Michael Gray, CPA's Tax and Business Insight

October 6, 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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Costumed dolls
My granddaughter, Minerva Siemer, helped my wife, Janet, dress her dolls for Halloween.

Boo! The year is almost over!

Halloween is already almost here! And after Halloween, the year roars to a close with the holiday season. 2020 is a year most of us are looking forward to being over.

Did you know Halloween is the second most popular holiday in the United States? It's a great one for business promotions and just having fun! This year families are encouraged to have virtual Halloween parties. Hope you can be creative in helping children and grandchildren enjoy the occasion anyway.

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Family celebrations.

My wife, Janet Gray, celebrates her birthday during October. Janet is a great blessing to me and our family. Happy birthday!

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ŽNuff said!

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Extended individual and C corporation income tax returns are due October 15.

Does your tax return preparer have your information to prepare your income tax returns yet? (Congratulations to those who have already filed their income tax returns!)

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Business owners can still set up a SEP-IRA for 2019.

Certain businesses that don't have other qualified plans and have extended the filing date for the income tax returns can still set up and fund a SEP-IRA plan and make a retirement plan contribution for 2019 up to October 15, 2020. See your tax advisor. (Under the SECURE Act, employers will have more flexibility for setting up retirement plans retroactively. Sooner is better. Employees can't make 401(k) contributions after the year-end!)

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Individual and C corporation tax returns due October 15.

The due date for 2019 individuals and calendar year corporations for which timely extensions were filed is October 15, 2020. Victims in federal declared disaster areas have additional time until December 15, 2020 to file their income tax returns and pay taxes. Here is a link to the IRS announcement. https://content.govdelivery.com/accounts/USIRS/bulletins/29ba201

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Check your 2020 withholding.

Even with updated Forms W-4, federal income tax withholding might not match up with your income tax return. I recommend that you review your withholding with your tax advisor now to consider whether you should increase your federal tax withholding. The current interest rate for computing the penalty for underpayment of estimated tax is 3%. Also, since personal exemptions have been repealed for federal tax reporting but not for state tax reporting, you should probably give your employer separate state income tax withholding instructions. The California form is DE-4.

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IRS has a Tax Withholding Estimator on its web site.

Here is a link to the IRS's Tax Withholding Estimator. https://www.irs.gov/individuals/tax-withholding-estimator

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Workers classified as employees under California Labor Code must receive Form W-2 and report wages on their income tax returns.

California has adopted some modifications to its employee classification rules under AB 5, which was enacted during 2019. There were too many changes for me to list here. They are effective September 4, 2020. An important provision in the new law is that workers classified as employees under California's Labor Code must be issued Form W-2 by their "employers" and must report their income as wages on their California income tax return. This could become the biggest nonconformity item for California reporting. Remember, business expenses are reported on Schedule C, so this change could result in losing substantial income tax deductions on the California income tax return.

No exemption was enacted for truckers or drivers working for Uber, Lyft, Doordash or other similar companies.

(AB 2257.)

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California conforms to federal coronavirus loan limit.

California has conformed to the federal limit of $100,000 for coronavirus-related loans during the period from March 27 through September 23, 2020 from qualified retirement plans that permit such loans (including some 401(k) plans). Without the change, loans exceeding $50,000 would have been taxable distributions for California reporting.

(AB 276.)

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Final regulations issued for meals and entertainment.

Meals and entertainment deductions were dramatically cut back by the Tax Cuts and Jobs Act of 2017, including de minimus meals provided to employees at an in-house dining facility. The IRS has issued final Treasury regulations explaining how to implement the changes. The regulations are effective for tax years beginning on or after the date they are published in the Federal Register. Business owners should discuss the regulations with their tax advisors.

(Treasury Decision 9925.)

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Final regulations issued for sourcing sales of personal property.

The Tax Cuts and Jobs Act of 2017 included a provision changing how the income from the sale of property that was produced in the United States and sold to a customer located outside the United States is sourced (what country the income is taxable in). Some or all of the income is sourced to the United States when the company produces the property in the United States or has a fixed place of business in the United States. The final regulations include guidance for implementing these rules. If your business sells goods outside the United States and produces or has a fixed place of business in the United States, you should consult with your tax advisor about these regulations. They are effective for tax years ending on or after December 23, 2019, but the taxpayer may elect to apply them for any tax year beginning after December 31, 2017 and ending before December 23, 2019.

(Treasury Decision 9921.)

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IRS Tip for reconstructing records.

With hurricanes in the East and South and wildfires in the West, it seems disaster is striking everywhere. Even when a taxpayer's records are destroyed, the IRS expect the taxpayer to reconstruct as many records as possible. The IRS gives tips on how to do it in Tax Tip 2020-127. Here's a link to the Tax Tip. https://content.govdelivery.com/accounts/USIRS/bulletins/2a30f8c

Since most people have access to cloud storage, the IRS expects taxpayers to use it to protect their records.

(Tax Tip 2020-127.)

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Court rules owner was the alter ego of a corporation and liable for its debts.

Arthur Lothringer formed a corporation, called Pick Ups, Inc. that sold and financed used pick-up trucks. The corporation failed to file a corporate federal income tax return for 2006. The IRS prepared a substitute 2006 income tax return and assessed income taxes and penalties. The corporation didn't pay the tax, so the IRS tried to collect the balance from Arthur Lothringer as the alter-ego of the corporation.

Arthur Lothringer contested the IRS action in a federal district court, claiming shareholders are liable for corporate debts.

The IRS presented several points in evidence that Arthur Lothringer was the corporate alter ego, including failing to follow formalities of corporate operation and writing multiple checks to Mr. Lothringer's wife, who used the funds to pay household expenses. These payments weren't accounted for as wages.

The district court judge ruled in favor of the IRS.

The lesson of this case is to keep corporate affairs in order, including timely filing corporate income tax returns, keeping corporate minutes, and reporting payments to shareholders. Otherwise, the IRS will "pierce the corporate veil" to collect income taxes and penalties.

(Lothringer, (DC TX August 11, 2020), 126 AFTR 2d ¶ 2020-5663.)

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Final Regulations issued for Estate and Trust deductions.

The IRS has issued final regulations about the tax reporting of excess deductions when an estate or trust is terminated. The deductions are allowed as a passthrough to the beneficiaries and are only tax deductible in the tax year of the beneficiary in which the estate or trust terminates.

(Treasury Decision 9918.)

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No information return required for PPP loans forgiven under the CARES Act.

The IRS has announced that lenders that make Paycheck Protection Program loans that are later forgiven under the CARES Act should not file information returns or furnish payee statements to report the forgiveness.

(Announcement 2020-12, 2020-41 IRB.)

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Final regulations issued for 100% bonus depreciation.

The IRS has issued final regulations implementing 100% bonus depreciation for changes in the Tax Cuts and Jobs Act of 2017, as modified by the CARES Act, including changes for Qualified Improvement Property. The definition of qualified improvement property in the final regulations applies for depreciable property placed in service after December 31, 2017. If you haven't done so already, you should discuss whether real estate improvements made after 2017 were qualified improvement property eligible for 100% bonus depreciation and alternatives for claiming it, including possibly filing amended income tax returns.

(Treasury Decision 9916.)

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California wildfires and Hurricane Laura in Louisiana have been designated as federal disaster areas qualifying for relief.

California wildfires that began on August 14, 2020 qualifying for federal relief include Bute, Lake, Monterey, Napa, San Mateo, Santa Cruz, Solano, Sonoma and Yolo counties. See your tax advisor for details. Here's a link to the FEMA website for declared disasters. https://www.fema.gov/disasters/disaster-declarations

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Final regulations issued for business interest deduction limitation.

The IRS has issued updated final regulations relating to the deduction for business interest expenses. The deduction was limited to 30% of adjusted taxable income for certain taxpayers in the Tax Cuts and Jobs Act of 2017, but increased to 50% of adjusted taxable income as a COVID-19 pandemic relief measure in the CARES Act of 2020. The limitation generally doesn't apply for businesses with average gross receipts of $25 million or less. The regulations were published on September 14, 2020 and are generally applicable to taxable years beginning on or after November 13, 2020. The 50% limitation applies for taxable years beginning in 2019 and 2020. Business owners should consult with their tax advisors about these rules.

(Treasury Decision 9905.)

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Want help with your promotions, web pages, newsletters, blog posts, emails or books?

Michael Gray is available for promotional and content writing assignments, including chatbots. Want more information? Call Michael Gray weekdays at 408-918-3161.

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Do you love Disney?

I have created a Facebook group, called Disney Magic, for members to share Disney photos, experiences and tips. I am also posting developments for Disney films, television shows, and amusement parks there. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/2006739209578437/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a private group, and I will approve your membership.

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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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Attention business owners with remote workers or remote customers!

Are you concerned about protecting your conversations and communications from hackers? Now there is a secure collaboration application including (unlimited) team member assignments, video conferencing (no Zoom bombing!), text messaging, voice messaging, PDF capture, electronic signature and large file transfer. Remote computer access feature is almost complete. Communications take place in a secure envelope. Cloud application so no installation is required on your computer network. Meets IRS security standards. http://www.securelycollaborate.com

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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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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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