Michael Gray, CPA's Tax and Business Insight
March 9, 2020
© 2020 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 St. Patrick's Day!
- Family celebrations.
- Due date for partnership and S corporation tax returns will soon be here.
- Due date for 2019 individual, calendar year estates and trusts, and calendar year corporation income tax returns is April 15, 2020.
- The election to be an S corporation for calendar-year corporations is also due March 16.
- Trust distribution deadline is March 5, 2020.
- Remember that an estimated tax payment is also due on April 15.
- Remember the second California real estate tax payment is due April 10.
- Cutoff for preparing tax returns will soon be here!
- Make your tax return preparation interview appointment now.
- Use new Form I-9 for new employees.
- Have you seen these blog posts?
- AB 5 and California personal income tax returns.
- Another non-resident business subject to California income tax.
- Suspended corporations and LLCs don't qualify for an extension of time to file.
- Remember to get a Tax Clearance Certificate when buying a business's assets.
- Loss limitations apply when computing self-employment tax.
- Did you get health insurance coverage through an exchange?
- Supreme Court to review the Affordable Care Act.
- Inflation adjustments for failure to report financial account penalties.
- Interest rates for overpayments and underpayments unchanged for 2nd quarter 2020.
- Tax relief for certain Americans who want to give up their U.S. citizenship.
- IRS issues proposed reliance regulations for meals and entertainment.
- IRS issues procedures for farmers eligible for more beneficial Uniform Capitalization exemption.
- Financial institution had to capitalize costs to acquire automobile leases.
- Updated list of vehicles qualifying for plug-in electric vehicle credit.
- Final regulations issued for valuing personal use of employer-provided vehicles.
- Don't report taxable income twice!
- Remember to report the sale of option stock.
- Watch reporting qualified sales of ISO stock.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: SPIN Selling
- Follow me on social media!
- Check out my blog.
- PS Marché Aux Fleurs
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
It took my grandson, Clive Baker, almost two years to assemble this Lego Death Star Happy St. Patrick's Day!
St. Patrick's Day is the occasion when all Americans celebrate being Irish! This year it falls on Tuesday, March 17. It's time for the wearin' of the green! The luck of the Irish be with ye!
Did you know that St. Patrick used the THREE-leafed clover as an analogy for the Holy Trinity? The four-leaf clover is actually an American tradition.
Family celebrations.
My sister Arlene Gray McLean and my brothers-in-law Wade Allison and Lane Johnston, are celebrating birthdays this month. Happy Birthdays!
Due date for partnership and S corporation tax returns will soon be here.
The due date for calendar year 2019 partnership and S corporation income tax returns is March 16, 2020. If the information for preparing them isn't complete, extension forms should be submitted with the estimated balance of tax by March 16.
Due date for 2019 individual, calendar year estates and trusts, and calendar year corporation income tax returns is April 15, 2020.
The election to be an S corporation for calendar-year corporations is also due March 16.
Trust distribution deadline is March 5, 2020.
Estates and irrevocable trusts for which the trustee has discretion for making distributions can elect to treat distributions made within 65 days after the year-end as made during the previous year. Distributions generally reduce taxable income for the estate or trust and carry taxable income to the beneficiaries of the estate or trust, who might have a lower marginal tax bracket. For 2019 calendar year trusts and estates, the deadline for making a distribution to make the election is March 5, 2020. Trustees and executors should consult with their tax advisor about whether their trust or estate and its beneficiaries would benefit from making such an election.
Remember that an estimated tax payment is also due on April 15.
The first 2020 estimated tax payment for individuals and most other calendar year entities is also due on April 15, 2020. The penalties for late payment of estimated taxes are computed as simple interest, but the interest rate has been increasing. The federal estimated payment can be based on 25% of last year's tax liability. California "front loads" the first estimated tax payment as 30% of last year's tax liability. California taxpayers with taxable income of $1 million or more must make their estimated tax payments based on their actual income and deductions.
Remember the second California real estate tax payment is due April 10.
There is a nasty penalty for paying real estate taxes late, and the date slips past us because we're thinking about April 15. Why not make this payment now, so you don't forget it?
Cutoff for preparing tax returns will soon be here!
If you provide complete information for preparing your 2019 income tax returns by March 16, your tax returns should be finished in time to file them by April 15. Otherwise, an extension form should be submitted with a payment of any estimated balance of tax by April 15.
Make your tax return preparation interview appointment now.
There is still time for a few personal interview appointments for preparing 2019 individual income tax returns. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Ms. Thi Nguyen, CPA at 408-286-7400, extension 206.
Use new Form I-9 for new employees.
The Department of Homeland Security has issued new Form I-9, Employment Eligibility Verification. The new form should be used for employees hired after January 31, 2020. Here's a link to details and to get copies of the form: https://www.uscis.gov/i-9
Have you seen these blog posts?
In the past few months, I've written several blog posts about tax developments. Check out whether any of them relate to you. (Please bookmark and check my blog, www.michaelgraycpa.com, for updates.)
- Final Opportunity Zone Regulations Issued http://www.michaelgraycpa.com/posts/final-qualified-opportunity-zone-regulations-increase-benefits/
- Recently passed federal tax benefit extenders could cut your 2018 or 2019 tax bill. http://www.michaelgraycpa.com/posts/will-any-of-these-extenders-cut-your-tax-bill-for-2018-or-2019/
- SECURE Act could spoil estate plans for retirement accounts with a Conduit Trust beneficiary. http://www.michaelgraycpa.com/posts/urgent-news-if-you-have-a-retirement-account-with-a-conduit-trust-named-beneficiary/
- SECURE Act includes major retirement plan changes and repeal of the Kiddie Tax. http://www.michaelgraycpa.com/posts/major-federal-retirement-changes-enacted-kiddie-tax-change-repealed/
AB 5 and California personal income tax returns.
AB 5 is California legislation passed during 2019 requiring that certain individuals who are independent contractors for federal purposes should be classified as employees under California employment law. It's currently unclear how the income should be reported on the taxpayer's California individual income tax return.
Although AB 5 is generally effective January 1, 2020, some businesses have already issued a California Form W-2 showing state wages for 2019. Since the federal rules are unchanged, a Federal 1099-MISC form should have been issued to these individuals.
According to the Franchise Tax Board, the classification under California's employment law should also apply for income tax reporting. This means the individual's business expenses would not be claimed on Schedule C and would likely be disallowed. The Schedule C income would be eliminated on Schedule CA and the California wages would be added on that form.
There is another reporting possibility. The California Revenue and Taxation Code hasn't changed. Just report the California wages in Box 12 of Form 540 as information. Report the income and deductions on federal Schedule C. Start with the federal adjusted gross income on the Form 540. Do not change the reporting of the income on the California income tax return.
(Be sure the state wages reported on Form W-2 are the same as the income reported on Form 1099-MISC.)
Although the intentions of the California legislature may have been good, it doesn't seem like they thought through the implications of enacting this legislation. Many groups are seeking exemptions.
Write your representatives in the California legislature and ask them to eliminate this issue.
(Spidell's California Taxletter, March 2020, p.1, "What does AB 5 mean for California income tax returns?")
Another non-resident business subject to California income tax.
A non-resident sole proprietor with a California customer was required to source its income to California, even though the work was performed outside California. The Office of Tax Appeals applied the market-sourcing rule to determine that income for work performed for a California business was subject to California income tax. The taxpayer wasn't able to demonstrate that the benefit of the work was received outside California.
(Appeal of Moro, 2019-OTA-381, November 6, 2019.)
Suspended corporations and LLCs don't qualify for an extension of time to file.
Please be aware that an entity that has been suspended by the California Secretary of State or the Franchise Tax Board doesn't qualify for an automatic extension of time to file it income tax returns. Filing late could subject the entity to late filing penalties including penalties for each partner, member or S corporation shareholder. Ouch!
Tax return preparers should check the entity's status at the Secretary of State's website at https:/businesssearch.sos.ca.gov/.
(Spidell's California Taxletter, March 2020, p. 13. "Suspension means no extension.")
Remember to get a Tax Clearance Certificate when buying a business's assets.
An employee of Oak Tree Diner in Rio Linda, California, bought the assets of her employer and opened a new restaurant, Creekside Diner, in the same location and kept the same telephone number for the business. She paid $50,000 for the assets of the business. She didn't get a tax clearance certificate for the purchase.
The California Department of Tax and Fee Administration said she had successor liability for unpaid liabilities of Oak Tree Diner for unpaid sales and use taxes.
Moral: Be sure to get a tax clearance certificate when buying the assets of a business.
(Appeal of Draper, December 23, 2019, 2019-OTA-435)
Loss limitations apply when computing self-employment tax.
The IRS Chief Counsel recently issued advice about computing self-employment tax. The Chief Counsel confirmed that loss limitations under the passive activity loss rules and basis and at-risk limitations income tax rules also apply when computing the self-employment tax. (Commercial tax return preparation software follows this procedure.)
(Chief Counsel Advice 202009024, February 28, 2020.)
Did you get health insurance coverage through an exchange?
Anyone who received health insurance coverage through an exchange must reconcile advance payments (premium subsidy) and compute the Health Coverage Tax Credit using Form 8885. The form includes an election that the taxpayer must make or repay all of the advance payments received. Here is a link to information the IRS recently posted about this. The Health Coverage Tax Credit was scheduled to expire after 2019, but was recently extended through 2020. https://www.irs.gov/forms-pubs/health-coverage-tax-credit-hctc-election-information
Supreme Court to review the Affordable Care Act.
The U.S. Supreme Court has agreed to hear a case about whether the Affordable Care Act (AKA Obamacare) is constitutional after law changes enacted in the Tax Cuts and Jobs Act of 2017.
Inflation adjustments for failure to report financial account penalties.
The Financial Crimes Enforcement Network (FinCEN) has announced the inflation-adjusted penalties for failure to report an interest in a financial account on a FBAR form, FinCEN Form 114, has been increased to $13,481 for a non-willful failure and begins at $134,806 for a willful failure, effective for penalties assessed after February 19, 2020.
Interest rates for overpayments and underpayments unchanged for 2nd quarter 2020.
For noncorporate taxpayers, the rate for both overpayments and underpayments, including estimated taxes, for the 2nd quarter of 2020 will be 5%.
For corporations, the overpayment rate for the 2nd quarter of 2020 will be 4%. Corporations will receive 2.5% for overpayments exceeding $10,000. The underpayment rate for large corporations will be 7% and will be 5% for all other corporations.
(Revenue Ruling 2020-7, February 28, 2020.)
Tax relief for certain Americans who want to give up their U.S. citizenship.
U.S. citizens by birth who live outside the U.S. and have little or no family or economic ties to the U.S. may qualify for relief if they wish to give up their U.S. citizenship. U.S. citizens are subject to U.S. tax on their worldwide income and may be required to file Federal income tax returns. The IRS has outlined tax relief provisions for these individuals. Here is a link to the explanation. https://www.irs.gov/individuals/international-taxpayers/relief-procedures-for-certain-former-citizens
IRS issues proposed reliance regulations for meals and entertainment.
The Tax Cuts and Jobs Act of 2017 eliminated the deduction for business entertainment expenses and subjects meals provided to employees to the 50% limit that applies to other meals, effective for expenses incurred after December 31, 2017. The deduction for meals provided to employees as a de minimus fringe benefit is eliminated entirely after 2025.
The IRS has issued proposed reliance regulations implementing the new law. Under the proposed regulations, "entertainment" does not include food or beverages unless the food or beverages are (1) provided at or during an entertainment and (2) the cost of the food or beverages are not separately stated from the entertainment cost.
Business owners should review these proposed regulations with their tax advisors.
(REG 100814-19, February 26, 2020.)
IRS issues procedures for farmers eligible for more beneficial Uniform Capitalization exemption.
Certain cash-basis farmers may have elected to be exempt from the Uniform Capitalization rules. Farmers who made the election must use the straight-line Alternative Depreciation System (ADS) and treat plants as Section 1245 property, totally ordinary income when sold.
The Tax Cuts and Jobs Act of 2017 includes a new exemption from the Uniform Capitalization rules for business taxpayers that meet a $25 million gross receipts test, not subject to ADS and the Section 1245 classification of plants.
The IRS has issued a Revenue Procedure for farmers to switch from the old exemption to the new one. Taxpayers may even make the change retroactively for 2018 by filing an amended income tax return.
Farmers should consult with their tax advisors about whether they should change their accounting method.
(Revenue Procedure 2020-13, February 21, 2020.)
Financial institution had to capitalize costs to acquire automobile leases.
The IRS Chief Counsel has issued advice that a financial institution was required to capitalize amounts that it paid to purchase automobile leases from automobile dealers. The amounts were costs to acquire an intangible, and should be amortized over the terms of the leases.
(Chief Counsel Advice 202005019, January 31, 2020.)
Updated list of vehicles qualifying for plug-in electric vehicle credit.
The IRS has updated its list of vehicles qualifying for the plug-in electric vehicle credit. Here's a link to the list. https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit
Final regulations issued for valuing personal use of employer-provided vehicles.
The IRS has issued final regulations about using the fleet-average and vehicle-cents-per-mile method to value personal use of employer-provided vehicles. The personal use should be included on Form W-2 as additional compensation to the employee.
The Tax Cuts and Jobs Act of 2017 increased the dollar limitations for depreciation deductions and made more vehicles eligible for the vehicle-cents-per-mile method.
Employers who provide company vehicles to their employees should review these rules with their tax advisors.
(TD 9893, February 5, 2020.)
Don't report taxable income twice!
A common error for employees who exercise employee stock options is to report their income twice. Ordinary income from exercising a non-qualified stock option or from the disqualified disposition of stock received from exercising an incentive stock option should be reported by the employer on Form W-2. The ordinary income amount is added to the tax basis (cost for computing gain and loss on your income tax return), reducing or eliminating the gain reported for the sale of the stock. Brokerage companies can also miss this adjustment on the information return for the sale. This is especially a common error for employees who skip the "interview mode" when preparing their own income tax returns using software like TurboTax.
Remember to report the sale of option stock.
Employees who exercise their stock options and immediately sell the stock sometimes omit reporting the sale of the stock. They figure the income is already reported on their W-2 form. They are essentially right, but the IRS "matches" the income reported on income tax returns with information returns for the sale of securities issued by brokerage companies. See the above information, "Don't report taxable income twice!" If you add the option price to the ordinary income reported for the nonqualified stock option exercise or disqualified disposition of ISO stock resulting from an exercise and immediate sale, the cost should be equal to or slightly more (because of selling expenses) than the sales price of the stock.
Watch reporting qualified sales of ISO stock.
A common error for employees who make a qualified disposition of ISO stock is to add the AMT income reported for the year of exercise to the cost of the stock. (A qualified sale is made more than two years after the grant of the ISO and more than one year after the exercise of the ISO.) Employees rationalize they have already paid income taxes for that income. The tax they paid was on the alternative minimum tax schedule, not the regular tax schedule, so there is no regular tax basis adjustment for the exercise. This is an error. The tax basis of the shares for regular tax reporting is generally the option price paid for the shares. (Note special rules apply when the option price is paid using other shares of employer stock. Those rules are beyond the scope of this explanation.)
The mechanism for recouping some of the AMT paid when the ISO was exercised is the minimum tax credit, reported on Form 8801. A second AMT Schedule D is prepared for the year of sale with the basis adjustment for the AMT income reported relating to the exercise of the ISO added to the tax basis on the AMT Schedule D for the sale of the ISO stock.
Does this make your head spin? Maybe you should hire someone who understands this to prepare your income tax returns. Call Thi Nguyen, CPA at 408-286-7400, extension 206 to make an appointment.
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.
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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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- SPIN Selling Book Review at www.profitadvisors.com/spin.shtml
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Check out my blog.
I have also started a blog at www.michaelgraycpa.com. Check it out!
P.S.
My daughter and her husband, Holly and Dan Baker, have a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs and their website address is marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at www.taxtrimmers.com/directions.shtml.
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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
