a double tax benefit. Also, publicly traded stock isn't subject to the appraisal requirements that apply to other property. It's a win-win-win! Remember to get a good acknowledgement letter to document the donation, including a statement that "no goods or services were received in exchange for the donation."

Charitable contributions of appreciated long-term capital gain property are limited to 30% of adjusted gross income.

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Donating a car to charity?

Remember that an appraisal is required for noncash contributions with a value exceeding $5,000. See Form 8283 and instructions as the IRS web site, http://www.irs.gov. (There is a Declaration of Appraiser on the form.) There is an exception to the rule for vehicles donated to a charity. If the charity sells the car, the taxpayer may rely on the sales price disclosed on Form 1098-C. The original Form 1098-C is submitted to the IRS with your income tax return (or otherwise sent to the IRS with Form 8453 if you efile).

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Will you benefit from itemizing deductions for 2019?

Since itemized deductions have been reduced or eliminated for 2019 and the standard deduction has been increased, many taxpayers won't benefit from itemizing their deductions for 2019, so scrambling for year-end deductions could be wasted. See your tax advisor about your situation.

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Should you adopt an accounting policy for small equipment purchases by December 31, 2019?

An election is available to currently deduct small expenditures when the taxpayer doesn't have an applicable (audited) financial statement. Items up to $2,500 may be currently deducted, effective for amounts paid or incurred for tangible property on or after January 1, 2016, for taxable years beginning on or after January 1, 2016. The election doesn't apply for inventoriable costs.

Among other requirements, in order to qualify for the current deduction: at the beginning of the taxable year, the taxpayer must have accounting procedures treating as an expense for non-tax purposes - (1) amounts paid for property costing less than a specified dollar amount; or (2) amounts paid for property with an economic useful life of 12 months or less. The taxpayer must also treat the amount paid for the property as an expense on its books and records in accordance with the accounting procedures. The amount paid for the property may not exceed $2,500 per invoice or per item, as substantiated by the invoice.

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Note the de minimus election is made each year on the income tax return for the business.

In order to be in position to make the election for 2020, you must have the accounting policy in place by December 31, 2019 and implement that policy in your accounting throughout 2020. If you didn't have the policy for 2019, consider getting it in place by December 31, 2019. We recommend that the policy should be written.

Under tax reform, the tax benefit of making this election has been reduced because of more generous expense election limits and bonus depreciation.

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Remember personal exemptions have been repealed for 2019.

Exemption deductions for dependents have been repealed for tax years beginning after 2017 and before 2026. Instead, taxpayers may claim a tax credit for dependent children and other qualifying relatives. The credit is $2,000 for each qualifying child under age 17 and $500 for each other qualifying child and relative. This credit is phased out if the taxpayer's modified adjusted gross income exceeds $400,000 for married filing jointly and $200,000 for other taxpayers.

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Reminder - Federal deduction limited for donations to California College Access Tax Credit Fund.

A taxpayer's California income tax liability can be reduced by 50% of donations to the California College Access Tax Credit Fund. The IRS has announced that, effective for contributions made after August 27, 2018, the federal charitable contribution deduction should be reduced for the amount allowed as a reduction of state income taxes as a "quid pro quo" (benefit received back by the donor).

(IR-2018-172, August 24, 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 and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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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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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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Visit our new article!

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Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Want to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

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.

I'm also on Facebook, LinkedIn, and Google+.

you can also follow me on other social media sites, Facebook, LinkedIn, and Google+.

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml

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Real estate investors, have you subscribed to Michael Gray, CPA's Real Estate Tax Letter at no charge or obligation?

For details, visit www.realestatetaxletter.com

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Check out my blog.

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

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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, 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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