Michael Gray, CPA's Tax and Business Insight
June 3, 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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Table of Contents
- Happy Father's Day!
- Keep your letter from President Donald Trump confirming your economic impact payment.
- Did you have a net operating loss for 2017 or 2018?
- Did you have excess business losses subject to a limitation for 2018 or 2019?
- Did your business have Qualified Improvement Property for 2017 through 2019?
- Did your C corporation have unrecovered minimum tax credits?
- Remember July 15, 2020 has become a BIG due date!
- Need help with getting your tax returns, amended returns, and elections done?
- Attention CPAs.
- Estimated fee payment due July 15 for some calendar year LLCs.
- SBA extends time for returning Paycheck Protection Program loans.
- Should you file a superseded tax return?
- Haven't received your Economic Impact Payment yet?
- Efiling amended individual income tax returns is coming.
- Extensive first year repairs on RV results in California use tax.
- Check my blog for coronavirus-related tax developments.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: Predictably Irrational
- Follow me on social media!
- Check out my blogs.
- PS Marché Aux Fleurs
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Clive Baker, who is my grandson, assembled this Hogwarts Lego Project Happy Father's Day!
Fathers' Day will be celebrated on Sunday, June 21 this year. Remember to express your appreciation to your father and other fathers who have contributed to your life.
Keep your letter from President Donald Trump confirming your economic impact payment.
The IRS is advising taxpayers to keep the letter for when they prepare their income tax returns for 2020. The economic impact payment will be recomputed and, if a higher amount is computed, taxpayers will receive the additional amount with their 2020 tax refund.
Did you have a net operating loss for 2017 or 2018?
The CARES Act made some major changes for net operating losses and excess business losses. The 80% of taxable income limitation for deducting net operating losses has been retroactively suspended for taxable years beginning after December 31, 2017 and before January 1, 2021.
For losses arising in a taxable year beginning after December 31, 2017 and before January 1, 2021, net operating losses may be carried back 5 taxable years. Previously, net operating loss carrybacks weren't allowed for those years.
Taxpayers may elect to waive the carryback.
Taxpayers may revoke a previous election to waive a net operating loss carryback by JULY 27, 2020. The revocation may be filed with an amended income tax return, Form 1045 (for noncorporate taxpayers) or Form 1139 (for C corporations.) Write "Filed pursuant to Rev. Proc. 2020-24" at the top of the form.
There are special rules when a taxpayer reports taxable offshore income under Internal Revenue Code Section 965. See a tax advisor if that applies to you.
The IRS has also given six additional months to submit "Quick Refund" Forms 1045 and 1139 for taxpayers that have a net operating loss that arose in a taxable year that began during 2018 and ended before June 30, 2019. The usual deadline for these forms is 12 months after the close of the taxable year in which the net operating loss arises, so for the applicable years, it is 18 months after the close of the year.
Since the IRS isn't currently processing paper-filed income tax returns, Forms 1139 may be faxed to 844-249-6236 and eligible Forms 1045 may be faxed to 844-249-6237.
(Revenue Procedure 2020-24, Notice 2020-26.)
Did you have excess business losses subject to a limitation for 2018 or 2019?
The limitation for excess business losses of noncorporate taxpayers (including individuals) was suspended by the CARES Act for 2018 through 2020, which means amended federal income tax returns might have to be prepared to claim additional business loss deductions on your federal income tax returns. See your tax advisor. If you prepared your own income tax return, it might be worth the investment to have a professional tax return preparer prepare your amended income tax returns.
(The limitations for excess passive loss deductions were NOT suspended. See a tax advisor if you don't know the difference.)
Did your business have Qualified Improvement Property for 2017 through 2019?
Qualified improvement property is an improvement to an interior portion of a building that is nonresidential real property provided the improvement is placed in service after the date the building was first placed in service. Improvements relating to the enlargement of a building, an elevator or escalator, or the internal structural framework of the building aren't qualified improvement property.
A drafting error in the Tax Cuts and Jobs Act of 2017 made the property subject to a 39 year depreciable life and not eligible for 100% bonus depreciation.
The CARES Act includes a technical correction defining qualified improvement property as 15 year property, qualifying for bonus depreciation. This correction is retroactive to the date of enactment of the Tax Cuts and Jobs Act of 2017, which was December 20, 2017.
Even with this technical correction, some taxpayers won't qualify for bonus depreciation for this property. Taxpayers that are otherwise subject to the limitation for business interest deductions under Internal Revenue Code Section 163(j) (generally they have average annual gross receipts for the three prior years of $26 million for tax years beginning in 2020) and make elections to be excluded from the limitations, notably electing real property trade or businesses, electing farming businesses, and certain infrastructure trades or businesses, must use the alternative depreciation system instead of the modified accelerated depreciation system. For these businesses, depreciable real estate has a useful life of 39 years, so they don't qualify for bonus depreciation on qualified improvement property.
Taxpayers with commercial buildings that had qualified improvement property placed in service after 2017 should amend their 2017, 2018 and 2019 income tax returns to claim bonus depreciation for the year the property was placed in service. Alternatively, they can adjust the depreciation using Form 3115. (CARES Act § 2307)
The IRS has issued Revenue Procedure 2020-25 for making the change to claim bonus depreciation or a shorter depreciable life. The change is temporarily considered a change of accounting method with a Section 481(a) adjustment. For property placed in service after December 31, 2017, the change can be made on amended income tax returns for 2018, 2019 or 2020 by October 15, 2021, but no later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed, or using Form 3115. Instead of filing an amended return, partnerships subject to the centralized partnership audit regime may file an administrative adjustment request (AAR). The Revenue Procedure is effective April 17, 2020.
(Revenue Procedure 2020-25)
Did your C corporation have unrecovered minimum tax credits?
The alternative minimum tax was repealed for C corporations by the Tax Cuts and Jobs Act of 2017. Unused minimum tax credits were scheduled to be refundable with an annual 50% limitation for taxable years beginning in 2018, 2019, and 2020 until a 100% limitation would be applied for taxable years beginning in 2021.
Under the CARES Act, taxpayers may elect to claim a refundable credit for 100% of the balance for taxable years beginning in 2018 or 2019.
The election to claim the 100% limit for 2018 can be made using an application of tentative refund form (Form 1139). The form should be filed by December 31, 2020. The IRS should issue the refund within 90 days after receiving the form. (CARES Act § 2305)
Remember July 15, 2020 has become a BIG due date!
The IRS and the Franchise Tax Board have extended the due date for the balance due for 2019 calendar year income tax returns and filing 2019 calendar year income tax returns and the first two 2020 estimated income tax payments to July 15, 2020. (The extension applies to federal income tax returns and payments due after April 1, 2020.) 2019 IRA contributions also have to be deposited by that date.
If you can't finish your 2019 income tax returns by July 15, 2020, you can still file an extension for additional time to file to October 15, 2020 for individuals and calendar year corporations, September 15, 2020 for S corporations and partnerships, or September 30, 2020 for calendar year estates and trusts.
Here's a URL to the IRS's page of questions and answers relating to the extension. https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers
Here's a URL to the Franchise Tax Board's page of questions and answers relating to the extension. https://www.ftb.ca.gov/about-ftb/newsroom/covid-19/extensions-to-file-pay.html
Here's a URL to the California Department of Tax and Fee Administration's page of questions and answers relating to the extension. https://www.cdtfa.ca.gov/services/covid19.htm
Need help with getting your tax returns, amended returns, and elections done?
To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.
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@taxtrimmers.com.
Estimated fee payment due July 15 for some calendar year LLCs.
California LLCs pay two items to the Franchise Tax Board: an annual tax of $800 and an annual fee based on the gross receipts of the LLC.
The estimated annual fee is paid with Form 3536 by July 15 for calendar year LLCs or online using WebPay at https://www.ftb.ca.gov/pay/bank-account/. There is no fee when the gross receipts for the LLC are less than $250,000. The estimated fee can be based on last year's income tax return when it is for twelve months.
SBA extends time for returning Paycheck Protection Program loans.
Some businesses that received Paycheck Protection Programs loans were surprised by a reduction in loan forgiveness based on a reduction in the workforce of the business as of June 30, 2020. They discovered they would have more tax benefits using tax credits for payroll under the CARES Act.
The SBA has modified the rule allowing the return of PPP loan funds from May 18, 2020 to the later of (1) May 29, 2020 or (2) 10 calendar days after disbursement or cancellation of a PPP loan.
If you are within that second window, it's probably a good idea to review your businesses compliance under the PPP loan rules. Returning the funds could make your business eligible to claim an employee retention credit.
There are proposals pending in Congress that are expected to be passed this week. Under the proposals, the period for qualifying wages to be paid using PPP loan fund would be extended and the percentage of loan funds that can be used for expenses like rent and utilities would be increased.
(SBA RIN 3245-AH45. Here's a URL to the announcement. https://www.sba.gov/document/policy-guidance--ppp-interim-final-rule-second-extension-limited-safe-harbor-respect-certification-concerning-need
Should you file a superseded tax return?
Since the filing date for 2019 income tax returns has been moved from April 15 to July 15, taxpayers have the opportunity to refile their federal income tax returns with superseded tax returns. This is an opportunity to change the instructions for applying an overpayment to 2020 versus a refund, to make corrections of errors or omissions to avoid accuracy-related penalties, or to make other changes relating to net operating losses, excess losses, and claiming bonus depreciation for qualified improvement property. Superseded tax returns are not eligible for efiling, so they must be paper-filed. See your tax advisor.
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. (My family members and I have received our payments. I hope you have, too!) https://www.irs.gov/coronavirus/get-my-payment
Efiling amended individual tax returns is coming.
The IRS has announced that taxpayers will be able to efile amended income tax returns, Form 1040X, starting this summer. This is a particularly important development because the IRS isn't processing paper-filed income tax returns right now.
Extensive first year repairs on RV results in California use tax.
A taxpayer who was a California resident purchased an RV in California for use in Arizona. The RV was delivered to Lake Havasu, Arizona, but returned to California for repairs. There were no facilities for warranty repair in Arizona. The RV was in California for repairs for a total of 115 days during the 12 months after purchase. Finally, the manufacturer replaced it under the "lemon law."
The California Office of Tax Appeals upheld the California Department of Tax and Fee Administration in assessing California Use Tax for the vehicle. The exception for the "first functional use test" for repairs is limited to 30 days, and the time in California in this case exceeded that.
The taxpayer was allowed to reduce the California use tax for $4,875 of sales tax paid to Arizona.
(Appeal of Steward, 2020-OTA-052, November 13, 2019, petition for rehearing denied 2020-OTA-051, March 11, 2020.)
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.
Please share your good experiences with Michael Gray, CPA.
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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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