Michael Gray, CPA's Tax and Business Insight

May 5, 2020

© 2020 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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Janet Gray at Villa Montalvo
Here's Janet on a hike at Montalvo Arts Center in Saratoga, California

Happy Mothers' Day!

Mothers' Day will be celebrated on Sunday, May 10 this year. Remember to express your appreciation to your mother and other mothers who have contributed to your life.

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Happy Memorial Day!

Memorial Day will be celebrated on Monday, May 25 this year. Memorial Day is the unofficial beginning of summer. Please honor those who died defending our country.

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Family celebration.

My daughter Holly Baker and her husband Dan are celebrating their wedding anniversary during May. Happy anniversary!

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See your tax advisor about whether you should be filing amended income tax returns or claims.

There were many retroactive tax relief measures included in the CARES Act, including allowing net operating loss carrybacks, temporarily repealing excess loss limitations, and allowing bonus depreciation for qualified improvement property. If you have a business or rental real estate, consult with your tax advisor to find out whether you should file amended income tax returns or other claim forms to get these tax benefits or to change elections that you claimed for 2018 or 2019.

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It's time to finish preparing 2019 tax returns.

The deadlines for filing many tax returns and making estimated tax payments has been changed to July 15, 2020. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.

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Haven't received your Economic Impact Payment yet?

Please be patient. The IRS is processing millions of payments. It's like everyone submitted income tax returns requiring tax refunds at once. You can try using this web page, but I didn't have any luck with it. https://www.irs.gov/coronavirus/get-my-payment

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Some SSI and VA recipients must register by May 5 to receive bigger Economic Income Payment.

The IRS says Supplemental Security Income (SSI) and Department of Veterans Affairs (VA) beneficiaries must act by Tuesday, May 5 if they didn't file a federal income tax return for 2018 or 2019 and they have qualifying dependents to increase their Economic Income Payment.

$500 is added to the payment for each child that would qualify for the child tax credit.

Just go to IRS.gov and click "Non-Filers: Enter Payment Information Here."

(IR-2020-86 https://www.irs.gov/newsroom/va-ssi-recipients-with-eligible-children-need-to-act-by-tuesday-may-5-to-quickly-add-money-to-their-automatic-economic-impact-payment-plus-500-push-continues)

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Low-income U.S. residents are eligible to get an economic impact payment.

Individuals who didn't file an income tax return for 2018 or 2019 because their income was too low should register with the IRS to get an economic impact payment. These individuals include married couples with income below $24,400 or single persons with income below $12,200.

Individuals who are claimed as a dependent by someone else aren't eligible for the payment.

The economic impact payment is usually $2,400 for married couples and $1,200 for single persons plus $500 each for most dependent children who are under age 17.

These individuals should register by going to the IRS home page, www.IRS.gov, and clicking Non-Filers: Enter Payment Info Here. Then enter Social Security Number, name, address and dependents.

If this doesn't apply to you, maybe you know someone it does apply to. Please tell them about it.

(IRS COVID Tax Tip 2020-51, May 5, 2020.)

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Avoid filing paper income tax returns right now.

The IRS has reduced its staffing due to the coronavirus pandemic, and isn't processing paper income tax returns. To avoid delays processing your 2019 income tax returns, including receiving any refund you might be entitled to, efile your income tax returns.

By the way, the IRS can't respond to paper correspondence and is not staffing its toll-free live-service telephone lines. You can submit correspondence by FAX. Correspondence received from the IRS should indicate a FAX number where you can send a response.

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Attention CPAs.

Do you need help writing content for your web site, books to promote your CPA firm, your CPA firm newsletter or promotional communications? Maybe I can help. Call me, Michael Gray, at 408-918-3161 or email mgray@profitadvisors.com.

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Were you able to "tune in" for my webinar on April 22, 2020?

On April 22, 2020, I gave a two-hour webinar about coronavirus-related developments for the California Education Foundation of the California Society of Certified Public Accountants. The webinar was free and open to the public, and included continuing education credits for CPAs and attorneys. There were a record-breaking 1,863 registrations for the event and 1,170 people actually attended. The chat box was shut down because there were so many questions.

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Check my blog for coronavirus-related tax developments.

We have been sending most of my blog posts relating to coronavirus-related tax developments to you. You can find them at www.michaelgraycpa.com.

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Expenses paid with forgiven PPP loans aren't tax deductible.

The IRS has issued guidance relating to the tax deductibility of expenses paid with a Paycheck Protection Loan that is forgiven. (Notice 2020-32. https://www.irs.gov/pub/irs-drop/n-20-32.pdf)

According to the CARES Act, the forgiveness of indebtedness is not taxable income. (CARES Act Section 1106(i).)

The CARES Act doesn't specify whether the expenses are tax deductible.

A Paycheck Protection Loan is eligible for forgiveness when the proceeds are used for the following expenses during the 8-week "covered period" beginning on the the loan's origination date (CARES Act Section 1106(b)):

  1. Payroll costs
  2. A payment of interest on a covered mortgage obligation
  3. A payment on a covered rent obligation
  4. A covered utility payment

The IRS reminds taxpayers that, according to Internal Revenue Code Section 265(a)(1), no deduction is allowed for any item that is allocable to tax-exempt income.

To receive tax-exempt income from the federal government and to be allowed a tax deduction paid using the income would be a double benefit.

Taxpayers and their tax return preparers should note that these items won't be tax-deductible on their 2020 income tax returns.

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Should you skip taking a distribution from a retirement plan during 2020?

Senior taxpayers don't have to take required minimum distributions from IRAs or qualified plans, like 401(k) plans or profit sharing plans during 2020. Since securities values are down, it's generally a good idea to keep the assets in the retirement plan, if you can afford it.

If you have already taken one or more distributions from an IRA or a retirement plan this year, see your tax advisor about possibly returning the distribution to the plan via a rollover. Remember, only one rollover is allowed from an IRA during a twelve-month period and rollovers aren't allowed for inherited accounts.

There is a new exception for coronavirus-related distributions by taxpayers who are up to age 59 . See your tax advisor.

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Watch California conformity for new federal tax laws.

For many provisions of the CARES Act, California has to pass conformity legislation or different rules will apply for California income tax reporting. For example, the CARES Act increases the loan limit from a 401(k) account to $100,000. The limit remains $50,000 for California. Loans exceeding that amount will be treated as taxable distributions, possibly subject to an early distribution penalty.

The limit for itemized deductions of cash charitable contributions on a 2020 federal income tax return has been increased to 100% of adjusted gross income. The California limitation for charitable contributions is generally 50% of federal adjusted gross income.

Under federal tax law, the cancellation of debt for qualifying expenses paid with a Paycheck Protection Loan is tax exempt. (Items paid with the forgiven loan are also not tax deductible.) Under California tax law, the cancellation of debt is taxable income.

Note these differences could change if California adopts conforming legislation.

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California extends payments of some sales taxes.

The California Department of Tax and Fee Administration has announced that businesses with less than $5 million in annual taxable sales for the 2019 calendar year may defer paying up to $50,000 in sales and use tax liability without interest or penalties.

Eligible businesses will make up to 12 monthly payments for the deferred payment obligation.

Here is a URL to get additional information. www.cdtfa.ca.gov/services/covid19.htm#small-business-payment or call CDTFA customer services at 800-400-7115.

(Spidell's California Taxletter, May 2020, p. 11. "Small businesses get additional sales and use tax relief.")

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Deduction for land repair claimed too late.

A taxpayer suffered damage to his property when a tree fell due to heavy rains during 2005. State Farm Insurance denied his insurance claim in 2007. The taxpayer finished repairing the damage in 2011 and claimed the loss on his 2009 income tax return. The taxpayer said the full extent of the loss was determined in 2009. The California Office of Tax Appeals (OTA) upheld the Franchise Tax Board in finding the loss should have been claimed on the taxpayer's 2007 income tax return, because that's when State Farm Insurance denied the claim. The OTA said the uncertainty relating to the damage didn't relate to the scope of the damage, but to the extent of the repairs required to correct it.

(We might see another appeal on this one.)

(Appeal of Michael, 2019-OTA-457, April 26, 2019 and 2020-OTA-031, February 5, 2020.)

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Be careful when modifying the terms of an incentive stock option.

Sometimes events happen where an employer wants to extend the term of an incentive stock option, such as an incentive to keep a key employee.

Such an extension can have disastrous consequences.

According to Internal Revenue Code Section 424(h), the modification, including an extension, of an incentive stock option is considered the grant of a new option. If the option price isn't changed to the fair market value on the date of the extension, the option probably won't qualify as an incentive stock option (Internal Revenue Code Section 422(b)(4)). The option will also probably violate the option pricing rules under Internal Revenue Code Section 409A, resulting in severe penalty taxes for the employee!

Look before you leap!

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Accelerated vesting isn't a modification of an ISO.

According to Internal Revenue Code Section 424(h)(3)(C), the accelerated vesting of ISOs isn't a modification.

This is helpful, since many companies accelerate the vesting of ISOs if the company is acquired.

However, if the option price of ISOs that are initially exercisable for the year exceeds $100,000, some of the ISOs will be converted to non-qualified stock options (NQSOs). (Internal Revenue Code Section 422(d).) The exercise of the NQSOs will result in ordinary compensation income, subject to withholding and employment taxes.

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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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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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