Michael Gray, CPA's Tax and Business Insight
November 4, 2021
© 2021 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy Thanksgiving!
- Family celebrations.
- Social Security threshold announced for 2021.
- IRS has a big backlog for processing tax returns.
- Tax filing relief for certain Pennsylvania residents.
- Health insurance premiums paid through a cafeteria plan were deductible as alimony.
- Fractional gifts qualified for valuation discounts.
- Corporate shareholder held liable for its income taxes.
- Tax preparer held guilty of tax fraud.
- States' challenge to limit on deduction for state income taxes rejected.
- Is your business eligible for California's Main Street Small Business Credit II?
- Benefit from California's State Tax Deduction Workaround might be limited.
- If you exercised ISOs during 2021, should you use the "escape hatch"?
- Year end planning - should you "harvest" losses before the year end?
- Do you sell services or software to CPAs?
- Do you love Disney?
- Attention Accountants! Speed up processing your 2020 business closings!
- Attention business owners with remote workers or remote customers!
- Check my blog for coronavirus-related tax developments.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: High Performance Habits
- Follow me on social media!
- Check out my blogs.
- PS Marché Aux Fleurs
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Here is Janet's Thanksgiving display on our living room mantle Happy Thanksgiving!
Thanksgiving falls on November 26 this year. With social distancing, etc. this year, many of us will have smaller celebrations. This is one holiday people of all faiths or no faith can share. Being thankful and counting your blessings is one of the best things you can do for your emotional health. Even when things aren't working out, you can still be thankful for past good memories.
Family celebrations.
My brother, Steve, and I are celebrating our birthdays this month. Thank goodness we are both healthy and enjoying spending time with our family.
Social Security threshold announced for 2021.
The Social Security Administration has announced that the threshold for Social Security tax for 2022 will be $147,000. Social Security benefits will also increase by a 5.9% cost of living adjustment for 2022.
IRS has a big backlog for processing tax returns.
With the pandemic, the IRS has fallen way behind on processing income tax returns and refund claims - especially paper returns and amended returns that weren't filed electronically. Remember that, until fairly recently, no one was at the IRS to open the mail. As of September 18, 2021, the IRS had a backlog of 7.8 million individual returns requiring manual processing. Also as of September 18, 2021, the IRS had more than 2.8 million unprocessed Forms 1040-X (amended individual income tax returns). The IRS had 2.3 million federal payroll tax returns, and it's way behind on processing Forms 1139 and 1045 (mostly net operating loss carryback claims.) Many taxpayers are suffering financial hardships because of delayed refund claims.
(The Kiplinger Tax Letter, October 1, 2021.)
Tax filing relief for certain Pennsylvania residents.
The IRS has announced tax relief for certain Pennsylvania victims of Hurricane Ida.
Under the relief, individuals who had a valid extension to file their 2020 returns, due to run out on October 15, 2021, now have until January 3, 2022 to file.
Relief applies to individuals and households affected by Hurricane Ida that reside or have a business in Bedford, Bucks, Chester, Dauphin, Delaware, Fulton, Huntingdon, Luzerne, Montgomery, Northampton, Philadelphia, Schuylkill and York counties.
Businesses with extensions, including calendar-year partnerships and S corporations whose 2020 extensions that run out on September 15, 2021 and calendar-year corporations whose 2020 extension ran out on October 15, 2021 also qualify for the relief.
Affected taxpayers who receive a late filing or late payment penalty from the IRS should call the telephone number on the notice to have the IRS abate the penalty.
(PA-2021-05, September 14, 2021, updated to October 20, 2021.)
Health insurance premiums paid through a cafeteria plan were deductible as alimony.
The Tax Court ruled in favor of a taxpayer that medical insurance paid on a pretax basis through his cafeteria plan at work were deductible as alimony. The medical insurance was paid as required in a separation agreement. The spouses were legally separated.
The IRS claimed the deduction resulted in a double tax benefit for the medical insurance payments.
The Tax Court pointed out that the taxpayer's spouse was required to report the alimony as taxable income, so there was no double tax benefit.
(Leyh v. Commissioner, 157 TC No. 7, October 4, 2021.)
Fractional gifts qualified for valuation discounts.
A Connecticut Federal District Court ruled against the IRS and allowed valuation discounts when a father made gifts of multiple tracts of timberland, 48% to his two sons. The Court rejected the IRS's argument that the donor must have owned a fractional interest in the property before making the gifts to qualify for a valuation discount. (If the property was included in a taxable estate, no discount would have been allowed, but gifts are valued differently.)
(Buck, D.C., Connecticut.)
Corporate shareholder held liable for its income taxes.
The Fifth Circuit Court of Appeals upheld a U.S. District Court ruling that the sole shareholder of a corporation can be held personally liable for his corporation's failure to pay its income taxes. The Court found that, under Texas law, the corporation was the shareholder's alter ego. He was the sole director, officer and shareholder and had complete dominion and control over the corporation.
The shareholder failed to observe certain corporate formalities, made substantial loans to the corporation, and made payments from the corporate bank account to service personal loans.
This case is a reminder that the IRS can "pierce the corporate veil" and shareholders can lose the liability shield benefits of a corporation if the formalities and separation of the corporation and owner aren't maintained.
(Lothringer, CA5 # 20-50823, October 8, 2021.)
Tax preparer held guilty of tax fraud.
The Ninth Circuit Court of Appeals upheld the Tax Court's conviction of a California certified tax preparer of tax fraud. The taxpayer also owned a marijuana-related business and refused to provide the IRS with that business's books and records.
The Court found the taxpayer failed to report income from the marijuana-related business for four years.
(Chico, CA9 # 20-71017, October 8, 2021.)
States' challenge to limit on deduction for state income taxes rejected.
The Second Circuit Court of Appeals affirmed a federal district court's ruling rejecting four states' constitutional challenge to the $10,000 limit for the deduction of state income taxes.
(State of New York et. al. v. Yellen, CA2 # 19-3962-cv, October 5, 2021.)
Is your business eligible for California's Main Street Small Business Credit II?
Eligible businesses may receive a credit equal to $1,000 for each net increase in qualified employees, measured by the monthly average full-time employee equivalents. Each employer may receive up to $150,000, reduced by the amount received for the Main Street Small Business Credit for taxable year 2020.
Eligible taxpayers must have had 500 or fewer employees, including part-time employees, on December 31, 2021. They must have experienced a decrease of 20% or more in gross receipts. They must apply for a tentative credit reservation from the California Department of Tax and Fee Administration (CDTFA) during the period November 1, 2021 through November 30, 2021.
Here is a link for more details. https://cdtfa.ca.gov/industry/main-street-small-business-tax-credit-II-AB150.htm
Benefit from California's State Tax Deduction Workaround might be limited.
California has a new passthrough entity elective tax that is intended to be a workaround for the $10,000 federal income tax deduction limit for state and local taxes. The tax is paid and deducted by the passthrough entity and owners claim a tax credit for the entity-level tax on their individual income tax returns. A limitation applies that throws a monkey-wrench in the workaround. The credit can't reduce the California tax below the California tentative minimum tax. Any unused credit can be carried forward for five years, so it could expire unused. The tentative minimum tax limitation only applies for taxpayers that have $1 million of gross receipts (regardless of filing status) from trades or businesses during the taxable year.
If this limitation might apply to you, you should discuss with your tax advisor whether or not the entity-level tax election should be made. Tax projections might have to be made to make this decision.
(Spidell's California Taxletter, November 2021, p. 1 "Be aware of AB 150's TMT Limitation.")
If you exercised ISOs during 2021, should you use the "escape hatch"?
Remember if you exercised ISOs during 2021 and didn't sell the stock, your AMT adjustment will be based on the fair market value of the stock on the date of exercise. However, if you sell the stock before the end of the year of exercise, the AMT adjustment is eliminated. Ordinary income is reported for the excess of the selling price over the option price. I call this strategy "the escape hatch."
For example, Jean Employee exercised an ISO for 1,000 shares of XYZ stock on March 1, 2021. The fair market value of the shares on March 1, 2021 was $55 per share and the option price was $5 per share. If Jean didn't sell the stock, she would report additional AMT income of $55 - $5 = $50 X 1,000 shares = $50,000. On December 15, 2021, Jean sells the stock for $15 per share. The AMT adjustment is eliminated and Jean reports $15 - $5 = $10 X 1,000 shares = $10,000 of ordinary income for regular tax and AMT.
There is an important requirement to get this tax benefit. A loss would have to be "allowable" if the stock was sold at a loss. A common transaction that would disqualify an escape hatch is a wash sale. A wash sale happens when replacement shares or an option to acquire replacement shares are acquired during the period 30 days before or 30 days after the sale.
For example, if Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2021, she would still have a disqualifying disposition of the ISO shares, but she would have $50,000 of ordinary income because the escape hatch wouldn't apply. Her short-term capital loss of $15 - $55 = $40 X 1,000 shares = $40,000 would be disallowed as a current deduction. The disallowed loss would be added to the tax basis of the replacement shares. Therefore, the tax basis of the replacement shares would be $16 + $40 = $56 X 1,000 shares = $56,000.
If you are going to use this "escape hatch" strategy, I suggest not waiting until the last minute. One of my clients was thinking of doing this, and an employee unexpectedly sued the company for an employment-related matter. The company's stock was locked up for employees because of the lawsuit. My client wasn't able to use the "escape hatch" strategy.
Year end planning - should you "harvest" losses before the year end?
The stock market has been very active this year. If you have sold securities (or other assets) for capital gains, review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.
Remember the wash sale rules. If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.
For very high-income taxpayers, consider Biden's tax proposals. Hopefully the legislation in process in Congress will be settled soon. Much higher tax rates might apply for some taxpayers and the effective date will be a consideration. Hopefully we'll soon have more certainty for making tax planning decisions. Consult with your tax advisor.
Do you sell services or software to CPAs?
Maybe I can help with writing promotional material and marketing ideas. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.com.
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.
Attention Accountants! Speed up processing your 2020 business closings!
Do you still have 2020 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
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
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.
Please share your good experiences with Michael Gray, CPA.
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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.
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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P.S.
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, CPA2482 Wooding Ct.San Jose, CA 95128(408) 918-3162FAX: (408) 938-0610email: mgray@taxtrimmers.comHours: 8am - 5pm PDT Monday - Friday
