Michael Gray, CPA's Tax and Business Insight

March 4, 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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Dolls dressed for St. Patrick's Day
Janet's dolls celebrate St. Patrick's Day

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.

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Family celebrations.

My sister Arlene Gray McLean and my brothers-in-law Wade Allison and Lane Johnston, are celebrating birthdays this month. Happy Birthdays!

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Live in California? Watch changed mailing addresses for Forms 1040 and 1040-V.

The instructions for Forms 1040 and 1040-V (payment voucher) give new mailing addresses.

For taxpayers making payments, the mailing address is:

P.O. Box 802501
Cincinnati, OH 45280-2501

For taxpayers requesting a refund or no payment is due, note there are two addresses for different dates. (You generally won't need to mail anything when you efile and there is no tax due.)

For returns filed from January 1, 2021 through June 18, 2021, the mailing address is:

Department of the Treasury
Fresno, CA 93888-0002

For returns filed starting June 19, 2021, the mailing address is:

Department of the Treasury
Ogden, UT 84201-0002

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IRS Commissioner says tax due dates will generally be normal this year.

IRS Commissioner Rettig told the House Appropriations Committee there is no plan to extend the April 15 filing deadline for 2020 federal income tax returns for individuals. Taxpayers may apply for an extension using Form 4868.

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Due date for partnership and S corporation tax returns will soon be here.

The due date for calendar year 2020 partnership and S corporation income tax returns is March 15, 2021. If the information for preparing them isn't complete, extension forms should be submitted with the estimated balance of tax by March 15.

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Due date for 2020 individual, calendar year estates and trusts, and calendar year corporation income tax returns is April 15, 2021.

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The election to be an S corporation for calendar-year corporations is also due March 15.

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Trust distribution deadline is March 6, 2021.

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 2020 calendar year trusts and estates, the deadline for making a distribution to make the election is March 6, 2021. 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.

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Remember that an estimated tax payment is also due on April 15.

The first 2021 estimated tax payment for individuals and most other calendar year entities is also due on April 15, 2021. 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.

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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?

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Cutoff for preparing tax returns will soon be here!

If you provide complete information for preparing your 2020 income tax returns by March 15, 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.

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Make your tax return preparation interview appointment now.

There is still time for a few personal interview appointments for preparing 2020 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. Contact Ms. Thi Nguyen, CPA at thi@atl-cpa.com.

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Biden COVID-19 relief bill passed by the House of Representatives.

The House of Representatives passed the American Rescue Plan Act of 2021, by a vote of 219-212. It's expected to be hard to get passed in the Senate, and some of the provisions will probably be changed. Don't expect to get another Economic Impact Payment soon.

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Remember to compute the Recovery Rebate Credit on your individual income tax return.

The amount of your Recovery Rebate Credit is computed based on the facts on your 2020 federal income tax return. The credit is reduced for any Economic Impact Payments that you received during 2020 and early 2021. Some taxpayers who didn't receive Economic Impact Payments will qualify for the Recovery Rebate Credit and should file a 2020 federal income tax return, even if it otherwise isn't required. Remember to report this item on your 2020 federal income tax returns or to provide the amounts of the payments that your received to your tax return preparer. Here's a link to an IRS explanation. https://www.irs.gov/newsroom/recovery-rebate-credit

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Had a PPP loan during 2020? Plan on filing an extension.

Here is a link to a blog post that I wrote about this subject. http://www.michaelgraycpa.com/posts/had-a-ppp-loan-in-2020-your-tax-returns-will-probably-be-delayed/ Legislation has been introduced in California to allow tax deductions for some of the expenses paid using a proceeds from a cancelled PPP loan.

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Efiling a 2020 federal income tax return when the IRS hasn't processed the taxpayer's 2019 federal income tax return.

The IRS is still working through a backlog of paper-filed 2019 federal income tax returns. The IRS has given instructions on its webpage how taxpayers whose 2019 federal income tax returns haven't been processed yet should efile their 2020 federal income tax return. According to the IRS, those taxpayers should enter $0 (zero) as their prior-year adjusted gross income.

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Filing date extended for Texas winter storm victims.

Following the disaster declaration by the Federal Emergency Management Agency (FEMA), the IRS is providing relief to taxpayers that are residents of the entire state of Texas. Under the relief, tax filing and payment deadlines that occurred starting on February 11, 2021 will have until June 15, 2021 to file returns and pay any taxes due during the period. This includes individual income tax returns and the initial 2021 federal estimated tax payment.

(IR-2021-43, February 22, 2021.)

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Filing date extended for Oklahoma winter storm victims.

The IRS has announced on its webpage that individuals and households affected by severe winter storms that reside or have a business in any of Oklahoma's 77 counties qualify for tax relief. Deadlines falling on or after February 8, 2021 and before June 15, 2021 are extended to June 15, 2021. These include individual income tax returns and the initial 2021 federal estimated tax payment.

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Lenders told to file corrected Forms 1099-MISC for certain CARES Act payments.

The IRS has told lenders that some of them have incorrectly included items paid under the Paycheck Protection Program. The items should not be included in taxable income. For guidance, see Notice 2021-6.

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Safe harbor issued for deducting COVID-19 protective items provided by an educator.

The IRS has issued guidance for educators to include unreimbursed COVID-19 protective items in the $250 deduction for educator unreimbursed expenses.

(Revenue Procedure 2021-15, February 4, 2021.)

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Victims of unemployment compensation identity theft should seek a corrected Form 1099-G.

In a News Release, the IRS has told taxpayers who received an erroneous Form 1099-G for unemployment benefits they didn't receive due to identity theft should notify the state agency that issued the form and request a collected form.

(IR-2021-24, January 28, 2021.)

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IRS sent erroneous notice about offset of Taxpayer Economic Impact Payments.

The IRS has stated on a webpage that a letter sent to 109,000 taxpayers was in error. It said, "We applied a credit to your 2007 tax account due to new legislation. We used (offset) all or part of your economic stimulus payment to pay your federal tax as the law allows."

The notice was supposed to say the IRS couldn't issue an Economic Impact Payment to the taxpayer because all of the first Economic Impact Payments were required to be issued by December 31, 2020 and, as of that date, the IRS hadn't processed the taxpayers 2019 return and there was no 2018 return on which to base the Economic Impact Payment.

The IRS should send another letter to affected taxpayers explaining the error.

Affected taxpayers can claim a Recovery Rebate Credit on their 2020 federal income tax return.

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Ford, Porsche models added to Plug-In Vehicle Credit list.

The IRS has added the following cars to the list of vehicles eligible for up to $7,500 of plug-in vehicle credits: $2021 Escape Plug-in Hybrid (credit $6,843), and Porsche 2021 Taycan 4S EV and Taycan Turbo S EV (credit $7,500).

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No depreciation or donation deductions allowed for marijuana dispensary.

The Tax Court upheld the IRS in disallowing income tax deductions for depreciation and charitable contributions for a medical marijuana dispensary that is legal under California law. Under Internal Revenue Code Section 280E, no deduction is allowed for any amount paid or incurred during the tax year in carrying on any trade or business that consists of trafficking in controlled substances, if that trafficking is prohibited under federal law or by the law of the state in which the trade or business is conducted.

(San Jose Wellness, 156 T.C. No. 4, 2021.)

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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.

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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.

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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.

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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 2020 business closings!

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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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
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