Michael Gray, CPA's Tax and Business Insight

December 8, 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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Mike and Janet Gray
Happy Holidays from Michael & Janet Gray!

Happy Holidays!

This year, Hanukkah begins the evening of December 10. Of course, Christmas Day will be Friday December 25. Our office will be closed December 24 and 25 and January 1. I think we're all looking forward to the pandemic ending during 2021. "God Bless us, every one!"

Dawn Siemer won't be available starting December 18, returning January 4.

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'Tis the season for year-end planning.

There is less than a month remaining for 2020. Make your year-end planning appointment now. Thi Nguyen, CPA will have limited availability. To make an appointment with her, call 408-286-7400, extension 206.

This is an important year for year-end planning, because President-elect Biden is proposing significant income tax increases for high-income taxpayers and estate and gift tax increases that would likely impact homeowners in California.

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Fourth quarter calendar year corporate estimated tax payment is due December 15.

The final 2020 estimated tax payment for calendar-year corporations is due December 15, 2020. Not all corporations can base their federal estimated tax payments on the previous year's income tax return. For example, new corporations and corporations that had no tax liability for the previous year must compute their estimated tax using the current year's facts. See your tax advisor for assistance.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2021. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

Consider making the California or state payment by December 31, 2020 for a 2020 tax deduction. Watch the alternative minimum tax. Also, remember the total tax deduction for state income tax payments and real estate tax is limited to $10,000 and the standard deduction has been increased to $24,800 for married filing joint and $12,400 for singles and married filing separate.

See your tax advisor.

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First property tax payment is due.

The first property tax payment for the 2020-2021 fiscal year in Santa Clara County is due December 10. Avoid a late payment penalty - mail your payment now!

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Calendar year accrual basis corporations should pay related parties by December 31.

In order to currently deduct expenses due to certain related persons, accrual-basis corporations must pay them by the year-end. These include wages, bonuses, interest expense, rent, etc. Be sure to review the status of these items with your tax advisor by December 31.

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Michael Gray discusses Biden tax proposals.

Michael Gray will give a Zoom presentation about year-end planning considerations for Biden's tax proposals. The presentation is sponsored by the Silicon Valley - San Jose chapter of CalCPA. Anyone can attend. The investment is only $5 for members and $10 for nonmembers. It will take place from noon to 1 p.m., PT on Monday, December 14, 2020. Register online at https://tinyurl.com/bidenyetax.

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Get our book updates for half-price!

We will shortly issue updates for two books: Real Estate Tax Handbook, 2020 Edition and How to Use Roth & IRA Accounts to Provide a Secure Retirement, 2021 Edition. As a subscriber to this newsletter, you can get The Real Estate Tax Handbook for half price at www.siliconvalleypublishingcompany.com. Use the code NEWBOOKS. You can also phone your order to Dawn Siemer at 408-918-3162. (Remember Dawn won't be available starting December 18, 2020, returning January 4, 2021.) This offer will expire January 31, 2021.

How to Use Roth & IRA Accounts to Provide a Secure Retirement, 2021 Edition is still in process. We'll let you know when it's available, and it will go on sale for half price as well.

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Final regulations issued for Like-Kind Exchanges.

Congress repealed Section 1031 like-kind exchanges for personal property in the Tax Cuts and Jobs Act of 2017, so only real estate qualifies for like-kind exchanges after 2017. The IRS has issued final regulations implementing the change. An important change in the final regulations compared to proposed regulations previously released by the IRS is the definition of real property so that property that is real property under the law of the state or local jurisdiction in which the property is located will be considered real property eligible for a like-kind exchange. Tax advisors should study the regulations and discuss them with clients planning exchanges.

(TD 9935, published in the Federal Register December 2, 2020.)

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IRA distribution to company was taxable to owner.

The Tax Court upheld the IRS in finding an IRA distribution was currently taxable. Mr. Ball received an IRA distribution of $210,000, which he deposited to a limited liability company, Ball, LLC. Ball, LLC loaned the funds to a third party. The loan proceeds were redeposited to his IRA as a rollover contribution during 2013.

The IRS found the rollover was disqualified because it wasn't completed in time.

Mr. Ball claimed his LLC held the funds as an agent for his IRA, following a case, Ancira and McGaugh.

The Tax Court said Mr. Ball's facts were different, so the rollover didn't qualify.

IRA transactions are very tax sensitive. There are self-directed IRAs that can handle private loans like this one. Their fees are higher that other IRA accounts.

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Bonus depreciation guidance issued.

The IRS has issued procedures for reporting bonus depreciation that became available for "qualified improvement property" for property placed in service after September 27, 2017 because of a technical correction enacted in the CARES Act during 2020. The procedures give taxpayers a lot of flexibility so they have an option to report the change on an amended income tax return or currently. The regulations also permit changes previous elections and for late elections to not claim bonus depreciation. See your tax advisor for details and advice.

(Revenue Procedure 2020-50.)

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If you exercised an incentive stock option and haven't sold the stock, consider using the "escape hatch."

I explained the details in the November 2020 edition of Michael Gray, CPA's Tax and Business Insight. When you sell the stock during the same year as the year of exercise, the alternative minimum tax adjustment is eliminated. If the stock is replaced with a wash sale (buying back the stock during the period from 30 days before the sale to 30 days after the sale) or the sale is to a related person, the strategy doesn't work. This strategy generally only works for vested publicly traded stock.

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Consider accelerating or deferring income.

Personal tax rates are low right now, so many high-income taxpayers would actually benefit from accelerating income to 2020. Usually, we would be thinking about deferring income at the year end. Under Biden's tax proposal, there would be significant tax increases for taxable income exceeding $400,000. See your tax advisor about what makes sense for you.

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"Harvest" losses or gains?

If you had capital gains this year and you're holding stock with a lower value than when you bought it, consider selling the stock to use the loss as an offset to your capital gains. Remember the wash sale rule - if you purchase the same stock during the period 30 days before the sale until 30 days after the sale, the loss is disallowed and added to the tax basis of the replacement stock.

If you decide the sell stock this year to report gains and avoid a potential Biden tax increase, the wash sale does NOT apply to gains, so you can repurchase the stock during the wash sale "window" without spoiling your tax strategy.

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California small business relief.

California has announced the following tax relief to help small businesses hurt by the COVID-19 pandemic.

$500 million will be available to provide grants of up to $25,000 to small businesses and nonprofits in California by early 2021, to be administered by the California Office of the Small Business Advocate.

An additional $12.5 million in funding has been provided to the California Rebuilding Fund to make low-interest loans to small businesses located in areas that are economically disadvantaged and that have few banks.

The CDTFA reminds taxpayers that applications may be filed for the Main Street Hiring Tax Credit, authorizing $100 million in hiring tax credits for qualified small business. The window closes January 15, 2021. Make credit reservations at https://cdtfa.ca.gov.

(Spidell Podcast: "New relief available for small businesses", December 6, 2020, Spidell Publishing.)

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California elections results

Proposition 22, giving independent contractor status to app-based drivers passed.

Proposition 19, enabling seniors and fire victims to transfer their historical assessed value to another residence in California and reassessing the value of inherited real estate not used as a residence by beneficiaries passed. The new law is effective for individuals over age 55 and wildfire/natural disaster victims for transactions after March 31, 2021. The new law is effective for transfers to qualifying beneficiaries after February 15, 2021, so now may be the time to consider making a gift of real estate to qualifying beneficiaries (generally children of the donor(s)).

Proposition 15, which would have created a separate property tax roll with current valuation for commercial property did not pass.

(Spidell's California Taxletter, December, 2020, p. 1, "As the wheels of worker classification turn" and p. 4, "Nine considerations now that Proposition 19 has passed.")

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Estates and trusts should plan distributions.

The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed estate or trust income exceeds $12,950. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, January 31, 2021) as distributed for a taxable year (for example 2020).

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.

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Business retirement plans now have more flexibility.

With changes enacted in the SECURE Act, business retirement plans can be adopted up to the extended due date of a business's income tax return. Employee contributions to a 401(k) plan must be paid by December 31. If your employees want to make a contribution and your plan isn't in place yet, contact your retirement plan advisor immediately.

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Should you buy business equipment before December 31?

The expense election for business equipment purchases is now $1 million. This election is even available for some SUVs and heavy trucks with a $25,000 limit, and some trucks and cargo vans don't have a limit. The excess might be eligible for bonus depreciation. See your tax advisor for details. Remember the expensed amount is only deductible against business income.

100% bonus depreciation also now applies to used property. Congress has corrected errors relating to expanding bonus depreciation for some building improvements. If you made improvements for commercial buildings, consult with your tax advisor about claiming tax benefits retroactively available for improvements made during 2018 and 2019.

See your tax advisor.

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Seniors, no required minimum distributions for 2020.

The CARES Act suspended required minimum distributions from retirement plans for 2020.

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Remember to take a physical inventory on January 1.

Calendar year businesses with inventories should take a physical count as of January 1. This creates a "clean" record for the income tax return.

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2020. Be sure you have installed those updates before processing your first payroll for 2019.

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No California FUTA makeup payment for 2020.

California employers will NOT have an additional tax for a credit reduction on their Federal Unemployment Tax Return, Form 940, for 2020.

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Should you make additional tax payments before December 31?

State estimated tax payments and early property tax payments made by December 31 are generally tax deductible for the regular tax. However, many people are finding they are subject to the alternative minimum tax. Deductions for taxes (and miscellaneous itemized deductions) aren't allowed for the alternative minimum tax, so there could be no benefit for a tax prepayment. A tax advisor can project your tax picture to determine if the AMT will apply. Turbo Tax and other tax preparation software can also be used to make the computations.

This situation has changed somewhat because of the 3.8% net investment income (NII) tax. Part of the state tax payment may be a "good" deduction for the NII tax even though there is no AMT benefit. See your tax advisor.

This decision has been more complicated by the new federal limit of $10,000 for the total of state and local income taxes and real estate taxes.

See your tax advisor.

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Should you donate appreciated publicly traded stock?

It's the season for giving. Many of us make extra donations during December to share our bounty with others. Appreciated publicly-traded stock that has been held for more than a year is an ideal asset for a donation. Under the Internal Revenue Code, the long-term capital gain is excluded from taxable income and the charitable contribution deduction is the fair market value of the stock, so there is a double tax benefit. Also, publicly traded stock isn't subject to the appraisal requirements that apply to other property. It's a win-win-win! Remember to get a good acknowledgement letter to document the donation, including a statement that "no goods or services were received in exchange for the donation."

Charitable contributions of appreciated long-term capital gain property are limited to 30% of adjusted gross income.

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Donating a car to charity?

Remember that an appraisal is required for noncash contributions with a value exceeding $5,000. See Form 8283 and instructions as the IRS web site, http://www.irs.gov. (There is a Declaration of Appraiser on the form.) There is an exception to the rule for vehicles donated to a charity. If the charity sells the car, the taxpayer may rely on the sales price disclosed on Form 1098-C. The original Form 1098-C is submitted to the IRS with your income tax return (or otherwise sent to the IRS with Form 8453 if you efile).

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Will you benefit from itemizing deductions for 2020?

Since itemized deductions have been reduced or eliminated for 2020 and the standard deduction has been increased, many taxpayers won't benefit from itemizing their deductions for 2020, so scrambling for year-end deductions could be wasted. See your tax advisor about your situation.

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Deduct donations on your federal return, even when you don't itemize!

Congress enacted a tax break for 2020 only. You can deduct up to $300 of cash donations on your federal income tax return, even when you don't itemize deductions. California has not conformed to this provision, so the deduction won't apply for your California income tax return.

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Federal cash donations limit is 100% of AGI for 2020!

Usually, the limitation for cash donations is 60% of adjusted gross income. As a relief measure to help charities during the pandemic, Congress increased the limit to 100% of adjusted gross income. Note this break doesn't apply to donations to a donor advised fund or a private foundation. It also doesn't apply to gifts of property, including appreciated stock. California has not conformed to this provision.

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Should you adopt an accounting policy for small equipment purchases by December 31, 2020?

An election is available to currently deduct small expenditures when the taxpayer doesn't have an applicable (audited) financial statement. Items up to $2,500 may be currently deducted, effective for amounts paid or incurred for tangible property on or after January 1, 2016, for taxable years beginning on or after January 1, 2016. The election doesn't apply for inventoriable costs.

Among other requirements, in order to qualify for the current deduction: at the beginning of the taxable year, the taxpayer must have accounting procedures treating as an expense for non-tax purposes - (1) amounts paid for property costing less than a specified dollar amount; or (2) amounts paid for property with an economic useful life of 12 months or less. The taxpayer must also treat the amount paid for the property as an expense on its books and records in accordance with the accounting procedures. The amount paid for the property may not exceed $2,500 per invoice or per item, as substantiated by the invoice.

Note the de minimus election is made each year on the income tax return for the business.

In order to be in position to make the election for 2020, you must have the accounting policy in place by December 31, 2020 and implement that policy in your accounting throughout 2020. If you didn't have the policy for 2020, consider getting it in place by December 31, 2020. We recommend that the policy should be written.

Under tax reform, the tax benefit of making this election has been reduced because of more generous expense election limits and bonus depreciation.

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Remember personal exemptions have been repealed for 2020.

Exemption deductions for dependents have been repealed for tax years beginning after 2017 and before 2026. Instead, taxpayers may claim a tax credit for dependent children and other qualifying relatives. The credit is $2,000 for each qualifying child under age 17 and $500 for each other qualifying child and relative. This credit is phased out if the taxpayer's modified adjusted gross income exceeds $400,000 for married filing jointly and $200,000 for other taxpayers.

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Reminder - Federal deduction limited for donations to California College Access Tax Credit Fund.

A taxpayer's California income tax liability can be reduced by 50% of donations to the California College Access Tax Credit Fund. The IRS has announced that, effective for contributions made after August 27, 2018, the federal charitable contribution deduction should be reduced for the amount allowed as a reduction of state income taxes as a "quid pro quo" (benefit received back by the donor).

(IR-2018-172, August 24, 2018.)

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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
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