Michael Gray, CPA's Tax and Business Insight
September 6, 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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Table of Contents
- Happy autumn!
- Family celebrations.
- September 15 due dates.
- Trusts and estate tax returns due September 30.
- Individual and C corporation tax returns due October 17.
- Foreign bank account form due October 17.
- Need help with getting your extended tax returns, amended returns, and elections done?
- California Middle Class Tax Refund Payments.
- California passthrough entity elective tax.
- California excess business loss carryovers can "disappear."
- California is auditing tax basis for partnership and S corporation loss limitations.
- Nonresidents could be partially taxable for the sale of a partnership interest.
- Federal tax credit for solar panels, etc. expanded.
- Federal tax credit for energy-efficient home improvements restored and expanded.
- Most EVs might not qualify for the Clean Vehicle Tax Credit.
- Late filing penalties waived for certain 2019 and 2020 income tax returns.
- Partner signature no longer required for an optional basis election.
- Lawyer's costs to fight disbarment were nondeductible.
- Uncashed gift checks included in a decedent's taxable estate.
- IRS increases interest rates for underpayments of tax.
- Remember to save your summer day camp receipts.
- Mileage for side business qualifies for a business tax deduction.
- No alimony deduction when it ends at childrens' majority.
- Do you sell services or software to CPAs?
- Attention Accountants! Speed up processing your 2019 business closings!
- Attention business owners with remote workers or remote customers!
- 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: The Nordstrom Way To Customer Experience Excellence
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Group picture for the "70@70" Reunion Dinner for Prospect High School Class of 1970 Happy autumn!
Summer ends and autumn begins on September 22. The year is 2/3 over! Are you ready for the year end?
Family celebrations.
My daughter, Holly Baker and her son, Kyan, are both celebrating birthdays during September. Happy birthdays! Thi Nguyen and her husband, Allen Le, are celebrating their wedding anniversary during September. Happy Anniversary!
September 15 due dates.
The due date for extended income tax returns for calendar-year partnerships and S corporations is September 15.
Federal estimated tax payments for individuals are also due September 15. There is no California estimated tax payment due September 15 because estimated payments for April and June are "front loaded."
The federal estimated tax payment can be based on the income tax reported on the 2021 federal income tax return. If the 2021 federal adjusted gross income was more than $150,000 (or $75,000 if married filing separately), the payment can be based on 110% of the income tax on the 2021 federal income tax return. Alternatively, the payment can be based on 90% of the actual tax for 2022. Although the tax payment is 25% of the annual tax liability, the computations can be made using income and deductions through August 31. (The computations have become so complex that I recommend using the "protected estimate" based on 2021 tax approach.)
Individuals with California adjusted gross income for the current year that is equal to or exceeding $1 million ($500,000 for married persons or registered domestic partners filing a separate return) must figure their California estimated tax based on their current year tax and aren't eligible for estimated tax payments based on their 2021 income tax.
If you aren't making your payments based on your 2021 income tax, you might want to get professional help with your estimated tax payments this year.
Trusts and estate tax returns due September 30.
The due date for 2021 calendar-year trusts and estates for which timely extensions were filed is September 30, 2022.
Individual and C corporation tax returns due October 17.
The due date for 2021 individuals and calendar year corporations for which timely extensions were filed is October 17, 2022.
Foreign bank account form due October 17.
FinCEN Form 114 is due April 15, and the due date is automatically extended to October 17, 2022 for 2021. FinCEN Form 114 is required to be filed when an individual has $10,000 or more of foreign financial assets, including foreign bank accounts and foreign brokerage accounts. See your tax advisor about foreign insurance policies, annuities and retirement accounts.
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.
California Middle Class Tax Refund Payments.
The State of California will send tax refund payments to certain taxpayers from October 2022 to January 2023.
To qualify, recipients must:
- Have filed their 2020 tax returns by October 17, 2021.
- Meet certain California adjusted gross income requirements.
- Have been a California resident for 6 months or more of the 2020 tax year.
- Not have been eligible to be claimed as a dependent for 2020.
- Be a California resident on the date the payment is issued.
Use this link to get more details at Franchise Tax Board's web site. https://www.ftb.ca.gov/about-ftb/newsroom/public-service-bulletins/2022-13-california-middle-class-tax-refund-payments.html#:~:text=The%20Middle%20Class%20Tax%20Refund%20payment%20is%20not,to%20Franchise%20Tax%20Board%20or%20other%20government%20agencies.
California passthrough entity elective tax.
The California passthrough entity elective tax has become something of a mess. The Franchise Tax Board issued some erroneous refunds of prepaid amounts. See your tax advisor for details and developments.
California excess business loss carryovers can "disappear."
Be aware when using tax return preparation software or when you prepare a paper income tax return that it's easy to miss the carryover of disallowed excess business losses to the following year's income tax return. When you don't carry the amount forward on the forms, a potential tax benefit might be "lost" forever.
California is auditing tax basis for partnership and S corporation loss limitations.
With the IRS being understaffed, I think there might be more California tax audits of individual income tax returns than IRS audits. One item the Franchise Tax Board has been auditing is the tax basis (cost for computing limitations on gains and losses) for loss limitations of interests in partnerships and S corporations. The Franchise wants to see a schedule of the tax basis and documentation to support the schedule. Be sure to keep copies of your Schedules K-1.
(Appeal of Crocker, 2022-OTA-137P, Appeal of Newell, 2022-OTA-138.)
Nonresidents could be partially taxable for the sale of a partnership interest.
The Franchise Tax Board recently issued advice that a nonresident of California who sells an interest in a partnership may have taxable ordinary income from of his or her share of California-source unrealized receivables, including depreciation recapture, and inventory.
(FTB Legal Ruling 2022-02.)
Federal tax credit for solar panels, etc. expanded.
The federal tax credit for alternative energy systems for a residence was expanded by the Inflation Reduction Act. The credit won't expire until 2034. The tax credit applies to alternative energy systems that rely on a renewable energy source, such as solar, wind, geothermal or fuel cell technology. The cost of wind turbines, solar panels, solar electric equipment and solar-power water heaters is eligible for the credit, whether they are installed in a primary residence or a vacation home. Effective 2023, the credit is expanded to include battery storage technology that is installed in a residence. For 2022 through 2032, the credit is 30% of the cost of the equipment and installation. The credit will fall to 26% in 2033, 22% in 2034 and end after 2034.
(Inflation Reduction Act ¶¶ 13302(a)(1), 13302(b)(1), 13302(b)(2).)
Federal tax credit for energy-efficient home improvements restored and expanded.
The federal tax credit for energy-efficient improvements to a principal residence expired on December 31, 2021.
The Inflation Reduction Act has extended and expanded the credit. For 2022, the credit applies to 10% of the cost of certain types of insulation, external windows, doors and skylights. The credit includes 100% of the cost of electric heat pumps and water heaters, some central air-conditioning systems and other energy-saving investments. There is a lifetime limitation of $500 and the credit is capped for many items. Maximum $150 for hot water boilers and furnaces, $200 for a window and $50 for a furnace circulating fan.
For 2023 through 2032, the credit percentage increases to 30% of costs. The $500 lifetime limit is replaced with a $1,200 annual limit. No more than $600 of the annual limit can apply for exterior windows and skylights and $500 for exterior doors and other items. The annual limit increases to $2,000 for a biomass stove, hot water boiler, or an electric or natural gas heat pump. Individuals can also take a credit for up to $150 of the cost of a home energy audit.
(Inflation Reduction Action ¶¶ 13301.)
Most EVs might not qualify for the Clean Vehicle Tax Credit.
The tax provision extending the $7,500 Clean Vehicle Tax Credit, including eliminating the limitation on the number of vehicles that qualify for a manufacturer, also disqualifies many vehicles by imposing new requirements. After 2023, no new electric vehicles might qualify for the credit.
Effective for vehicles sold after August 16, 2022, the Act requires that final assembly of the vehicle occurs in North America.
Effective for vehicles sold after 2022:
- Eligible cars can't have an MSRP exceeding $55,000. The MSRP for eligible trucks, vans and SUVs can't exceed $80,000.
- Income limits for buyers of new vehicles are $300,000 for married, joint, $225,000 for head of household and $150,000 for single individuals.
- Vehicles must be assembled in North America and built after December 31, 2022.
Effective for vehicles sold after 2023:
- An eligible vehicle's battery must contain certain levels of critical materials, including lithium, sourced in North America or a country with which the U.S. has free-trade agreements Minimum levels start at 40% of cost in 2023 and increase by 10% each year until reaching 80% in 2027.
- Battery-critical minerals from China, Russia and other nations deemed "Countries of Particular Concern" by the U.S. State Department are prohibited after 2025.
- Eligible vehicles' non-mineral battery components must be sourced in North American or free-trade countries at increasing levels starting at 50% of cost in 2023 to 100% in 2029.
Vehicle manufacturers will have to make significant investments in U.S manufacturing facilities and mining operations in order to qualify for the credit, and reduce the price of electric vehicles.
(Forbes Wheels, August 12, 2022, "New Clean Vehicle Tax Credit Plan Means Most EVs No Longer Qualify".)
Late filing penalties waived for certain 2019 and 2020 income tax returns.
The IRS has announced relief from failure to file penalties and certain international information return penalties for tax returns for tax years 2019 and 2020 that were filed on or before August 1, 2021. Penalties previously assessed will be refunded or abated. If you had penalties assessed for late filing for a 2019 or 2020 income tax return or international information return, see your tax advisor for details.
(Notice 2022-36.)
Partner signature no longer required for an optional basis election.
The IRS has issued final regulations eliminating the requirement that a partner sign an election under Internal Revenue Code § 754 for an optional adjustment to basis for a transfer of a partnership interest, such as for inherited property, or for a transfer of property by a partnership. These regulations eliminate a common "foot fault" for partnership income tax returns.
(TD 9963 August 5, 2022.)
Lawyer's costs to fight disbarment were nondeductible.
A lawyer was disbarred in the State of California and challenged the disbarment. He deducted the costs of fighting the disbarment on his Schedule C (trade or business schedule). The Tax Court upheld the IRS in disallowing the tax deduction, ruling they were nondeductible personal expenses.
(Kinney, TC Memorandum Decision 2022-81.)
Uncashed gift checks included in a decedent's taxable estate.
Before death, a decedent wrote checks for gifts to family members. One of them was cashed before death, the others after death. The Tax Court upheld the IRS in allowing the cashed check to be excluded from the taxable estate and requiring the uncashed checks to be included in the taxable estate.
(Estate of Demuth, TC Memorandum Decision 2022-72.)
IRS increases interest rates for underpayments of tax.
The IRS has announced it is increasing interest rates for underpayments of tax for the fourth quarter, 2022 from 5% to 6%. The interest rate for corporations that owe more than $100,000 will increase from 7% to 8%.
The interest rate paid to taxpayers for their tax refunds will also increase from 5% to 6% for individuals and from 4% to 5% for corporations for the fourth quarter, 2022. For corporate refunds that exceed $10,000, the interest rate for the excess will increase from 2.5% to 3.5%. For large corporations, the interest rate for refund will increase from 7% to 8%.
Remember to save your summer day camp receipts.
Summer day camp can qualify for the dependent care credit. The cost of summer school does not qualify.
Mileage for side business qualifies for a business tax deduction.
An employee lives and works in Palo Alto. She owns a small clothing design business in Los Angeles. She kept a mileage log for her weekend business trips to Los Angeles. The Tax Court allowed her deduction for business mileage.
(Gonzales, TC Summary Opinion 2022-13.)
No alimony deduction when it ends at childrens' majority.
Under a divorce decree, monthly family support by the husband ends when the children reach age 18 or the ex-wife remarries. The Tax Court ruled the payments didn't qualify for the alimony deduction because of the child-related contingency. (Rojas, TC Memorandum Decision 2022-77.)
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.
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
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
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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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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