Michael Gray, CPA's Tax and Business Insight

February 4, 2021

© 2021 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!

Route to _______   _______   _______   _______   _______

(If you find this information valuable, please pass it on to a friend!)

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Lego piano
This LEGO piano was assembled by my grandson, Clive Baker.

Valentine's Day!

Remember to show your love and appreciation for your loved ones on Sunday, February 14. Book your reservation at your favorite restaurant now. (In California, most restaurants are limited to outdoor dining and have limited capacity.)

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February celebrations.

My grandson, Clive Baker, and Thi Nguyen, CPA, who is now serving my former clients, are celebrating birthdays this month. Happy birthday Clive and Thi! My wife's sister, Gail Johnston, and her husband Lane are celebrating their wedding anniversary this month. Congratulations!

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Get our Roth IRA book update for half-price!

Our new updated book, How to Use Roth & IRA Accounts to Provide a Secure Retirement, 2021 Edition has finally been released. Considering the delay, we are extending our half-price offer for that book. As a subscriber to this newsletter, you can get it for half price at www.siliconvalleypublishingcompany.com. Use the code ROTH21. You can also call your order to Dawn Siemer at 408-918-3162. This offer expires February 28, 2021.

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Remember federal income tax returns for calendar-year S corporations and partnerships are due March 15.

(Federal income tax returns for calendar-year C corporations are due April 15.)

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The election to be an S corporation for calendar-year corporations is also due March 15.

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Have you received your tax preparation materials?

If you haven't received a tax data organizer or instructions to submit information online and want tax return preparation service by my successor, Ms. Thi Nguyen, CPA, please contact her at thi@atl-cpa.com.

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File your tax return early, if you can.

Identity theft has become a rampant problem. Scammers are filing bogus income tax returns and claiming refunds for withholding and estimated tax payments of innocent taxpayers. It can take months to straighten out a duplicate filing situation. Your easiest defense is to be the first one to file an income tax return under your social security number. Individuals who have suffered from identity theft in the past can get a special identification number for electronic filing from the IRS. Meanwhile, many taxpayers must wait to receive documents like Schedule K-1 as late as September, and have to file for extension of time to file their tax returns.

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Mail Form 1099-NEC to California.

The Internal Revenue Service sends most 1099 information electronically to California, but not for Form 1099-NEC. The due date for paper filing the 2020 form is February 28, 2021. The due date for electronic filing is March 31, 2021.

Form 1099-NEC for payments to a nonresident who performs services for a California business should be sent to the Franchise Tax Board. The income is generally taxable in California.

Mail the forms to: Franchise Tax Board, P.O. Box 942840, Sacramento, CA 94240-6090

(Spidell's Flash E-mail, January 13, 2021, "California 1099-NEC filing requirements.")

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Temporary relief for employers and employees using the automobile lease valuation rule.

Personal use of a company car should be reported on Form W-2. The IRS has issued temporary relief for the situation where an employee's personal use of a vehicle is more than 50% because of the pandemic. Vehicle use previously determined using the automobile lease valuation rule may be changed effective March 13, 2020 to the cents per mile method. Note the fair market value of the vehicle can't exceed $50,400 to use the cents per mile method. If you have questions about this issue, contact your tax advisor.

(Notice 2021-7.)

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Final regulations issued for business interest deduction limitation.

The deduction for business interest was limited in the Tax Cuts and Jobs Act of 2017 and increased by the CARES Act. The IRS has issued final regulations explaining how to compute the limitation. These rules are complex. If your business pays interest expenses, I recommend that you discuss with your tax advisor whether the rules apply to you.

(T.D. 9943.)

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Final carried interest regulations issued.

The IRS has issued final regulations about recharacterizing long-term capital gains for a partner that holds one or more applicable partnership interests as short-term capital gains. These relate to venture capital operations where the compensation for investors is realized as capital gains. The recharacterization applies when the investment isn't held for more than three years. The final regulations have changed from proposed regulations previously issued by the IRS. If you think this rule might apply to you, discuss it with your tax advisor.

(T.D. 9945.)

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IRS answers questions about the second economic impact payment.

The IRS is issuing second economic impact payments under the COVID-Related Tax Act, passed December, 2020. My son and I received them as debit cards. Here is a link to an IRS web page with questions and answers relating to second economic payments. https://www.irs.gov/coronavirus/second-eip-faqs

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Final regulations issued for health reimbursement arrangements.

The IRS has issued final regulations clarifying the application of the employer shared responsibility provisions and certain nondiscrimination rules for health reimbursement arrangements integrated with individual health insurance coverage or Medicare.

(TD 9949.)

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Electronic filing for individuals starts February 12, 2021.

The IRS has announced tax season will start February 12, 2021, when it will start accepting and processing 2020 individual income tax returns.


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IRS gives penalty relief relating to beginning partnership capital account reporting.

For 2020, many partnerships (including LLCs taxed as partnerships) will be changing how they report activity for partners' capital accounts to tax-basis reporting. The IRS announced it will waive penalties for reporting incorrect information when the partnership can show it took ordinary and prudent business care in following the 2020 Form 1065 instructions to report its partners' beginning capital account balances.

(Notice 2021-13.)

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Online Power of Attorney and Tax Information Authorization forms.

The IRS has announced it has initiated an online option so that tax professionals can remotely get signatures from individual and business clients and submit authorization forms electronically.

(IR 2021-20, January 21, 2021.)

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Virtual currency to be added to FBAR reports.

The Financial Crimes Enforcement Network (FinCEN) has announced its intention to issue regulation requiring the foreign accounts holding virtual currency should be reported on annual FBAR reports by U.S. persons with foreign financial assets exceeding $10,000 at any time during a calendar year.

(FinCEN Notice 2020-2 (December 31, 2020.)

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IRS releases guidance for corporate donations for disaster relief.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 enacted a corporate charitable contribution deduction up to 100% of taxable income for donations used for qualified disaster relief. Qualified disaster areas are those in which a major disaster has been declared under Section 401 of the Robert T. Stafford Disaster and Emergency Assistance Act. These include major disaster declarations made by the President during the period beginning January 1, 2020 and ending on February 25, 2021 for occurrences specified by the Federal Emergency Management Agency beginning after December 27, 2019 and no later than December 27, 2020.

The taxpayer must receive a contemporaneous written acknowledgment from the donee organization that the contribution will be used for those disaster relief efforts.

"Qualified disaster areas" don't include any disaster declaration relating to COVID-19.

Qualified contributions must be paid by the corporation during the period January 1, 2020 to February 25, 2021. The contributions must be paid in cash.

Considering the timing of the new law, the IRS understands written acknowledgements received by the taxpayer corporation might not include the disaster relief statement. The IRS won't challenge a corporation's deduction of a qualified contribution made before February 21, 2021 on the grounds the contemporaneous written statement doesn't include the disaster relief statement.

(IR 2021-27, January 29, 2021.)

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FTB say expenses paid using cancelled PPP loan must be reduced.

California hasn't conformed to a federal tax law change allowing an income tax deduction for business expenses paid using proceeds of a cancelled Paycheck Protection Loan. Legislation has been introduced, AB 281, conforming California's tax law to the federal tax law for this item. It hasn't passed at this time.

The Franchise Tax Board told representatives from Spidell Publishing that the correct way to report the debt cancellation on a California income tax or franchise tax return is to reduce the expenses by the debt cancellation amount used to pay them. "The information submitted to lenders to obtain loan forgiveness would be sufficient to document the amount of deduction reduced."

Schedule C PPP loan borrowers with no employees aren't required to make any expense adjustment if all of the PPP loan relates to payroll (their own earnings).

(Spidell's Flash E-Mail, February 1, 2021, "FTB provides guidance on PPP deductions.")

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EIDL grants are taxable in California.

Economic Injury Disaster Loans (EIDLs) are taxable in California.

The federal exclusion was enacted in the federal Consolidated Appropriations Act, which California hasn't conformed to.

(Spidell's Flash E-mail, January 26, 2021, "EIDL grants are taxable to California.")

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First year annual tax waived for LLCs, LPs and LLPs.

California has enacted a new exemption from the $800 annual tax for the first year of any limited liability entity organized and registered with the California Secretary of State on or after January 1, 2021 and before January 1, 2024. The $800 tax will kick in starting the second year. The exemption doesn't apply to LLC gross receipts fee.

(California Revenue and Taxation Code §§ 17935(f)(1), 17941(g)(1), 17948(e)(1) and 17942(d)(1).)

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Don't report taxable income twice!

A common error for employees who exercise employee stock options is to report their income twice. Ordinary income from exercising a non-qualified stock option or from the disqualified disposition of stock received from exercising an incentive stock option should be reported by the employer on Form W-2. The ordinary income amount is added to the tax basis (cost for computing gain and loss on your income tax return), reducing or eliminating the gain reported for the sale of the stock. Brokerage companies can also miss this adjustment on the information return for the sale. This is especially a common error for employees who skip the "interview mode" when preparing their own income tax returns using software like TurboTax.

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Remember to report the sale of option stock.

Employees who exercise their stock options and immediately sell the stock sometimes omit reporting the sale of the stock. They figure the income is already reported on their W-2 form. They are essentially right, but the IRS "matches" the income reported on income tax returns with information returns for the sale of securities issued by brokerage companies. See the above information, "Don't report taxable income twice!" If you add the option price to the ordinary income reported for the nonqualified stock option exercise or disqualified disposition of ISO stock resulting from an exercise and immediate sale, the cost should be equal to or slightly more (because of selling expenses) than the sales price of the stock.

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Watch reporting qualified sales of ISO stock.

A common error for employees who make a qualified disposition of ISO stock is to add the AMT income reported for the year of exercise to the cost of the stock. (A qualified sale is made more than two years after the grant of the ISO and more than one year after the exercise of the ISO.) Employees rationalize they have already paid income taxes for that income. The tax they paid was on the alternative minimum tax schedule, not the regular tax schedule, so there is no regular tax basis adjustment for the exercise. This is an error. The tax basis of the shares for regular tax reporting is generally the option price paid for the shares. (Note special rules apply when the option price is paid using other shares of employer stock. Those rules are beyond the scope of this explanation.)

The mechanism for recouping some of the AMT paid when the ISO was exercised is the minimum tax credit, reported on Form 8801. A second AMT Schedule D is prepared for the year of sale with the basis adjustment for the AMT income reported relating to the exercise of the ISO added to the tax basis on the AMT Schedule D for the sale of the ISO stock.

Does this make your head spin? Maybe you should hire someone who understands this to prepare your income tax returns. Contact Thi Nguyen, CPA at thi@atl-cpa.com to make an appointment.

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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, including chatbots. 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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Attention Accountants! Speed up processing your 2020 business closings!

Check out this trial balance software, EZ Trial Balance, that's super-easy to set up and use. There is a desktop version and an online version. The online version includes consolidations and ratio analysis for analytical review. http://www.eztrialbalance.com

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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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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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