Michael Gray, CPA's Tax and Business Insight

October 4, 2022

© 2022 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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Janet at the entry of Walt Disney World's Animal Kingdom in Florida
Janet at the entry of Walt Disney World's Animal Kingdom on September 22, 2022. (We just missed Hurricane Ian!)

Boo! The year is almost over!

Halloween is already almost here! And after Halloween, the year roars to a close with the holiday season.

Did you know Halloween is the second most popular holiday in the United States? It's a great one for business promotions and just having fun! Some daring families will go ahead with trick or treating, this year. Some will celebrate with parties. Hope your family has some fun.

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Family celebrations.

My wife, Janet Gray, celebrates her birthday during October. Janet is a great blessing to me and our family. Happy birthday!

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Individual and C corporation tax returns due October 17.

The due date for 2021 individuals and calendar year corporations for which timely extensions were filed is October 17, 2022.

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Hurricane victims get due date relief.

The IRS has announced that Hurricane Ian victims throughout Florida now have until February 15, 2023 to file their 2021 individual and corporate income tax returns for which the due date was previous extended to October 17, 2022. The due date extension also applies to quarterly estimated tax payments due on January 17, 2023, quarterly payroll and excise tax returns normally due October 31, 2022 and January 31, 2023, tax-exempt organization with extensions due to run out on November 15, 2022.

In addition, penalties on payroll and excise tax deposits due on or after September 23, 2022 and before October 10, 2022 will be abated provided the deposits are made by October 10, 2022.

(IR-2022-168, September 29, 2022.)

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Calendar-year 2021 retirement payments to SEPs and Keogh accounts for which extensions apply are also due October 17, 2022.

Taxpayers who filed extensions may also withdraw excess IRA contributions for 2021. The maximum IRA contribution for 2021 is $6,000 plus a $1,000 "catch up" contribution for individuals age 50 and up.

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Foreign bank account form due October 17.

FinCEN Form 114 is due April 15, and the due date is automatically extended to October 17, 2022 for 2021. FinCEN Form 114 is required to be filed when an individual has $10,000 or more of foreign financial assets, including foreign bank accounts and foreign brokerage accounts. See your tax advisor about foreign insurance policies, annuities and retirement accounts.

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Need help with getting your extended tax returns, amended returns, and elections done?

To make an appointment, contact Thi Nguyen, CPA at thi@atl-cpa.com.

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Tax Court allows interest deduction for an equity participation loan.

A company's mortgage financing arrangement for the purchase of a building included a provision that 50% of the appreciation of the building when it was later sold would be payable as interest. The IRS claimed the lender and borrower entered a partnership for tax purposes. The Tax Court overruled the IRS and allowed the deduction as interest expense.

(Diech, TC Memo. 2022-86.)

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Student loan cancellation might be state taxable.

The cancellation of up to $20,000 in debt owed by Pell Grant recipients with student loans held by the Department of Education and up to $10,000 in debt owed by non-Pell Grant recipients under President Biden's executive order are generally excluded from federal taxable income under the American Rescue Plan Act of 2021 (ARPA). The ARPA exclusion applies for student loan discharges in 2021 through 2025. Not all states, including California, have conformed to that exclusion, so the income may be taxable on the taxpayer's state income tax return.

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Legal settlement paid to a former employee was taxable.

Thomas Dern worked as a salesperson for P.F.I., Inc. He was mostly paid on commission. On September 19, 2015, Dern was hospitalized for acute gastrointestinal bleeding and a resulting heart attack. Due to his health condition, he wasn't able to resume making personal calls on customers. During January 2016, an officer of PFI asked to resume his duties. He was unable to do so. On January 27, 2016, PFI notified Dern that it was terminating their sales representative agreement.

In 2017, Dern's attorney and the company negotiated a settlement of $550,000 for all claims, with a general release. No amount was specified for a physical injury.

Dern's attorney issued a Form 1099-MISC to Dern reporting nonemployee compensation of $330,000 ($550,000 less attorney fee of $330,000).

Dern excluded the income on his joint 2017 individual income tax return, believing is was excludable because it was paid for "physical injuries."

The Tax Court upheld the IRS in finding there was no evidence the settlement was paid for physical injuries.

This case highlights the importance of specifying any amount of a settlement that is paid for physical injuries. In this case, it seems to me the settlement related to a health condition unrelated to the taxpayer's employment.

This is a Tax Court Memorandum decision. I think it was handled hastily based on the Form 1099-MISC. It seems to me PFI should have issued the 1099-MISC to Dern, reporting $550,000 of nonemployee compensation. Legal fees relating to personal injuries are not tax deductible.

So I think Dern skated on $220,000 of taxable income. He shouldn't appeal the decision.

(Dern v. Commissioner, T.C. Memo. 2022-90.)

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Donor Advised Fund isn't under donor's control.

A recent Ninth Circuit Court of Federal Appeals ruling is a sobering reminder. Philip Pinkert opened a donor-advised fund (DAF) at Schwab Charitable in 2007. Pinkert became dissatisfied with the arrangement and sued Schwab Charitable Fund, the Schwab Board of Directors, and the Schwab Charitable DAF. According to Pinkert, Schwab breached its fiduciary duties by charging excessive fees and imprudently managed the funds, affecting his ability to direct funds to his preferred charities.

The Ninth Circuit Court of Appeal affirmed a ruling in the U.S. District Court of the Northern District of California that Pinkert lacked standing to file the suit.

Amounts donated to a DAF come under the total discretion of the DAF. According the IRS Guide Sheet on DAFs, "the right of a donor to provide noncompulsary recommendations, suggestions or consultative advice" about the disposition or investment of funds in the donor's account. The donor doesn't retain any "right" to direct where the funds will be invested or donated.

It's important to have a clear understanding when entering such an arrangement what fees will be charged to administer the account and invest the assets.

These arrangements are particularly dependent on a relationship of trust between the donor and the DAF.

(Pinkert v. Schwab Charitable Fund, Ninth Circuit No. 21-16299, September 14, 2022.)

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Supreme Court abortion ruling has a tax effect.

In order to claim an itemized deduction for medical expenses relating to an abortion, it must be performed in a state where it's legal. (I would expect most women or families who have an abortion will claim the standard deduction anyway.)

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Georgia expands who qualifies as a dependent.

Georgia has adopted a tax law change allowing a dependency exemption of $3,000 for a human fetus with a detectable heartbeat. The federal tax law doesn't allow a dependency exemption in this case. (What name should be listed? No social security number will have been issued.)

(The Kiplinger Tax Letter, September 1, 2022.)

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Did your IRA invest in a limited partnership?

Making alternative investments, including master limited partnerships and limited partnerships has become popular. When these entities have taxable income, the partner's share is taxable, even if it's not distributed, provided the IRA's "unrelated business taxable income" exceeds $1,000. The income and tax are reported using form 990T.

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Passthrough entity tax credit fix enacted.

Governor Newsom has signed SB851, which fixes the reduction in the Other State Tax Credit (OTC) for taxpayers claiming the passthrough entity tax credit (PTEC) for taxable years beginning on or after January 1, 2022. Before the change, the limitation for the OTC was based on the California tax after reduction by the PTEC. After the change, the limitation for the OTC will be based on the California tax before reduction by the PTIC, increasing the OTC.

(Spidell's Flash E-mail: Passthrough entity tax OTC fix enacted, September 29, 2022.)

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Other California tax provisions approved by Governor Newsom:

(Spidell's Flash E-mail: Wildfire settlement exclusion and paid supplemental sick leave bills enacted, September 30, 2022.)

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New California unclaimed property question on California business tax returns.

As required by AB 466 enacted during 2021, 2021 California business tax returns (Forms 100, 100S, 565 and 568) include new questions relating to a business's unclaimed property reporting history.

Here's a State Controller web page with the reporting requirements for unclaimed property. https://www.sco.ca.gov/upd_rptg.html

The new questions are:

  1. Has this business entity previously filed an unclaimed property Holder Remit Report with the State Controller's office?
  2. If "Yes," when was the last report filed (mm/dd/yyyy)?
  3. What is the amount last remitted?

Common items of unclaimed property are uncashed paychecks and uncashed payments to vendors.

The State Controller's Office will have an Unclaimed Property Voluntary Disclosure Program to clear up "past sins" and waive penalties.

The Franchise Tax Board will share responses to the questions with the State Controller's Office, which will likely result in compliance audits. Remember, the answers to these questions are made under penalties of perjury.

(Spidell's California Taxletter®, October, 2022, p. 3 "Reporting unclaimed property on California tax returns.")

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CalSavers will apply to more employers.

Governor Newsom has approved SB 1126, which expands CalSAvers requirements to any business with one employee. By December 31, 2025, eligible employers with one or more eligible employees that do not provide a retirement savings program must register with the CalSavers program.

(Spidell's California Taxletter®, October, 2022, p. 13, "CalSavers will apply to more employers.")

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California Middle Class Tax Refund Payments.

The State of California will send tax refund payments to certain taxpayers from October 2022 to January 2023.

To qualify, recipients must:

Use this link to get more details at Franchise Tax Board's web site. https://www.ftb.ca.gov/about-ftb/newsroom/public-service-bulletins/2022-13-california-middle-class-tax-refund-payments.html#:~:text=The%20Middle%20Class%20Tax%20Refund%20payment%20is%20not,to%20Franchise%20Tax%20Board%20or%20other%20government%20agencies.

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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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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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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
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