Michael Gray, CPA's Tax and Business Insight

July 2, 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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Wonder Woman costume
"Wonder Woman" Minerva Siemer

Happy Fourth of July!

This is going to be a strange Fourth of July, with most events shut down. Our neighbors are providing a lot of fireworks, especially considering they are illegal in Santa Clara County. This is a good time to reflect on the blessings of liberty and what they mean to us and to be grateful to those who defend our country. If you have Disney +, consider watching the streaming version of Hamilton.

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The year is half over!

Time is sneaking by us again! How is 2020 going for you? Is there any way we can help you reach your goals? How is your tax picture shaping up this year? Call Thi Nguyen, CPA at 408-286-7400, extension 206 or send an email to thi@koehlercpa.com.

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Keep your letter from President Donald Trump confirming your economic impact payment.

The IRS is advising taxpayers to keep the letter for when they prepare their income tax returns for 2020. The economic impact payment will be recomputed and, if a higher amount is computed, taxpayers will receive the additional amount with their 2020 tax refund.

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Remember July 15, 2020 has become a BIG due date! (Potentially a triple whammy!)

The IRS and the Franchise Tax Board have extended the due date for the balance due for 2019 calendar year income tax returns and filing 2019 calendar year income tax returns and the first two 2020 estimated income tax payments to July 15, 2020. (The extension applies to federal income tax returns and payments due after April 1, 2020.) 2019 IRA contributions also have to be deposited by that date.

If you can't finish your 2019 income tax returns by July 15, 2020, you can still file an extension for additional time to file to October 15, 2020 for individuals and calendar year corporations, September 15, 2020 for S corporations and partnerships, or September 30, 2020 for calendar year estates and trusts.

Here's a URL to the IRS's page of questions and answers relating to the extension. https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers

Here's a URL to the Franchise Tax Board's page of questions and answers relating to the extension. https://www.ftb.ca.gov/about-ftb/newsroom/covid-19/extensions-to-file-pay.html

Here's a URL to the California Department of Tax and Fee Administration's page of questions and answers relating to the extension. https://www.cdtfa.ca.gov/services/covid19.htm

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Need help with getting your tax returns, amended returns, and elections done?

To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.

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Estimated fee payment due July 15 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 July 15 for calendar year LLCs or online using WebPay at https://www.ftb.ca.gov/pay/bank-account/. 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.

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Should you file a superseded tax return?

Since the filing date for 2019 income tax returns has been moved from April 15 to July 15, taxpayers have the opportunity to refile their federal income tax returns with superseded tax returns. This is an opportunity to change the instructions for applying an overpayment to 2020 versus a refund, to make corrections of errors or omissions to avoid accuracy-related penalties, or to make other changes relating to net operating losses, excess losses, and claiming bonus depreciation for qualified improvement property. Superseded tax returns are not eligible for efiling, so they must be paper-filed. See your tax advisor.

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Independence Day sale!

To celebrate Independence Day, we are offering subscribers our large volume tax planning book, Secrets of Tax Planning for Employee Stock Options, 2018 Edition for half price for the month of July 2020. (The book was updated for the Tax Cuts and Jobs Act of 2017. There were no changes related to employee stock options in the CARES Act or the SECURE Act. The regular price is $299.97 plus California sales tax for California residents. We are offering the book for $149.99 plus California sales tax for California residents. Order the book online at www.siliconvalleypublishingcompany.com and enter the discount code FIREWORKS, or call Dawn Siemer weekdays at 408-918-3162. (You might have to leave a message and she'll return your call.)

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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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It's time to think about California real estate property tax appeals.

Has your home declined in value because of the COVID-19 pandemic? Your family might have received a supplemental assessment notice relating to a change of ownership that you don't agree with. Santa Clara County sends its notices of assessed value during June.

The deadlines for appeals are 60 days after the date of a supplemental assessment notice and either September 15 or November 30 for regular assessments, depending on the county the property is located in. Here is a link for a list. http://www.boe.ca.gov/proptaxes/pdf/filingperiods.pdf

If you want help preparing your California real estate property tax appeal, call Ms. Thi Nguyen, CPA at 408-286-7400, extension 206.

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IRS issues proposed regulations for Section 1031 exchanges.

The Tax Cuts and Jobs Act of 2017 repealed Section 1031 exchanges for personal property exchanges and preserved them for real estate exchanges. The change created problems for some real estate exchanges that include some personal property. The IRS has issued proposed regulations to define what is real estate for the purposes of Section 1031. They make clear that the definition of real estate for Section 1031 is not the same as for other purposes of the Internal Revenue Code.

An important provision is that funds held by a qualified intermediary for an exchange can be used to purchase personal property incidental to real property, provided the personal property is typically transferred together with real property and the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15% of the aggregate fair market value of the replacement real estate. The value of the personal property will still be boot for the exchange, which can result in some currently taxable gain.

The proposed regulations are effective for exchanges beginning on or after the date the regulations are published as final regulations. Taxpayers may rely on the proposed regulations for exchanges of real property beginning after December 31, 2017 before the final regulations are published.

(REG-117589-18., scheduled to be published June 12, 2020.)

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IRS issues proposed regulations for Qualified Transportation Fringe (including employee parking), Transportation and Commuting Expenses.

A complex new requirement enacted in the Tax Cuts and Jobs Act of 2017 is the limitation of deductions for employee parking.

The IRS has issued proposed regulations for this limitation. Here are a few highlights.

Employers may elect to include employee parking in an employee's W-2 income. If the employer does this, the amount that would otherwise be nondeductible becomes deductible on the employer's federal income tax return. The amount should be deducted as wages.

If there are no reserved parking lot spaces, the parking lot provides parking to the public (customers, etc.), and the majority of the parking places aren't used by employees of the business, the limitation doesn't apply. (Yay!)

Spaces reserved for handicapped persons are treated the same as other spaces not reserved for employees.

The limitation doesn't apply to depreciation expense.

If a billing allocation isn't made for "mixed expenses," such as office rent, the employer may estimate the allocation to parking as 5% of the total expense.

An employer must use actual costs and not value for the amount disallowed or taxable to the employee.

Parking expenses exceeding the monthly exclusion amount (currently $272 per month) must be included on the employee's Form W-2 as additional wages.

This is an area that some practitioners will apply the doctrine of "selective compliance." The 5% of mixed costs guideline should simplify the process to make it easier to comply. Also, many businesses that don't provide reserved parking areas may find that employees don't use the majority of the parking spaces, so they aren't subject to the limitations.

I highly recommend that tax return preparers who prepare business income tax returns and taxpayers who prepare their own business income tax returns study these proposed regulations. They are scheduled to be final when they are issued as final regulations, and taxpayers may rely on them now.

(REG-119307-19, June 19, 2020.)

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Investment deadline for Qualified Opportunity Fund extended again.

The IRS has announced that taxpayers who had a capital gain during 2019 and the 180th day to invest in a Qualified Opportunity Fund to defer the gain would have fallen on or after April 1, 2020 and before December 31, 2020 now may reinvest in a Qualified Opportunity Fund no later than December 31, 2020.

In addition, a Qualified Opportunity Fund's failure to hold at least 90% of its assets in Qualified Opportunity Zone Property on any semi-annual testing dates from April 1, 2020 through December 31, 2020 is due to a reasonable cause because of the COVID-19 pandemic. Therefore, the failure does not prevent qualification of an entity as a Qualified Opportunity Fund.

The IRS Notice includes additional extensions for operating requirements for Qualified Opportunity Funds.

(Notice 2020-39, June 4, 2020.)

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IRS loses - TWICE!

The Federal Circuit Court of Appeals reversed the Claims Court for a second time on the same case, after remanding the case to the Claims Court. A couple who suffered investment losses as the result of a pump-and-dump scheme was entitled to deduct the losses on their 2004 federal income tax return because the taxpayers had no reasonable prospect of recovering their losses.

(Adkins v. United States, No. 19-1356, Fed. Cir. 2020.)

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Taxpayers lose Qualified Residence Interest deductions.

The Tax Court upheld the IRS in disallowing a taxpayer's qualified residence interest deductions. A property was not a qualified residence because it wasn't occupied by the taxpayer. The loan for a second property wasn't secured by the property, so it wasn't qualified indebtedness.

(McCarthy v. Commissioner, T.C. Memo. 2020-74, June 3, 2020.)

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Guidance for filing a 2019 federal income tax return after using the non-filer's tool.

Taxpayers who used the non-filers tool on the IRS website to request their Economic Impact Payment aren't eligible to electronically file their 2019 income tax returns. They should complete a paper Form 1040 or 1040SR, write "Amended EIP Return" at the top of page one, and mail the return to the IRS.

(Checkpoint Newsstand, June 29, 2020, p. 3. "Guidance for taxpayers filing a 2019 return after using nonfiler's tool.")

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Washington state general partner corporation subject to California minimum franchise tax.

The California Office of Tax Appeals upheld the California Franchise Tax Board in finding a corporation located in the state of Washington that was a general partner in two California limited partnerships was "doing business" in California, so it was required to file a California Franchise Tax return and pay the $800 minimum tax. (The corporation had zero taxable income in California for the years at issue.) The corporation claimed it didn't have economic nexus in California because it had no physical presence in California and earned less than $500,000 in California for management services performed in Washington.

Case law in California holds that a general partner of a limited partnership is "doing business" wherever the limited partnership is conducting business. The limited partnerships owned and rented California real estate. As the general manager, the taxpayer had the right to manage and conduct the activities of the limited partnership and was liable for their debts. The limited partnership's activities were attributable to the taxpayer and the taxpayer was engaging in transactions in California for the purpose of financial or pecuniary gain, so it was "doing business" in California.

This decision shouldn't be surprising for anyone familiar with California tax law, but is a reminder to out of state corporations with operations in California via partnerships and LLCs.

(Appeal of GEF Operating, Inc., 2020-OTA-057P, May 9, 2019.)

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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.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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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.

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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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Visit our new article!

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Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Want to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

I'm also on Facebook, LinkedIn, and Google+.

you can also follow me on other social media sites, Facebook, LinkedIn, and Google+.

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml

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Real estate investors, have you subscribed to Michael Gray, CPA's Real Estate Tax Letter at no charge or obligation?

For details, visit www.realestatetaxletter.com

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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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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, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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