Michael Gray, CPA's Tax and Business Insight

May 5, 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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Minnie with her mom's birthday cake.
Minerva Siemer made and decorated her Mom's birthday cake!

Happy Mothers' Day!

Mothers' Day will be celebrated on Sunday, May 9 this year. Remember to express your appreciation to your mother and other mothers who have contributed to your life.

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Happy Memorial Day!

Memorial Day will be celebrated on Monday, May 31 this year. Memorial Day is the unofficial beginning of summer. Please honor those who died defending our country.

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Family celebrations.

My daughter Holly Baker and her husband Dan are celebrating their wedding anniversary during May. Happy anniversary!

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Due date of 2020 individual income tax returns is May 17, 2021.

If you don't have the information yet to prepare your return, you can file Form 4868 by May 17, 2021 to get an additional five months to October 15, 2021 to file. Examples of why people might file for an extension include they haven't received Schedule K-1 for passthrough entities or they need to file for an employee retention credit for 2020 that wasn't previously available.

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What if you don't have the money to pay the tax?

The IRS will allow you to file an extension without paying the tax. You are still required to include an estimate of the tax due on the form. (The extension will not be accepted without this amount being entered.) The late filing penalty will be waived provided your income tax returns are filed on the extended due date, which is October 15, 2021 for most individuals.

California automatically allows the extension without filing a form.

A late payment penalty of 1/2% per month will apply for any tax due not paid by May 17, 2021, unless at least 90% of the tax finally determined was paid by that date.

Interest will also be charged for the unpaid tax and can't be waived. (The current rate is 3% for individuals.)

If a 2021 individual income tax return isn't filed by May 17, 2021 and a valid extension isn't filed by that date, the late filing penalty is 5% of the unpaid tax per month filed late, to a maximum of 25%. (In some cases, California will assess a penalty on the entire tax without reduction for payments received. See your tax advisor for details.)

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Will 2020 overpayments applied to 2021 estimated tax be credited as of April 15, 2021?

On April 12, 2021, the IRS announced that an overpayment applied to 2021 estimated tax from a 2020 individual income tax return would be considered made on April 15, 2021 to the extent the funds were received by the IRS before April 15, 2021. For example, if a taxpayer made a payment on May 17, 2021 with an extension form that resulted in an overpayment that the taxpayer elects to apply to 2021 estimated tax, that payment would be considered received by the IRS when it was paid on May 17, 2021. https://www.irs.gov/forms-pubs/electing-to-apply-a-2020-return-overpayment-from-a-may-17-payment-with-extension-request-to-2021-estimated-taxes

(Notice 2021-21.)

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Unemployment received 2020 partially excluded from taxable income.

Up to $10,200 of unemployment compensation received during 2020 per taxpayer is excluded from taxable income. If the income tax return has modified adjusted gross income of $150,000 or more, the exclusion is lost. Note the same threshold applies for a single, married filing joint, and married filing separate return.

Consider whether filing married, filing separate is more advantageous for 2020.

Married taxpayers who are undecided whether they will file separate income tax returns should file separate extension Forms 4868. They can still elect to file a joint income tax return later.

The exclusion only applies for 2020.

If a taxpayer already filed a 2020 individual income tax return and didn't claim the exclusion, the IRS says not to file an amended income tax return. It will automatically make the adjustment. Affected taxpayers should review their returns to be sure there aren't other related adjustments or corrections to be made.

(IR-2021-71, March 31, 2021, Internal Revenue Code § 85(c)(1), American Rescue Plan Act § 9042(a))

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California personal property tax form is due May 7, 2021.

California personal property tax Form 571 for 2021 is due May 7, 2021. If the form is filed late, a 10% penalty is assessed.

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IRS guidance on business meal expense deduction.

Under the Consolidated Appropriations Act, 2021, enacted December 27, 2020, the limitation for the deduction for business meals paid or incurred after December 31, 2020 and before January 1, 2023 for food or beverages provided by a restaurant has been increased from 50% to 100%. The IRS has issued guidance on the suspension of the limit.

(Notice 2021-25.)

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IRS issues guidance to employers claiming the employee retention credit for 2021.

The Consolidated Appropriations Act, 2021, enacted December 27, 2021, and the American Rescue Plan, enacted March 11, 2021 have extended and expanded the employee retention credit for 2021 to 70% of up to $10,000 of qualified wages per employee PER QUARTER!

The IRS has issued guidance for the employee retention credit for the first two quarters of 2021 under the Consolidated Appropriations Act.

Since the Consolidated Appropriations Act also repealed a rule disallowing the employee retention credit when a taxpayer excludes cancellation of debt income from a forgiven Paycheck Protection Program loan, most small businesses who received a Paycheck Protection Program loan and any other business impacted by the COVID-19 pandemic should revisit the employee retention credit. Note the employee retention credit is subtracted from the wages deduction on the business's income tax return.

(Notice 2021-23.)

California has enacted legislation, AB 1577, that disallows tax deductions for business expenses paid using proceeds from a forgiven PPP loan. The legislation codifies IRS Revenue Ruling 2020-27, later overturned by Congress. If the taxpayer expects the PPP loan will be forgiven, the expenses are deemed nondeductible.

On April 29, 2021, Governor Newsom signed AB 80. Under AB 80, a taxpayer may deduct business expenses paid using proceeds from a forgiven PPP loan, provided the business can demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 from the same quarter's gross receipt during 2019. If the entity was not in business during all of 2019, then the business must show a 25% reduction in gross receipts during any quarter in 2020 from the 2019 calendar quarters it was in operation. If the PPP application was submitted on or after January 1, 2021, then the fourth quarter of 2020 may be used.

Here is a link to the text of the bill. https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB80

(Spidell's Flash E-mail April 16, 2021, "Big changes to AB 80", Spidell's Flass E-mail, April 29, 2021, "Governor signs AB80".)

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Restaurant Revitalization Grants open up.

The SBA is opened an application portal for restaurant revitalization grants at http://restaurants.sba.gov. Applications may be submitted starting Monday, May 3, 2021 at noon EDT.

Here's a link to an SBA article with more details: https://www.sba.gov/article/2021/apr/27/sba-administrator-guzman-announces-application-opening-286-billion-restaurant-revitalization-fund

(Spidell's Flash E-mail, April 27, 2021, "Apply for restaurant grants starting May, May 3", Spidell's Flash E-mail, April 27, 2021, "Restaurant Revitalization Grants open up.")

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Questionable interpretation of 10-year distribution period for inherited retirement accounts.

In Publication 590, the IRS unexpectedly showed a computation of the first year's required minimum distribution for an inherited retirement account as being based on an actuarial computation using the beneficiary's life expectancy and single table.

Required minimum distributions for inherited retirement accounts were changed under the SECURE Act to a 10-year rule, effective for accounts inherited from a decedent who died after December 31, 2019. Just about everyone expected the 10-year rule to be applied similarly to the 5-year rule under the prior law. That means no distribution is required to be made until year 10. The IRS publication is probably wrong on this item.

Natalie Choate has an excellent analysis of this issue at http://www.ataxplan.com.

If you have this situation, please consult with your tax advisor.

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President Biden proposes raising income tax rates for long-term capital gains.

To help fund his social programs, President Biden is proposing raising the federal income tax rate for long-term capital gains for taxpayers with more than $1 million in taxable income to 39.6% plus the 3.8% net investment income tax.

This proposal should not be a surprise because it was included in President Biden's platform when he ran for office.

I don't expect major individual tax reform to be passed (if at all) until close to the end of the year.

Taxpayer with more than $1 million in taxable income should consider taking long-term capital gains during 2021.

(President Biden is also proposing repealing the tax basis adjustment to fair market value for inherited property.)

Here is a link to a FACT SHEET for The American Families Plan. https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/

Please write to your representatives in Congress with your opinion about these proposals.

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Sanders estate tax proposal.

Senator Bernie Sanders has proposed reducing the federal estate tax exemption to $3,500,000 and gift tax exemption to $1,000,000, effective January 1, 2022.

The current flat 40% estate and gift tax rate would become progressive rates of 45% for taxable estates between $3.5 million and $10 million, 50% from $10 million to $50 million, 55% for estates from $50 million to $1 billion, and 65% for estates over $1 billion.

Senator Sanders also proposes eliminating discounts for non-business entities and assets and eliminating the benefits of defective grantor trusts.

2021 should be a year for aggressive estate planning to use the current federal lifetime exemption of $11.7 million before it is repealed.

Please write to your representatives in Congress with your opinion about this proposal.

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Senator Van Hollen's proposed income tax at death.

Senator Chris an Hollen of Maryland has announced a legislative proposal, the Sensible Taxation and Equity Promotion Act, that would impose a capital gains tax at death and for gifts of property.

Here's a link to the text of his proposal. https://www.vanhollen.senate.gov/imo/media/doc/STEP%20Act%20discussion%20draft.pdf

Please write to your representatives in Congress with your opinion about this proposal.

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President Biden's proposed corporate income tax increase.

On March 31, 2021, President Biden introduced an ambitious infrastructure rebuilding plan, called The American Jobs Plan. The Plan includes many infrastructure projects.

To fund the plan, he also introduced The Made In America Tax Plan, which would increase corporate income taxes for 15 years.

A goal of the tax plan is to provide disincentives for locating corporate headquarters outside the United States. The President is requesting other countries to join in imposing a Global Minimum Tax.

The U.S. corporate income tax rate would be increased from 21% to 28%.

A 15% minimum tax would be imposed on the book income of large corporations.

Corporate incentives for offshore income under the Tax Cuts and Jobs Act of 2017 would be eliminated.

Here is a link for a FACT SHEET on the proposals. https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/

This the beginning of a negotiation process relating to President Biden's proposals.

Please write to your representatives in Congress with your opinion about this proposal.

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What if a business didn't deduct expenses paid using proceeds of a forgiven PPP loan?

The IRS has issued guidance for taxpayers that didn't deduct expenses paid using proceeds from a forgiven PPP loan. Under the Consolidated Appropriations Act, 2021, enacted on December 27, 2020, those expenses are tax deductible. Under a safe harbor, those taxpayers may elect to deduct those expenses on the taxpayer's income tax return for the first taxable year following the taxpayer's 2020 taxable year instead of filing an amended return or administrative adjustment request.

(Rev. Proc. 2021-20.)

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Love marketing? Check out the Content Marketing Power Up.

Kelly Mirabella and Yvonne Heimann have just concluded a 30-day series of about one-hour video sessions about content marketing, including the details about how they conduct video webinars using multiple platforms. (Including what equipment and what software they use.) I haven't watched all of them yet, but what I have seen is excellent. They are offering access to all of the videos plus some great bonuses for only $199! If you only watch one or two of the videos, it will be worth the investment. You'll want to watch of them! Check it out here. https://academy.askyvi.com/product/the-content-marketing-power-up-recordings/?ref=501

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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
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San Jose, CA 95128
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