Michael Gray, CPA's Tax and Business Insight

August 2, 2022

© 2022 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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Lotus lily
A lotus blossom in the Peace Garden, Rosicrucian Museum, San Jose, California

School days, school days.

It's hard to believe, but summer vacation is almost over and most children will be back in school by the end of August! Please drive carefully with those kamikaze kids out there!

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Family celebrations.

Janet and I are celebrating our wedding anniversary this month. Our other August family celebrations include my granddaughter, Minerva Siemer's birthday and Janet's sister, Gail Johnston, is celebrating a birthday. Happy birthdays!

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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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Congress passes the CHIPS and Science Act of 2022.

The U.S. House of Representatives passed the CHIPS and Science Act of 2022 on July 28, 2022, which was previously passed by the U.S. Senate. President Biden is expected to sign the legislation.

The tax provision creates a 25% income tax credit for investments in semiconductor manufacturing. Taxpayers may elect to treat the credit as a payment against tax or direct pay. The credit may be claimed for property that's placed in service after December 31, 2022 and for which construction begins before January 1, 2027.


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Emergency property tax change of ownership rules will help some beneficiaries receiving California real estate.

The California Board of Equalization has adopted emergency rules relating to parent-child and grandparent-grandchild real estate transfers. The rules are effective July 18, 2022 to January 14, 2023.

The new rules clarify that taxpayers aren't required to apply for a property tax homeowner's exclusion in order to qualify for a parent-child or grandparent-grandchild property tax base year transfer. (Note the exemption from reassessment only applies to a grandparent-grandchild transfer when both of the grandchild's parents are deceased on the date of the transfer.)

Transferees who live in the home as their primary residence within one year after the transfer (usually the date of death) qualify for the base-year transfer even if the homeowner's property tax exemption is not applied to the property within that time. If they filed a claim for the base-year transfer, and filed the homeowner's exemption of Disabled Veteran's Exemption within one year of the transfer of the family home, they are entitled to a refund of overpaid taxes.

If they used the home as their primary residence but failed to file the Homeowner's or Disabled Veteran's Exemption claim within one year of the transfer, they do not qualify for a refund of the increased taxes paid, but they do qualify for future relief from the increased property taxes.

If they didn't use the home as their principal, residence within one year of the transfer, they are ineligible for the exclusion.

Some county assessors have been disallowing the exclusion for reassessment when the beneficiary who inherited the property didn't claim the Homeowner's or Disableld Veteran's Exemption within one year of the transfer. Those beneficiaries should contact the county assessor to claim the exclusion from reassessment under the emergency rules.

(Spidell Publishing, Podcast: Emergency Proposition 19 rules adopted for parent-child transfers, July 31, 2022.

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California confusion with passthrough entity payments.

Some software providers erroneously applied passthrough entity tax payments made with 2022 vouchers to the 2021 tax year. As a result, the Franchise Tax Board is issuing refunds in error. The Franchise Tax Board says the incorrect application of the payments won't jeopardize the taxpayer's ability to elect to use the passthrough entity tax for 2022. Taxpayers must return the erroneous refunds.

(Spidell's Flash Email, More passthrough entity tax problems, July 27, 2022.)

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California middle class tax refunds.

California has enacted legislation authorizing tax refunds of $400 to $1,050 for married, filing joint taxpayers and $200 to $700 for other taxpayers.

California residents who didn't file 2020 income tax returns by October 15, 2021 aren't eligible for the payments.

The payments are excludable from California taxable income and probably excludable from federal income as welfare payments.

For specific amounts, see www.caltax.com/files/2022/cataxrefunds.pdf

(AB 194, June 30, 2022, Spidell's California Taxletter, August 2022, p.1, "California issuing middle class tax refunds.")

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PPP conformity in California tax relief legislation.

California's budget deal signed by Governor Newson on June 30, 2022 includes partial PPP conformity.

California's partial conformity to the federal treatment of Paycheck Protection Program loan forgiveness has been extended to PPP loans approved after March 2021.

In order to deduct expenses paid with forgiven PPP loan amounts for loans approved after March 2021, a business must demonstrate at least a 25% reduction in gross receipts in any 2020 calendar quarter compared to the comparable 2019 calendar quarter. (Since a requirement to get a second-draw PPP loan was to have a 25% gross receipts reduction, second-draw PPP loans should automatically qualify for deduction expenses paid with forgiven loans.

California still does not conform to the American Rescue Plan Act's expansion of PPP loan eligibility to include nonprofit entities and certain internet publishing companies, so forgiveness of PPP loans made to those entities don't qualify for the California exclusion. The cancellation of debt is California taxable income and expenses paid with those loans are California tax-deductible.

(AB 194, June 30, 2022. Spidell's California Taxletter, August, 2022, p. 2, "Tax relief included in California budget deal".)

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Sale of nonresident of a partnership interest might include income taxable by California.

The California Franchise Tax Board has issued a legal ruling that surprised many tax practitioners. A sale of a partnership interest is generally a sale of an intangible asset, which is sourced to the state of residence of a nonresident partner. Part of the sale might relate to the partnership's unrealized receivables, including depreciation recapture, and inventories, which are taxable as ordinary income. According to the Franchise Tax Board, some or all of that ordinary income might be apportionable to California, and taxable in California. If the partnership only operates in California, all of the ordinary income would be taxable in California.

(Franchise Tax Board Legal Ruling 2022-02, Spidell's California Taxletter, August 2022, p. 13, "Surprise ruling regarding nonresident sale of partnership interest.")

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Reminder - Miscellaneous itemized deductions haven't been repealed for California income tax reporting.

The federal tax deduction for miscellaneous itemized deductions, including deductions of investment management fees and employee business expenses, were repealed for tax years 2018 through 2025 by the Tax Cuts and Jobs Act of 2017. California has not conformed to that provision, so tax deductions for miscellaneous itemized deductions can still be claimed on a California individual income tax return. (Miscellaneous itemized deductions aren't tax deductible for computing the California alternative minimum tax. See Form 540, Schedule P.)

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New procedure issued for extending a portability election.

The IRS has issued a procedure with a new, simplified method to get an extension of time to make a portability election. The election allows a surviving spouse to use a deceased spouse's unused exclusion amount (DSUE) to reduce the surviving spouse's federal estate tax liability.

The procedure applies when a federal estate tax return isn't otherwise required to be filed for a deceased spouse.

The extension is to five years after the date of death of the deceased spouse.

The simplified method is used instead of applied for a letter ruling. There is no user fee.

It is effective July 8, 2022.

(Revenue Procedure 2022-32, July 8, 2022. Supercedes Revenue Procedure 2017-34.)

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Donation deduction disallowed.

Kevin and Patricia Keefer donated a 4% limited partnership interest to a donor advised fund. A sale by the limited partnership was in process and the Keefers retained rights to certain assets of the partnership. A federal district court upheld the IRS in finding the arrangement was an anticipatory assignment of income, so the donation wasn't tax deductible. In addition, the contemporaneous written acknowledgement wasn't qualified. The acknowledgement was issued before the transfer was completed.

(Keefer v. U.S., Civil Action C.V. 3:20-CV-0836-B, N.D. Texas, July 6, 2022.)

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Proposed regulations apply present value adjustments to some estate claims.

The IRS has issued proposed regulations that would require present value adjustments for certain items deducted when computing the taxable estate for federal estate tax. These items include funeral expenses, administration expenses, claims against the estate and unpaid mortgages, or any indebtedness in respect of, property where the value of the decedent's interest, undiminished by the mortgage or indebtedness, is included in the value of the gross estate.

The proposed regulations also clarify the deductibility of interest expense, the requirements for substantiating the value of a claim against the estate and the deductibility of amounts paid under a decedent's personal guarantee.


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Do you sell services or software to CPAs?

Maybe I can help with writing promotional material and marketing ideas. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.com.

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Attention Accountants! Speed up processing your 2019 business closings!

Do you still have 2019 business income tax returns on extension that need to be done? 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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Attention business owners with remote workers or remote customers!

Are you concerned about protecting your conversations and communications from hackers? Now there is a secure collaboration application including (unlimited) team member assignments, video conferencing (no Zoom bombing!), text messaging, voice messaging, PDF capture, electronic signature and large file transfer. Remote computer access feature is almost complete. Communications take place in a secure envelope. Cloud application so no installation is required on your computer network. Meets IRS security standards. http://www.securelycollaborate.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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Check out my blog.

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

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Michael Gray, CPA
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