Michael Gray, CPA's Tax and Business Insight
June 3, 2019
© 2019 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 Father's Day!
- It's time for cleanup and extensions.
- Attention CPAs.
- Second estimated tax payment due.
- Estimated fee payment due June 17 for some calendar year LLCs.
- IRS corrects errors in 2018 Schedule D worksheets for Forms 1040 and 1041.
- Nonrecourse debt rule limits interest deduction.
- Taxpayer materially participated when away from business location.
- Compensatory employee stock not a second class of S corporation stock.
- ESOP participants are subject to related party rules.
- IRS issues 2019 guidelines for personal use of employer-provided vehicles.
- Fraud loss disallowed.
- Excluded Medicaid waiver payments were earned income for certain tax credits.
- Value of S corporation stock was reduced for C corporation tax rate.
- No exempt status for aid to medical marijuana users.
- House approves retirement bill.
- Signature required for California Power of Attorney.
- Hyatt loses appeal to Supreme Court.
- Franchise Tax Board confirms an error on its nonfiler questionnaire.
- Make copies of retirement payments received when you move to or from California.
- California employers may be required to implement CalSavers retirement plans.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: The Magic of Short Books
- Follow me on social media!
- Check out my blog.
- PS Marché Aux Fleurs
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
I've started a YouTube channel with performance recordings. Click this link to see the current list. https://www.youtube.com/channel/UCbgPno90biX8MpOBHBYqqCw Happy Fathers' Day!
Fathers' Day will be celebrated on Sunday, June 16 this year. Remember to express your appreciation to your father and other fathers who have contributed to your life.
It's time for cleanup and extensions.
Maybe you have an issue for which you would like a second look on the income tax returns you just filed. Maybe you have extended income tax returns that you need to have prepared. Or maybe you have some planning issues for which need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.
Attention CPAs.
Do you need help writing content for your web site, books to promote your CPA firm, your CPA firm newsletter or promotional communications? Maybe I can help. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.com.
Second estimated tax payment due.
The second estimated tax payment for most individuals and calendar year corporations and fiduciaries is June 17.
For individuals, federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2018 tax on your income tax return if your adjusted gross income exceeds $150,000. Alternatively, you can make payments based on your income and deductions for 2019.
The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2018 tax, unless your adjusted gross income is $1 million or more. In that case, your estimated tax payments should be based on your actual income and deductions for 2019.
If you want our help computing your second quarter estimated tax payments, call Ms. Thi Nguyen, CPA at 408-286-7400, extension 206 on weekdays to make an appointment for a consultation.
Estimated fee payment due June 17 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 June 17 for calendar year LLCs or online using WebPay at https://www.ftb.ca.gov/online/webpay/Business_Entities.asp?WT.mc_id=Business_Online_WebPay. 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.
IRS corrects errors in 2018 Schedule D worksheets for Forms 1040 and 1041.
The IRS issued corrected 2018 Schedule D worksheets for Forms 1040 and 1041 on May 15, 2019. The corrected worksheets are now available at the IRS web site and will be incorporated in tax return preparation software updates. Anyone who filed a federal income tax return with income taxes for long-term capital gains based on the previously-issued worksheets should determine whether they should amend their 2018 income tax returns. In most cases, the regular income tax will be lower when the corrected worksheets are used.
Nonrecourse debt rule limits interest deduction.
A federal district court ruled that a mortgage for a principal residence discharged in bankruptcy became a nonrecourse debt. Although the bank applied proceeds ($522,015) from a subsequent sale of the real estate to interest and issued Form 1098 to the taxpayers, the short sale proceeds were much less than the principal balance of the mortgage ($744,992.95). In this situation, the tax law disregards how the creditor/bank applies the sale proceeds and applies them to principal, so no deduction is allowed for the interest.
The principle applied by a majority of the courts is where the debtor has the choice of abandoning the property that secures the debt rather than make payment (as any nonrecourse debtor does), there is valid indebtedness only where the debtor has an economic incentive to satisfy the obligation.
(Milkovich, DC WA May 1, 2019, 123 AFTR 2d¶ 2010-710.)
Taxpayer materially participated when away from business location.
The Tax Court ruled that a taxpayer whose business was located in Chicago, but who lives 60% of the year in Florida and worked remotely in Florida was not engaged in a passive activity. His remote work counted in determining that he participated in the business on a regular, continuous and substantial basis.
(Barbara, TC Memo 2019-50, May 13, 2019.)
Compensatory employee stock not a second class of S corporation stock.
The IRS has issued a Private Letter Ruling concluding that an S corporation's employee stock compensation plan did not create a second class of stock. S corporations are only permitted to have a single class of stock. Shares acquired under the plan were subject to certain restrictions, including transfer restrictions. The IRS said the transfer restrictions are disregarded when determining whether the plan shares have identical rights to other stock issued by the S corporation.
(PLR 201918013, dated November 16, 2018, issued May 3, 2019.)
ESOP participants are subject to related party rules.
The Tenth Circuit Court of Appeals has ruled that an employee stock ownership plan (ESOP) holding stock of an S corporation was a trust under the related party rules for S corporations. (It was not a trust under the laws of the state where it was located.) Therefore, the S corporation couldn't deduct accrued expenses for payroll due to employees who were participants in the ESOP until they were paid and includible in the employee's gross income.
(Petersen, CA 10 May 15, 2109, 123 AFTR 2019-699.)
IRS issues 2019 guidelines for personal use of employer-provided vehicles.
The IRS has issued Notice 2019-34, stating the maximum value of an employer-provided vehicle first made available to employees for personal use in calendar year 2019 for which the vehicle cents-per-mile valuation rule or the fleet-average valuation rule may be applied. The value is adjusted annually for inflation. The maximum value for 2019 is $50,400.
(Notice 2019-34)
Fraud loss disallowed.
The Tax Court upheld the IRS in disallowing a taxpayer's theft loss due to a fraud. The taxpayer did not take any action to try to recover his loss by the end of 2011. The taxpayer failed to prove there was no reasonable prospect of recovery at the end of 2011. The taxpayer never filed a lawsuit or title insurance claims relating to the fraud.
(McNely, TC Memo 2019-39, April 18, 2019.)
Excluded Medicaid waiver payments were earned income for certain tax credits.
Taxpayers followed IRS Notice 2014-7 and excluded qualified Medicaid waiver payments as difficulty of care payments, excludible as foster care payments from their taxable income for 2015. They included the payments as earned income when computing their refundable earned income credit and addition child tax credit.
The IRS tried to disallow the credits, since the income wasn't taxable.
The Tax Court ruled against the IRS and in favor of the taxpayers. The Court said the IRS cannot remove a statutory benefit provided by Congress.
The Court did not rule whether the Notice was in error and the taxpayers should have included the payments in taxable income.
(Feigh, May 15, 2019, 152 TC No. 15.)
Value of S corporation stock was reduced for C corporation tax rate.
A U.S. District Court ruled on the valuation of S corporation stock in a gift tax case. The valuations by both the experts for the taxpayer and for the IRS reduced the value of discounted estimated future earnings by an income tax factor at rates that apply for C corporations. The Court accepted the valuation developed by the taxpayer's expert, with minor modifications. Although the case doesn't have strong precedential weight, it is significant because the IRS accepted an income tax adjustment for a passthrough entity, which doesn't pay income taxes.
(Kress v. U.S., U.S. District Court, Eastern District of Wisconsin, March 26, 2019, 123 AFTR 2d 2019-1224.)
No exempt status for aid to medical marijuana users.
The IRS refused to grant tax-exempt status to an organization that provides financial aid to disadvantaged patients who have a medical need for marijuana, because under federal law, cannabis use is illegal.
(PLR 201917008, April 26, 2019.)
House approves retirement bill.
The House of Representatives approved the "Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019", (H.R. 1994). The vote was 417-3, indicating strong bipartisan support.
Some significant provisions in the bill include:
- Permitting pooled arrangements for employers to join together to offer retirement plans for their employees;
- Raising the age for required minimum distributions from 70 1/2 to 72;
- Repealing the prohibition on contributions to a traditional IRA by an individual who has reached age 70 1/2;
- Eliminating "stretch" life expectancy payments for inherited retirement accounts (including IRAs) for many beneficiaries of account owners who are deceased after December 31, 2019. Inherited retirement accounts for beneficiaries subject to the new rules would have to be distributed within 10 years after the death of the account owner. Significant exceptions include surviving spouses, beneficiaries who are minors, and beneficiaries who are disabled or chronically ill.
- Repealing the changes to the "kiddie tax" enacted in the Tax Cuts and Jobs Act of 2017, that subject the unearned income of children to trust income tax rates. This change would be effective for tax years beginning after December 31, 2018, but a taxpayer could elect to apply it retroactively to tax years beginning after December 31, 2017.
The Senate hasn't indicated when it will take up the bill.
Signature required for California Power of Attorney.
Beginning in July, 2019, the California Franchise Tax Board will require taxpayers/clients to log into their MyFTB account to approve an unsigned Power of Attorney declaration, including those submitted by a tax professional through MyFTB without a signed declaration. If the taxpayer doesn't approve the declaration within 90 calendar days, it will expire and be rejected by the Franchise Tax Board.
(Spidell's California Taxletter®, June, 2019, p. 1, "Be sure to include a signed power of attorney declaration.")
Hyatt loses appeal to Supreme Court.
The U.S. Supreme Court overruled a precedent, Nevada v. Hall, (1979) 440 U.S. 410, and found the Franchise Tax Board was immune from being sued in Nevada courts. A Nevada jury had awarded Hyatt close to $400 million in damages. Initially, the U.S. Supreme Court limited the award to $50,000, the amount that a Nevada citizen can recover from a Nevada state agency. The Franchise Tax Board asked the Supreme Court to reconsider its decision. The Court decided to overrule Nevada v. Hall. Now, Hyatt isn't entitled to any damages after two decades of litigation. Although the Franchise Tax Board won the damages issue, last year Hyatt won most of his residency case before the California State Board of Equalization, so he ended up having a minimal California tax liability. (The Hyatt case related to whether Hyatt was a resident of California when he realized a big capital gain.)
(FTB v. Hyatt (May 13, 2019) U.S. Supreme Court Case No. 17-1299.)
Franchise Tax Board confirms an error on its nonfiler questionnaire.
The California Franchise Tax Board has confirmed there is an error on its 4602J questionnaire, which is mailed with the 4600 Request/Demand for Tax Return Notice. The error is in Section F for Part-Year Resident or Nonresident of California. The instructions tell part-year residents and nonresidents to include the gross income (line 2) in their total California-source gross income (line 8) when determining whether they have a filing requirement. Only California-source gross income should be entered at line 8.
The Franchise Tax Board has fixed the error for future mailings and will reissue the form to taxpayers who received an erroneous one.
(Spidell's California Taxletter®, June, 2019, p. 4, "FTB confirms error on nonfiler questionnaire.")
Make copies of retirement payments received when you move to or from California.
The Franchise Tax Board claimed all retirement income should have been reported as California income for 2012 when a taxpayer moved to Maryland in May 2012. The taxpayer initially wasn't able to provide documentation for when the payments were received. Eventually, she was able to provide the required documentation for her repeal and have the adjustment eliminated.
(Appeal of McMillan, 2019 OTA-055.)
California employers may be required to implement CalSavers retirement plans.
A federal district court ruled that CalSavers, a California state-mandated retirement plan for private employers, does not violate ERISA (Federal pension laws), so the program can proceed. Under the CalSavers plan, employers that don't have their own retirement plans will be required to offer a payroll deduction Roth IRA program. Employers make no contributions to the accounts.
The program is being phased in over a three-year period. Employers subject to the requirement must be registered as follows: more than 100 employees on June 30, 2020; more than 50 employees on June 30, 2021; Five or more employees on June 30, 2022.
Employees may opt out of participating in the plan.
(U.S. District Court, East District of California, Case No. 2:18-cv-01584-MCE-KJN, Spidell's California Taxletter®, June, 2019, p. 12, "Employers may be required to offer state-mandated retirement program.")
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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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