Michael Gray, CPA's Tax and Business Insight

January 6, 2021

© 2021 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's new cat
This is Loki, who is a new member of our family
(Janet's "Christmas present.")

Happy New Year!

Happy New Year!

Most of us are glad to have 2020 behind us. I think we have had some benefits learning to work remotely, commuting less and making adjustments or "pivoting" for business survival.

Thankfully, vaccines have been developed, but it looks like it's going to take some time to roll them out so that we can be protected and avoid continuing the spread of the coronavirus.

Please continue to take precautions for your safety and the safety of others.

Best wishes to you and your family for you to accomplish your dreams and to be safe in turbulent times.

Your CPA, enrolled agent and financial planner should be working with you to help you achieve your financial goals, but it's up to you to ask for that help.

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January celebrations.

My son in law, Dan Baker, is celebrating his birthday this month. Happy birthday Dan!

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President Trump signs The Consolidated Appropriations Act 2021.

President Trump changed his mind and signed The Consolidated Appropriations Act, 2021 on December 27, 2020. The Act is more than 5,000 pages. There were not very many law tax changes in the Act compared to the CARES Act enacted during March 2020.

Here are a few highlights:

See your tax advisor for more details.

(H.R. 133, Consolidated Appropriations Act, 2021, enacted December 27, 2020.)

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California credit expires January 15, 2021.

The State of California has earmarked $100 million for a tax credit for employers who restored employee hours or rehired employees laid off during the second quarter 2020. I just looked at the reservation web site and $54 million has been reserved so far.

In order to qualify to apply, you must be a California small business that (1) employed 100 or fewer employees as of December 31, 2019 and (2) had a 50% or greater decrease in income gross receipts when comparing second quarter 2020 and second quarter 2019.

The credit is $1,000 per net increase in full-time equivalent employees.

You must reserve the credit by January 15, 2021 at https://taxcredit.cdtfa.ca.gov/ If you qualify, do it soon, because the $100 million could be reserved before that date.

You can find details, including FAQs, at https://cdtfa.ca.gov/taxes-and-fees/SB1447-tax-credit.htm.

(Spidell's California Tax Letter, January, 2021, page 5, ("Time is running out to reserve Small Business Hiring Tax Credit".)

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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.

See your tax advisor.

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Final regulations issued for small business accounting methods and long-term contracts.

The Tax Cuts and Jobs Act of 2017 liberalized accounting methods for small businesses, enabling certain small businesses to use the cash method of accounting and to use the completed contract method for certain long-term contracts.

The IRS has issued final regulations implementing those changes, including clarifying accounting for inventory as "non-incidental materials and supplies."

(TD 9942.)

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Final regulations issued for executive compensation limits.

Business income tax deductions for executive compensation were limited in the Tax Cuts and Jobs Act of 2017. The IRS has issued final regulations implementing the limitations. See your tax advisor for details.

(TD 9932.)

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Final regulations issued for disallowed transportation and commuting expenses.

The Tax Cuts and Jobs Act of 2017 limited business tax deductions for employer-provided transportation and commuting expenses, including parking provided to employees. The IRS has issued final regulations implementing the limitations. See your tax advisor for details.

(TD 9939.)

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IRS proposes a user fee for an estate tax closing letter.

The IRS has issued proposed regulations imposing a $67 fee on requests for the issuance of IRS Letter 627, the estate tax closing letter.

Executors will typically request the letter when an estate tax return is filed to assure that all federal estate taxes have been paid before distributing a decedent's estate.

The IRS plans to initiate a web-based procedure to pay the fee and request the letter.

The fee would apply to requests received by the IRS after the date 30 days after final regulations are published in the Federal Register.

(Prop. Reg. REG-114615-16, Prop. Reg. 300.13.)

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IRS interest rates are unchanged for the first quarter 2021.

The IRS has announced that interest rates are unchanged for the first quarter 2021.

(Revenue Ruling 2020-28.)

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Tax preparation materials will soon be on the way.

Koehler & Associates is in the process of mailing instructions for sending their 2020 tax return preparation instructions. If you haven't received instructions by January 20 or you would otherwise like to receive instructions, call Thi Nguyen at 408-286-7400, extension 206.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2020 individual income tax returns will be scheduled in February. 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.

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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. For 2020, 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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Remember to take a physical inventory as of 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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W-2s, 1099s and DE 542 reminder.

Remember that most 2020 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by March 1, 2021, including electronically filed forms, except Form 1099-NEC and Form W-2 should be submitted by February 1, 2021. If you have a California business, be sure to send Form 1099-NEC to the Franchise Tax Board.

Amounts paid using a credit card or a payment service like PayPal should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that claim their real estate operations are a trade or business (including for the 20% federal tax deduction for trade or business income) should prepare them anyway. See your tax advisor for details.

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Standard mileage rate for 2021.

The standard business mileage rate for 2021 is 56 per mile down from 57.5 per mile for 2020. The medical mileage rate is 16 per mile for 2021, down from 17 per mile for 2020. The mileage rate for moving is also 16 per mile for 2021, down from 17 per mile for 2020 and now only applies for military personnel, because the deduction has been repealed for everyone else starting 2018. The charitable mileage rate is 14 per mile, unchanged.

I expect more taxpayers will be electing to claim bonus depreciation or the expense election for their business vehicles purchased during 2020. The standard mileage rate will NOT apply for those vehicles.

(Notice 2021-02.)

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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 2020.

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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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Get our book updates for half-price!

We recently issued an updated Real Estate Tax Handbook, 2020 Edition and will soon release How to Use Roth & IRA Accounts to Provide a Secure Retirement, 2021 Edition. You can make advance orders now. As a subscriber to this newsletter, you can get them for half price at www.siliconvalleypublishingcompany.com. Use the code NEWBOOKS. You can also phone your order to Dawn Siemer at 408-918-3162. This offer will expire January 31, 2021.

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'Tis the season to exercise ISOs?

Since stock received from exercising an incentive stock option has to meet two holding period tests (more than two years after grant and more than one year after exercise) to avoid having the excess of the fair market value over the option price taxed as ordinary income, exercising early in the year can be advantageous when you decide to hold the stock after exercise. The reason is you have the alternative of selling the stock before the end of the year of exercise and possibly avoiding the alternative minimum tax if the value of the stock drops after exercise. I call this tax strategy the "escape hatch."

If the company's stock isn't publicly traded and you can't sell the shares, this strategy won't work.

Be careful about blackouts. I have had some individuals call me who wanted to use the escape hatch during December, only to discover they were prohibited from selling their shares because they were subject to an employee blackout. Sometimes blackouts can happen unexpectedly, like when an employer becomes a party to a lawsuit. There's no magic solution in these cases - you could be stuck with a significant tax liability.

For many people, the exercise and immediate sale of the shares is the most comfortable alternative, even if the tax bill is higher.

Also remember the wash sale rules can spoil an "escape hatch" transaction. You can't repurchase the shares or even receive an employee stock option or buy a put option during the period starting 30 days before the sale to 30 days after the sale.

Another advantage of an exercise early in the year is to be able to meet the holding period requirements and sell the shares before the tax is due on April 15. But check the estimated tax payment requirements to avoid penalties for late estimated tax payments. (The alternative minimum tax liability should be included in estimated tax payments.)

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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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