Michael Gray, CPA's Tax and Business Insight

December 2, 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 and Janet in Santa hats.
Janet and I wish you a Joyous Holiday Season!

Happy Holidays!

This year, Hanukkah began the evening of November 28. Of course, Christmas Day will be Saturday, December 25. Our office will be closed December 23, 24 and 31. 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 20, returning January 3.

Michael Gray won't be available from December 6 through 10.

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'Tis the season for year-end planning.

There is less than a month remaining for 2021. Make your year-end planning appointment now. Thi Nguyen, CPA will have limited availability. To make an appointment with her, write to her at thi@atl-cpa.com.

The Senate is now considering President Biden's Build Back Better legislation. It might not pass at all. If it does pass, I think it will be late December 2021 or early January 2022. That makes it almost impossible to incorporate in your 2021 tax planning. Most of the extreme tax proposals in the package have been eliminated. For more information, see your tax advisor.

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

The final 2021 estimated tax payment for calendar-year corporations is due December 15, 2021. 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 18.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 18, 2022. (January 15 falls on Saturday and January 17 is Martin Luther King's birthday.) 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, 2021 for a 2021 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 $25,100 for married filing joint and $12,550 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 2021-2022 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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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 2021 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 2021. Usually, we would be thinking about deferring income at the year end. The Build Back Better proposal includes a 5% tax surcharge for very high-income taxpayers. See your tax advisor for details and what makes sense for you. This modest amount doesn't justify radical tax planning moves.

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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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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 $13,051. 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, on January 31, 2022) as distributed for a taxable year (for example, 2021).

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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Should you buy business equipment before December 31?

The expense election for business equipment purchases is now $1,050,000. This election is even available for some SUVs and heavy trucks with a $26,200 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.

See your tax advisor.

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Seniors, required minimum distributions are back for 2021.

Anyone age 72 or older as of December 31, 2021 who owns an IRA or qualified retirement account (like a 401(k)) is required to take a required minimum distribution for 2021. Most must take the distribution by December 31, 2021, but those who became age 72 during 2021 may take their first distribution by April 1, 2022. (If they do, two distributions will be payable during 2022.)

Also remember the election to have up to $100,000 of the distribution paid to a charity to avoid the charitable contribution deduction limit. Doing this can also help reduce your Medicare premiums and increase your tax deduction for medical expenses, if you itemize deductions.

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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, 2022. Be sure you have installed those updates before processing your first payroll for 2022.

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No California FUTA makeup payment for 2021.

California employers will NOT have an additional tax for a credit reduction on their Federal Unemployment Tax Return, Form 940, for 2021.

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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 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 2021?

Since itemized deductions have been reduced or eliminated for 2021 and the standard deduction has been increased, many taxpayers won't benefit from itemizing their deductions for 2021, 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!

You can deduct up to $300 of cash donations ($600 for married couples filing a joint return) 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 2021!

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, 2021?

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 2021, you must have the accounting policy in place by December 31, 2021 and implement that policy in your accounting throughout 2021. If you didn't have the policy for 2020, consider getting it in place by December 31, 2021. 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 2021.

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 $3,600 for each qualifying child age 5 and under and $3,000 for each qualifying child age through age 17 and $500 for each other qualifying child and relative. This credit is phased out to $2,000 if the taxpayer's modified adjusted gross income exceeds $150,000 for married, filing jointly and $75,000 for other taxpayers. The remaining $2,000 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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IRS guidance for tax-exempt income from forgiveness of PPP loans.

The IRS has issued guidance that taxpayers may treat amounts that are excluded from gross income for the forgiveness of a PPP loan as received or accrued (1) as eligible expenses are paid or incurred, (2) when an application for PPP loan forgiveness is filed, or (3) when ppp loan forgiveness is granted.

If the amount of the forgiveness of a PPP loan is less than originally reported, such as because there weren't sufficient qualified expenses to justify forgiveness, the taxpayer must file an amended return or administrative adjustment request.

(Revenue Procedure 2021-48 and Revenue Procedure 2021-49.)

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California nonconformity for PPP loan forgiveness.

California hasn't conformed to the federal exclusion for PPP loan forgiveness for first- and second-draw PPP loans approved after March 31, 2021. Since the forgiveness is taxable, the deductions paid using the loan proceeds are also tax-deductible on a California income tax return. (In order to deduct the expenses for PPP loans approved before April 1, 2021, the taxpayer may not be a public corporation and must meet a 25% reduction of gross receipts test.)

Be aware the California legislature might extend the exclusion in the future.

The federal American Rescue Plan Act also expanded the eligibility for PPP loans to include certain 501(c) nonprofit organizations and internet-only news and periodical publishers. California has not conformed to those amendments, so forgiveness of those loans aren't excluded from income on a California income tax return. The California legislature might conform in the future.

(Spidell's California Tax Letter, December, 2021, p. 1, "New PPP nonconformity guidance.")

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California nonresident withholding for passthrough entities.

California passthrough entities (partnerships, S corporations, estates and trusts) are generally required to withhold California income taxes for distributions to their owners, including individuals who aren't California residents; corporations not qualified to do business in California or having no permanent place of business in California; partnerships or LLCs with no permanent place of business in California; and trusts without a resident grantor, beneficiary, or trustee; or estates when the decedent wasn't a California resident.

The rate of California tax withheld is 7%.

Withholding is required when cumulative distributions to the payee within a taxable year exceed $1,500.

Payers may apply for a waiver from withholding using California Form 588. One reason for granting the waiver is the payee has California state tax returns on file for the two most current taxable years in witch the payee has a filing requirement.

Payees that are residents of California may claim exemption from withholding using California form FTB 590.

Payees that are nonresidents of California may request a reduced tax rate for withholding using California form FTB 589.

Withholding is required to be paid quarterly. The payments are made with California form FTB 592-Q, due April 15, June 15, September 15 and January 15.

The total withholding is allocated annually using Form 592-PTE. The form is due January 31 of the year following the year of withholding.

Here is a link to the Franchise Tax Board Publication explaining nonresident withholding. https://www.ftb.ca.gov/forms/misc/1017.html

According to the Franchise Tax Board, nonresident withholding for distributions made to individual nonresident owners is still required even if the passthrough entity pays the passthrough entity elective tax on behalf of its nonresident individual owners.

See your tax advisor for more details.

(Spidell's California Taxletter, December, 2021, p. 5, "Nonresident withholding and passthrough entities".)

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Physical possession of coins owned by a self-directed IRA was a taxable distribution.

A taxpayer self-directed her individual retirement account to invest in American Eagle coins through a limited liability company owned by the IRA and managed by the taxpayer. The taxpayer took physical custody of the coins. The Tax Court ruled that receiving the physical custody of the coins was a taxable distribution equal to the cost of the coins. The Tax Court also ruled that relying on a representation on a website that taking physical possession of the coins using this structure isn't a taxable distribution isn't a reasonable cause to avoid the substantial understatement of tax penalty.

(McNulty v. Commissioner, 157 T.C. No. 10.)

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Proposed tax change would give some tax rules authority to the FASB.

The Build Back Better bill includes a corporate alternative minimum tax based on the financial statement income of some public companies. The Financial Accounting Standards Board promulgates the financial reporting rules for those financial statements. It is not a governmental agency answerable to the voters. Something to think about and likely to be a controversial issue if the legislation is passed and implemented.

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Closing the tax gap to fund Build Back Better legislation.

Many of the individual tax law changes for funding President Biden's social and climate spending plan have been eliminated from the proposal. $400 billion of new revenue is to come from better enforcing the tax laws, especially for high-income taxpayers. That means there will be more federal income tax audits for high-income individuals in the near future. The legislation includes $80 billion designated to improve operations at the Internal Revenue Service.

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Build Back Better legislation includes a higher limit for state and local taxes.

The revised bill sent to the Senate includes an increase of the limit for the deduction for state and local taxes from $10,000 to $80,000 ($40,000 for married persons filing separate returns and trusts) for tax years through 2031. Ironically, Republicans are calling this change an unfair change favoring the wealthy. We'll see if the proposal survives in the Senate's version of the legislation.

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Maximum 401(k) contribution increased for 2022.

The IRS has announced a cost of living increase to the maximum 401(k) contribution for 2022 to $20,500, up from $19,500 for 2021. The maximum contribution to an IRA is unchanged at $6,000. The catch-up contribution limits for individuals age 50 and over is unchanged at $6,500 for 401(k)s and $1,000 for IRAs.

(Notice 2021-61.)

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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.

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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!

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

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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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San Jose, CA 95128
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