Michael Gray, CPA's Tax and Business Insight

June 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!

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Mike and Janet at Lake Tahoe.
Janet and Michael Gray at Lake Tahoe, May 27, 2021

Happy Fathers' Day!

Fathers' Day will be celebrated on Sunday, June 20 this year. Remember to express your appreciation to your father and other fathers who have contributed to your life.

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Need help with getting your extended tax returns, amended returns, and elections done?

To make an appointment, contact Thi Nguyen, CPA at thi@atl-cpa.com.

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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://webapp.ftb.ca.gov/webpay/login/belogin? 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.

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Sales and Use Tax Return deadline extended.

The deadline for California sales and use tax returns that were originally due on April 30, 2021 has been extended to July 31, 2021, provided the taxpayer is reporting less than $1 million.

(Spidell's California Taxletter, June, 2021, p. 16, "Thumb Tax - April 30 sales and use tax return deadline extended.")

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Remember this AMT adjustment for disqualified dispositions of ISO shares after the year of exercise.

For regular tax reporting, there is a disqualified disposition of shares acquired by exercising an incentive stock option (ISO) when the shares sold within the later of two years after the options were granted or one year after the exercise. Transactions involving ISO shares are reported differently for the alternative minimum tax (AMT). Adjustments for differences between the two systems are reported on Form 6251. For example, ordinary income for exercising vested ISO shares is reported for the year of exercise on Form 6251 on line 2i. Differences in capital gains and losses due to basis adjustments for ordinary income reported for AMT are reported at line 2k.

When there is a disqualified disposition in the year of exercise, there is no AMT adjustment, subject to a wash sale exception. (Internal Revenue Code Section 56(b)(3).) The disposition in the year of exercise takes the transaction out of the AMT.

Since there is no separate line on Form 6251 identified for an adjustment relating to a disqualified disposition after the year of exercise, the adjustment is commonly missed. It should be reported at Form 6251, line 3. The adjustment is a subtraction of the ordinary income reported as a part of wages on line 1 of Form 1040 for the disqualified disposition of the ISO shares for the year of the disqualified disposition. Those wages are a duplication of the ordinary income reported on Form 6251, line 2i for the year of exercise. Making this adjustment should enable the taxpayer to use his or her minimum tax credit to offset the regular tax for the ordinary income on the wages from the disqualified disposition.

The rules for income tax reporting for employee stock options are very confusing. It can be a worthwhile investment to have your income tax returns prepared by a professional income tax return preparer who knows the rules.

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More federal income tax audits coming?

The Biden Administration has issued a press release and a report, "The American Families Plan Tax Compliance Agenda", relating to initiatives to increase tax compliance.

The U.S. Treasury has conducted a study that indicates a tax shortfall of about $600 billion for 2019, mostly related to unreported income.

The Biden Administration is proposing increasing funding for the IRS by $80 billion over the next decade, mostly for increasing the number of tax audits of high-income individuals and businesses. These efforts are estimated to increase income tax revenues by about $700 billion over the next decade, and by about $1.6 trillion for the next decade, as more auditors are trained to conduct the audits.

In addition, the IRS would get oversight authority over non-licensed income tax return preparers.

The "party" of few tax audits might be ending.

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IRS issues child tax credit guidelines for non-filers.

The American Rescue Plan of 2021 includes a provision for advance payment of refundable child tax credits. The payments are scheduled to begin on July 15, 2021. The IRS doesn't have the information to make the payments to taxpayers who don't file income tax returns. Now it has issued guidelines for how those taxpayers can apply for the benefits.

(Revenue Procedure 2021-24.)

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IRS disagrees with Sixth Circuit Split Dollar Life decision.

The IRS has announced it isn't acquiescing to a decision by the Sixth Circuit Court of Appeals that the economic value of a compensatory split-dollar life insurance arrangement should be reported as a non-taxable distribution to an S corporation shareholder. The IRS says that the compensation relates to the relationship as an employee, not a shareholder, and should be treated as taxable wages.

(Action on Decision 2021-2.)

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Taxpayer changed residence too late to avoid California tax.

A married couple moved to Nevada and sold highly-appreciated stock in their California corporation. They rented an apartment in Nevada on March 6, 2008 as a temporary residence while searching for a permanent home, and purchased a permanent home during September 2008, they spent the majority of their time in California from February 25, 2008 through July 18, 2008, when the sale of the stock was completed.

The California Office of Tax Appeals upheld the Franchise Tax Board in finding the taxpayers didn't change their residence to Nevada until they purchased the permanent home in Nevada during September 2008. Therefore, the sale of stock was taxable in California.

(Appeal of Bracamonte, 2021-OTA-156P.)

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Some income from California tax-exempt bonds owned by a mutual fund is taxable.

A California court of appeals recently upheld the California Franchise Tax Board in taxing interest income from California tax-exempt bonds passed through from a mutual fund when less than 50% of the fund was invested in California tax-exempt bonds. The California Supreme Court denied review of the decision.

(Mass et al. v. Franchise Tax Board (August 15, 2019) August 15, 2019) California Court of Appeals, Second District, Case No. B286857; Mass v. FTB (November 20, 2019), California Supreme Court, Case No. S258092.)

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All states with a sales and use tax have enacted an economic nexus threshold.

Missouri recently enacted SB 153, so all 45 states that have a sales and use tax now have an economic nexus threshold for when sales and use taxes must be collected by a retailer or a marketplace facilitator, like Amazon.com. The economic nexus concept was upheld in the Supreme Court's Wayfair opinion during 2018. Spidell Publishing has prepared a summary of all of the laws for all 45 states at www.caltax.com/files/2021/nexuschart.pdf.

(Spidell's California Taxletter, June, 2021, p. 9, "A clean sales tax sweep for Wayfair".)

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Do you sell services or software to CPAs?

Maybe I can help. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.com.

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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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