Michael Gray, CPA's Tax and Business Insight
December 1, 2023
© 2023 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy Holidays!
- 'Tis the season for year-end planning.
- Fourth quarter calendar year corporate estimated tax payment is due December 15.
- Fourth quarter estimated tax payment for non-corporate taxpayers is due January 16.
- IRS announces inflation adjustments.
- First property tax payment is due.
- Exchange of variable prepaid forward contracts was taxable.
- Calendar year accrual basis corporations should pay related parties by December 31.
- Reliance on a CPA didn't satisfy return filing requirement.
- Bankrupt S corporation can't revoke its S election.
- Make Israeli/Gaza relief donations to qualified charities.
- Make passthrough entity elective tax payments by the year-end.
- If you exercised an incentive stock option and haven't sold the stock, consider using the "escape hatch."
- Consider accelerating or deferring income.
- Year-end planning - Seniors should consider making donations from their IRAs.
- Required minimum distributions for 2023.
- Important December 31 deadline for inherited IRAs.
- Year end planning - should you "harvest" losses before the year end?
- Remember the wash sale rules.
- Estates and trusts should plan distributions.
- Should you buy business equipment before December 31?
- Clean vehicle credit.
- Do you sell services or software to CPAs?
- Attention CPAs-would you like help with marketing your services?
- Attention CPAs-do you need support for tax issues?
- Attention Accountants! Speed up processing your business closings!
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: Tiny Thunder
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Janet's dolls are dressed for the holidays Happy Holidays!
This year, Hanukkah begins the evening of December 7. Of course, Christmas Day will be Monday, December 25. "God Bless us, every one!"
Michael Gray won't be available starting December 1, returning December 18.
Dawn Siemer won't be available starting December 14, returning January 2.
'Tis the season for year-end planning.
There is less than a month remaining for 2023. Make your year-end planning appointment now. Thi Nguyen, CPA will have limited availability. To make an appointment with her, write to her at thi@atl-cpa.com.
Fourth quarter calendar year corporate estimated tax payment is due December 15.
The final 2023 estimated tax payment for calendar-year corporations is due December 15, 2023. Not all corporations can base their federal estimated tax payments on the previous year's income tax return. For example, new corporations and corporations that had no tax liability for the previous year must compute their estimated tax using the current year's facts. See your tax advisor for assistance.
Fourth quarter estimated tax payment for non-corporate taxpayers is due January 16.
The final 2023 estimated tax payment for individuals and calendar-year estates and trusts is due January 16, 2024. (Martin Luther King's birthday is celebrated on January 15.) Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.
Consider making the California or state payment by December 31, 2023 for a 2023 tax deduction. Watch the alternative minimum tax. Also, remember the total tax deduction for state income tax payments and real estate tax is limited to $10,000 and the standard deduction has been increased to $27,700 for married filing joint and $13,850 for singles and married filing separate returns.
See your tax advisor.
IRS announces inflation adjustments.
The IRS has released its annual list of inflation adjustment for various tax-related items. The Unified Credit equivalent for estate and gift tax for 2024 will be $13,610,000. The 2024 annual exclusion for gift tax is $18,000 per taxpayer ($17,000 for 2023), per donee. Taxpayers must report aggregate gifts received from foreign persons exceeding $19,570. The annual exemption for gifts to a non-citizen spouse is $185,000. (Note the unlimited marital exemption doesn't apply to gifts to non-resident spouses.)
(Revenue Procedure 2023-34.)
First property tax payment is due.
The first property tax payment for the 2022-2023 fiscal year in Santa Clara County is due December 11. Avoid a late payment penalty - mail your payment now!
Exchange of variable prepaid forward contracts was taxable.
In 2007, Andrew McKelvey, founder of Monster Worldwide, Inc., entered into a variable prepaid forward contract (VPFC) for the sale of Monster shares. The IRS had ruled in Revenue Ruling 2003-7 that such contracts weren't taxable until the future delivery of the underlying property.
During 2008, before the original settlement dates, McKelvey exchanged the original contracts plus $11 million for an amended set of contracts with settlement dates in 2010. McKelvey treated the new contracts as extensions for the original contracts, and didn't report any gain or loss for the transaction.
On remand from the Eighth Circuit Court of Appeals, the Tax Court ruled that the exchange closed the first set of VPFCs, resulting in a taxable short-term capital gain of $71,668,034.
(Estate of McKelvey v Commissioner, 161 T.C. No. 9 (2023).)
Calendar year accrual basis corporations should pay related parties by December 31.
In order to currently deduct expenses due to certain related persons, accrual-basis corporations must pay them by the year-end. These include wages, bonuses, interest expense, rent, etc. Be sure to review the status of these items with your tax advisor by December 31.
Reliance on a CPA didn't satisfy return filing requirement.
Wayne Lee is a Florida surgeon. Kevin Walsh, Lee's CPA, prepared Lee's income tax returns for 2014 - 2016. Lee reviewed the returns and signed and returned Form 8879, IRS e-file Signature Authorization, to Walsh.
Walsh didn't efile the returns, claiming his software couldn't handle it for Lee's complex tax returns.
Walsh didn't receive IRS letters requesting the tax returns because the IRS didn't have Lee's correct address. According to Lee, Walsh agreed to notify the IRS of his change of address, but never did so.
The tax returns were actually submitted for 2014 - 2016 during December 2018.
The IRS assessed late filing penalties plus interest.
Lee said that the penalties should be waived based on his reasonable reliance on Walsh to efile the returns.
The Eleventh Circuit, citing Boyle v. U.S., 469 U.S. 241 (Supreme Court, 1985), ruled that taxpayers have a non-delegable duty to file their income tax returns on time, and upheld the late filing penalties.
(I imagine Lee will have a large malpractice claim against Walsh.)
(Lee v. U.S., 11th Circuit Court of Appeals No. 22-10793, October 24, 2023.)
Bankrupt S corporation can't revoke its S election.
A U.S. Bankruptcy Court ruled the sole shareholder of an S corporation in Chapter 11 bankruptcy couldn't revoke the corporation's S election to avoid taxable income from the liquidation of the corporation's assets. The court said the S election was an asset of the bankruptcy estate.
The court said a ruling by the Third Circuit Court of Appeals, In re Majestic Star Casino, 716 F. 3d at 756, was in error and should be disregarded. The Third Circuit Court of Appeals had ruled that, since the S election resulted in taxation to the shareholders, the election was the property of the shareholders.
(In re Vital Pharmaceuticals, U.S. Bankruptcy Court 716 F. 3d at 756 October 6, 2023.)
Make Israeli/Gaza relief donations to qualified charities.
Tax deductions (and qualified charitable distributions from traditional IRAs) are only allowed when made to qualified domestic charities. Donations to individuals aren't tax deductible. The IRS has an online Tax Exempt Organization tool to search for qualified charities. https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
Make passthrough entity elective tax payments by the year-end.
Calendar-year end passthrough entities should make an effort to pay any remaining tax by December 31, 2023. According to IRS Notice 2020-75, the tax must be paid in order to claim a current tax deduction. The tax payments reduce the taxable income passed through to the owners.
See your tax advisor for details. The elective tax payment isn't a do-it-yourself project.
(Spidell's California Taxletter®, November 2022, p. 9, "2022 passthrough entity elective tax payments.")
If you exercised an incentive stock option and haven't sold the stock, consider using the "escape hatch."
I explained the details in the November 2023 edition of Michael Gray, CPA's Tax and Business Insight. When you sell the stock during the same year as the year of exercise, the alternative minimum tax adjustment is eliminated and the ordinary income is limited to the excess of the selling price of the stock over the option price. If the stock is replaced with a wash sale (buying back the stock during the period from 30 days before the sale to 30 days after the sale) or the sale is to a related person, the strategy doesn't work. This strategy generally only works for vested publicly traded stock.
Consider accelerating or deferring income.
Personal tax rates are low right now, so many high-income taxpayers would actually benefit from accelerating income to 2023. Usually, we would be thinking about deferring income at the year end.
Year-end planning - Seniors should consider making donations from their IRAs.
Many of us make a lot of donations during the holiday season. With a $30,700 federal standard deduction for married couples over age 65, $15,600 for singles for 2023, most taxpayers get no federal tax benefit from making charitable contributions. (Especially when their home mortgage has been paid off!) A better approach for individuals age 70 1/2 or greater is to make donations to "50% charities" (not a donor advised fund) directly from their traditional IRA.
An individual age 70 1/2 or older may distribute up to $100,000 for 2023 to qualified charities each year without including the distribution in taxable income. (The limit will be indexed for inflation after 2023.) In addition, the distribution "counts" as part of any required minimum distribution for the year.
In order to qualify, a qualified receipt is required to be kept by the taxpayer. The donation must be made directly by the IRA to the charity.
My IRA custodian gave me a checkbook for the purpose of making donations from my account.
Most seniors who make significant charitable contributions should consider making this their regular practice.
See your IRA custodian and your tax advisor for guidance with this important tax planning strategy.
Required minimum distributions for 2023.
Participants in qualified plans (including 401(k) plans) and traditional IRAs must take required minimum distributions starting for the year the participant reaches age 73, effective 2023. Generally, the distribution is required to be made by December 31. There is an exception for participants whose 73rd birthday is during 2023. They may take the 2023 distribution by April 1, 2024. See your financial advisor about what make sense for you.
Important December 31 deadline for inherited IRAs.
The beneficiaries of an inherited IRA must divide the account into separate accounts for each beneficiary by December 31 of the year of the decedent's death for favorable distribution rules. Otherwise, the distribution will generally be based on the life expectancy of the oldest beneficiary.
Year end planning - should you "harvest" losses before the year end?
The stock market has been very active this year, and many individuals have experienced lost value in their investments. Review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains plus $3,000. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.
Remember the wash sale rules.
If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.
Consult with your tax advisor.
Estates and trusts should plan distributions.
The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed estate or trust income exceeds $14,450. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, on January 31, 2024) as distributed for a taxable year (for example, 2023).
In most cases, capital gains don't qualify for the distribution deduction. See your tax advisor.
The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) to avoid unpleasant surprises.
Should you buy business equipment before December 31?
The expense election for business equipment purchases is now $1,160,000. This election is even available for some SUVs and heavy trucks with a $28,900 limit, and some trucks and cargo vans don't have a limit. The excess might be eligible for bonus depreciation. See your tax advisor for details. Remember the expensed amount is only deductible against business income.
100% bonus depreciation also may alternatively apply for 2023 depreciable property, including some building improvements. The bonus depreciation percentage is scheduled to decrease to 80% for 2024.
See your tax advisor.
Clean vehicle credit.
Considering changes in the qualification requirements for the clean vehicle credit, including income thresholds, it might be advantageous to wait until 2024 to buy one and pass through the credit to the auto dealer to reduce the amount paid for the vehicle. Another alternative might be to lease the vehicle. See your tax advisor before going ahead with a clean (usually electric) vehicle purchase.
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 CPAs-would you like help with marketing your services?
Maybe I can help with writing promotional material and marketing ideas, including encouraging referrals from your current clients. Call me, Michael Gray, at 408-918-3161 or email mgray@profitadvisors.com.
Attention CPAs-do you need support for tax issues?
Michael Gray, CPA can help you with research and guidance on complex tax planning and tax return reporting issues. mgray@profitadvisors.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
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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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Michael Gray, CPA2482 Wooding Ct.San Jose, CA 95128(408) 918-3162FAX: (408) 938-0610email: mgray@taxtrimmers.comHours: 8am - 5pm PDT Monday - Friday
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