Michael Gray, CPA's Tax and Business Insight
February 5, 2024
© 2025 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
- Valentine's Day!
- February celebrations.
- Tax season is here!
- Make your tax return preparation interview appointment now.
- Michael Gray explains retirement plan distribution rules for the Silicon Valley Bar Association (SVBA).
- Michael Gray explains retirement plan distribution rules for CalCPA.
- Remember federal income tax returns for calendar-year S corporations and partnerships are due March 17.
- California Wildfire Relief.
- Canada and Mexico dodge a bullet - for now.
- Surprised by President Trump's quick actions after inauguration?
- The election to be an S corporation for calendar-year corporations is generally March 15, 2025; see your tax advisor for new corporations.
- Have you received your tax preparation materials?
- File your tax return early, if you can.
- Trump freezes IRS hiring, just in time for tax season.
- Regulatory Freeze Memorandum.
- California wages could be wrong on Form W-2.
- Consider updating your Forms W-4 and DE-4 for 2025.
- Changing jobs could result in an excess 401(k) contribution.
- Backdoor Roths.
- Roth conversion reminder.
- Distribution election for estates and complex trusts.
- Were you age 73 or older during 2024?
- Business Ownership Information Reports still on hold.
- Final regulations issued for partnership related party basis shifting transactions.
- Investment Firm's limited partners were subject to self-employment tax.
- 401(k) payments previously taxed in Pennsylvania subject to California tax.
- Proposed regulations issued for automatic enrollment in certain retirement plans.
- Final regulations issued for micro-captive insurance transactions.
- Updated final and proposed regulations issued for consolidated returns and controlled groups.
- Final regulations issued for credit for production of clean hydrogen and energy credit.
- Do you sell products, 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: Essentialism
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Janet and I sharing a dinner table with Janet's sister, Gail and our brother in law, Lane Johnston, at the Beach House Restaurant in Pacific Grove on January 25, 2025. Valentine's Day!
Remember to show your love and appreciation for your loved ones on Friday, February 14. Book your reservation at your favorite restaurant now.
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!
Tax season is here!
The IRS has announced it began accepting and processing (including efiling) 2024 individual income tax returns on January 27, 2025. Note that the final versions of some tax forms haven't been released yet and there are other reasons to delay filing 2024 individual income tax returns, including waiting to received Schedules K-1 for partnerships and S corporations. Consult with your tax return preparer.
Make your tax return preparation interview appointment now.
Most personal interview appointments for preparing 2024 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now.
Michael Gray explains retirement plan distribution rules for the Silicon Valley Bar Association (SVBA).
Michael Gray will give a one-hour online presentation about Highlights of the Final and Proposed Regulations for Retirement Plan Distributions, including for inherited accounts, at noon on Thursday, February 13, 2025, for the Silicon Valley Bar Association. Attorneys get one hour of MCLE for attending the event.
The registration fee is $30 for Silicon Valley Bar Association members and $50 for nonmembers.
Here's a link to register for the event. https://www.svba.org/events/EventDetails.aspx?id=1913023&group=
Michael Gray explains retirement plan distribution rules for CalCPA.
Michael Gray will give a two-hour online "Tax Tuesday" presentation about Highlights of the Final and Proposed Regulations for Retirement Plan Distributions, including for inherited accounts, at noon on Tuesday, February 25, 2025, for the California Society of Certified Public Accountants.
For CPAs and EAs to qualify for continuing education credit, the registration fee is $58 for members and $78 for nonmembers. Here's a link to register for the event. https://store.calcpa.org/catalog/activity/tax-tuesday--highlights-of-the-final-regulations-and-proposed-regulations-for-retirement-plan-distributions---131918
The event is free with no continuing education credit. Here's a link to register with no continuing education credit. https://store.calcpa.org/catalog/activity/tax-tuesday--highlights-of-the-final-regulations-and-proposed-regulations-for-retirement-plan-distributions--no-cpe----131919
Remember federal income tax returns for calendar-year S corporations and partnerships are due March 17.
(Federal income tax returns for calendar-year C corporations are due April 15.)
California Wildfire Relief.
As relief for victims of wildfires in Los Angeles County, The IRS and California have postponed the filing dates and payment dates for 2024 tax returns and tax payments due between January 7 and October 15, 2025 to October 15, 2025. https://www.irs.gov/newsroom/irs-california-wildfire-victims-qualify-for-tax-relief-various-deadlines-postponed-to-oct-15, https://www.gov.ca.gov/2025/01/11/california-provides-tax-relief-for-those-affected-by-los-angeles-wildfires/
Also see the IRS Tax Relief in Disaster Situations page. https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
Canada and Mexico dodge a bullet - for now.
President Trump has postponed imposing 25% tariffs on imports from Canada and Mexico for 30 days to allow time to negotiate for better border security and drug enforcement in those countries.
Canada and Mexico were prepared to impose retaliatory tariffs. Businesses and consumers in Canada, Mexico and the United States would suffer from paying higher prices for imported goods. Tariffs aren't paid by the country they're imposed on, but by those who buy goods from those countries. It's a tax that mostly hurts the poor and the middle class, since the wealthy class consumes a smaller portion of their income.
Surprised by President Trump's quick actions after inauguration?
If you were paying attention, you shouldn't be surprised. A plan was in place, and Trump said he was going to aggressively deport illegal aliens and impose tariffs during his campaign. Although he denied knowing about Project 2025, it was created to be a blueprint for his first 180 days in office, and he's following it. You can download it for free at https://www.project2025.org/playbook/. To be prepared for what's coming in the days ahead, study the playbook.
The election to be an S corporation for calendar-year corporations is generally March 15, 2025; see your tax advisor for new corporations.
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.
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.
Another way to protect yourself is to get an Identity Protection Personal Identification Number (IP PIN) from the IRS. Here is a link to an IRS explanation. https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin. A new IP-PIN is generated for each year that your file an income tax return.
Trump freezes IRS hiring, just in time for tax season.
President Donald Trump signed a series of executive orders after his inauguration on January 20, 2025, including a hiring freeze for federal government workers, particularly at the Internal Revenue Service. The freeze initially applies for all federal civilian employees. For most federal employees, except for IRS employees, the order will expire when the Director of the Office of Management and Budget (OMB), in consultation with the Director of OPM and the Administrator of the United States DOGE Service issues a plan to reduce the size of the Federal Government's workforce through efficiency improvements and attrition. The freeze for IRS employees will remain in effect until the Secretary of the Treasury, in consultation with the Director of OMB and the Administrator of USDS, determines that it is in the national interest to lift the freeze.
As I understand it, temporary help has already been hired by the IRS for tax season, Federal employees were later offered a "buyout" to encourage them to leave.
These actions might lead to worse customer service, including a shortage of employees to answer telephone questions, during tax season this year.
(Accounting Today, January 20, 2025, "Trump freezes IRS hiring, nixes global tax deal".)
Regulatory Freeze Memorandum.
Another executive order by President Donald Trump freezes proposing or issuing regulations, including submitting them for publication in the Federal Register, and to withdraw regulations that have been submitted but not published, until they have been reviewed and approved by a department or agency head appointed by President Trump.
Departments and agencies are further directed to consider postponing the effective date of regulations that have been published in the Federal Register but aren't effective yet for at least 60 days to review questions of fact, law, or policy.
(Checkpoint Newsstand, Thomson Reuters, "Memorandum Orders Regulatory Freeze; Executive Order Addresses Protections Based on Gender Identity", January 22, 2025.)
California wages could be wrong on Form W-2.
Since many people who work for California employers are working remotely, some of them have chosen to move out of state. If the move is permanent, they are no longer residents of California and the wages earned after moving probably aren't California wages. If they haven't notified their employer, the employer would have continued reporting the wages as California wages and done so on Form W-2.
There are exceptions for employment taxes like California unemployment insurance, employment training tax and state disability insurance when most of the services are performed in California, when some services are performed in California and the individual's base of operations is in California, or if some services are performed in California and the place from which the employer exercises general direction and control over the employee's services is in California.
The liability for personal income tax withholding is based on where the work is done.
Ideally, the employee should notify the employer of any error in sourcing wages and a corrected Form W-2 should be issued.
If the employer refuses, the employee should report the corrected information on his or her California income tax return with an explanation. This is one situation when the tax return should be paper filed, not efiled.
There could be a conflict because some employers have said they would reduce the pay scale for employees who move out of California.
Any taxpayer who hires a professional tax return preparer should tell them when remote work for a California employer is performed remotely out of the state.
Consider updating your Forms W-4 and DE-4 for 2025.
The IRS has issued updated Form W-4 for 2025. Now is a good time to review yours to consider updating it. It isn't required to be updated each year, but is required to be submitted for a new job. California has its own withholding form, Form DE-4. Since California still has personal exemption credits, a separate Form DE-4 form should probably be submitted.
Here are links for the forms. https://www.irs.gov/pub/irs-pdf/fw4.pdf, https://www.edd.ca.gov/pdf_pub_ctr/de4.pdf
Changing jobs could result in an excess 401(k) contribution.
A common error when changing jobs is not to notify the employer about 401(k) contributions made for the taxable year at your previous employment. Since the maximum voluntary 401(k) contribution for 2024 was $23,000 plus $7,500 "catch up" contribution for individuals age 50 or older, having contributions with two employers can result in an excess contribution. If the excess contribution is returned to the employee by April 15 of the following year, the 10% penalty doesn't apply and the returned amount is included in taxable wages for the year of the contribution. If excess contributions aren't timely returned to the employee, they are subject to a 10% excess contribution penalty, they aren't tax deductible and will be taxed a second time. There is also a risk the employer's plan could be disqualified because of this issue.
Backdoor Roths.
SECURE Act 2.0 did NOT include any provisions eliminating "backdoor Roth" contributions. These are generally funded by making a nondeductible IRA contribution that is immediately rolled over to a Roth IRA.
Another type of backdoor Roth is the mega backdoor Roth. These are set up via employer 401(k) plans with Roth accounts. Some permit voluntary employee contributions. For 2024, up to $69,000 can be contributed to these accounts.
Find out if your employer permits mega backdoor Roth contributions.
Roth conversion reminder.
Taxable Roth conversions of IRA accounts are still allowed. With higher federal income tax rates scheduled to return after 2025, making a taxable Roth conversion during 2025 might be a wise tax planning move.
Distribution election for estates and complex trusts.
The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. For 2024, they apply when the undistributed estate or trust income exceeds $15,199. Distributions by the estate or complex trust shifts the taxation of income to the beneficiaries. An election is available to treat distributions made during the first 65 days of the following year (for example, January 31, 2025) as distributed for a taxable year (for example 2024).
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.
Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that claim their real estate operations are a trade or business (including for the 20% federal tax deduction for trade or business income) should prepare them anyway. See your tax advisor for details.
Were you age 73 or older during 2024?
Required minimum distributions apply for traditional IRAs and employer retirement accounts (with some exceptions) for the year the plan participant reaches age 73. The first payment must be made by April 1 of the following year. Thereafter, the payment must be made by December 31, so there could be two payments required during the year following the year the plan participant reaches age 73. The two payments could throw you into a higher tax bracket or make qualified dividends or long-term capital gains subject to a higher tax rate. Calendar taking care of this. Consider scheduling automatic payments with the plan custodian. See your tax advisor.
Business Ownership Information Reports still on hold.
The U.S. Supreme Court has stayed the preliminary injunction against enforcement of the requirement to file Beneficial Ownership Information Reports, pending the disposition of the appeal in the Fifth Circuit Court of Appeals in Texas Top Cop Shop, Incorporated or a potential appeal to the U.S. Supreme Court.
FinCEN still says filing the report is voluntary at this time. https://www.fincen.gov/boi
If you haven't filed, have your documents ready in case the penalties are ultimately upheld.
(James R. McHenry, III, Acting Attorney General, et. al. v. Texas Top Cop Shop, Incorporated, et al., U. S. Supreme Court No. 24A653, January 23, 2025.)
Final regulations issued for partnership related party basis shifting transactions.
The IRS has issued final regulations that identify certain partnership related-party basis adjustment transactions as transactions of interest, subject to the reportable transaction requirements. The final regulations finalize proposed regulations issued during June 2024. They increase the threshold amount for a basis increase in a transaction of interest from $5 million to $25 million for tax years before 2025 and $10 million after 2024.
(T.D. 10028.)
Investment Firm's limited partners were subject to self-employment tax.
The IRS upheld the IRS in finding "limited partners" in an investment firm partnership weren't in fact limited partners, and their distributive shares of partnership income were subject to self-employment tax.
The Tax Court applied a functional analysis test, focusing on how partnership income was derived, and determined that it was received in exchange for services provided by the partners. In a previous case, the Tax Court found the limited partner exception only applies to passive investors and not to a partner who is limited in name only.
The Tax Court rejected the taxpayer's claim that the income was a return on the partners' investments, especially considering only one of the partners made a capital contribution to acquire his interest.
(Denham Capital Management LP v. Commissioner, T.C. Memo. 2024-114.)
401(k) payments previously taxed in Pennsylvania subject to California tax.
Taxpayers K. Saraiya and M. Saraiya lived in Pennsylvania from 2010 through 2013. They made 401(k) contributions, which were not excluded from Pennsylvania and taxed in those years.
They moved to California and received a $75,000 payment from the 401(k) account. They initially didn't report the income, and received a Notice of Proposed Assessment from the California Franchise Tax Board for $3,077 in additional tax.
The Saraiyas submitted a 2017 Schedule S, claiming a $2,303 State Tax Credit for the taxes paid to Pennsylvania on the income from 2010 to 2013.
The California Office of Tax Appeals and the Franchise Tax Board allowed the credit for taxes paid to Pennsylvania on the income.
They denied the Saraiya's claim the income shouldn't be subject to California tax.
(Appeal of Saraiya, 2025-OTA-017SCP)
Proposed regulations issued for automatic enrollment in certain retirement plans.
The IRS has issued proposed regulations relating to automatic enrollment of employees in certain retirement plans enacted in the SECURE 2.0 Act of 2022, which applies for plan years beginning after December 31, 2024.
(REG-100669-24.)
Final regulations issued for micro-captive insurance transactions.
The IRS has issued final regulations subjecting micro-captive insurance transactions or transactions substantially similar to micro-captive insurance transactions to reportable transaction disclosure rules.
(T.D. 10029.)
Updated final and proposed regulations issued for consolidated returns and controlled groups.
The IRS has issued final and proposed regulations that affect affiliated groups of corporations that file consolidated federal income tax returns. The final regulations reflect statutory changes made by the Inflation Reduction Act of 2022. The proposed regulations clarify that, for transfers between members of a consolidated group, a transferee's assumption of certain liabilities will not reduce the transferor's basis in the transferee's stock received in the transfer.
(T.D. 10018, REG-13442010.)
Final regulations issued for credit for production of clean hydrogen and energy credit.
The IRS has issued final regulations implementing the credit for production of clean hydrogen under Internal Revenue Code Section 45V and certain provisions of the energy credit under Internal Revenue Code Section 48, as enacted by the Inflation Reduction Act of 2022.
(T.D. 10023.)
Do you sell products, 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@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
Please share your good experiences with Michael Gray, CPA.
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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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