Michael Gray, CPA's Tax and Business Insight

January 4, 2023

© 2023 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!

Route to _______   _______   _______   _______   _______

(If you find this information valuable, please pass it on to a friend!)

Table of Contents

Janet and me in Sausalito
Janet and me in Sausalito with San Francisco in the background

Happy New Year!

Happy New Year!

2022 was an eventful year that many will be glad to have behind us. I'm optimistic that 2023 will have better times ahead.

Higher interest rates provide better income opportunities for bank accounts and short-term bonds than we've seen in a long time. Managing debt and being current with estimated tax payments is more important than we're accustomed to.

Best wishes to you and your family for you to accomplish your dreams and to be safe in turbulent times.

Your CPA, enrolled agent, attorney and financial planner should be working with you to help you achieve your financial goals, but it's up to you to ask for that help.

Return to Table of Contents

Special Holiday Sale Offer -- Get our books for half-price!

As a year-end holiday offer to subscribers of this newsletter, you can get any of our books for half-price: Secrets of Tax Planning for Employee Stock Options, 2018 Edition, Executive Tax Planning for Employee Stock Options, 2018 Edition, Real Estate Tax Handbook, 2020 Edition and How to Use Roth & IRA Accounts to Provide a Secure Retirement, 2021 Edition. Order the books online for half price at www.siliconvalleypublishingcompany.com. Limited copies are available. We have temporarily repriced the books so no code is required. You can also phone your order to Dawn Siemer at 408-918-3162. (Remember Dawn won't be available starting December 15, 2022, returning January 3, 2023. Order now to avoid delayed shipping.) This offer will expire January 31, 2023.

Return to Table of Contents

January celebrations.

My son in law, Dan Baker, is celebrating his birthday this month. Happy birthday Dan!

Return to Table of Contents

Tax preparation materials will soon be on the way.

ATL-CPAs & Advisors, Inc. is in the process of mailing instructions for sending their 2022 tax return preparation instructions. If you haven't received instructions by January 20 or you would otherwise like to receive instructions, contact Thi Nguyen at thi@atl-cpa.com.

Return to Table of Contents

Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2022 individual income tax returns will be scheduled in February. 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.

Return to Table of Contents

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. For 2022, they apply when the undistributed estate or trust income exceeds $13,450. 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, January 31, 2023) as distributed for a taxable year (for example 2022).

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.

Return to Table of Contents

Fourth quarter estimated tax payment for non-corporate taxpayers is due January 17.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 17, 2023. (January 15 falls on Sunday and Martin Luther King's birthday is celebrated on January 16.) Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

See your tax advisor.

Return to Table of Contents

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.

Return to Table of Contents

Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2023. Be sure you have installed those updates before processing your first payroll for 2023.

Return to Table of Contents

California FUTA makeup payment for 2022.

California employers will have an additional tax for a credit reduction on their Federal Unemployment Tax Return, Form 940, for 2022. The credit reduction is .03% of FUTA wages, or a maximum of $21.00 per employee.

Return to Table of Contents

W-2s, 1099s and DE 542 reminder.

Remember that most 2022 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by February 28, 2023, including electronically filed forms, except Form 1099-NEC and Form W-2 should be submitted by January 31, 2023. If you have a California business, be sure to send Form 1099-NEC to the Franchise Tax Board.

Amounts paid using a credit card or a payment service like PayPal should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date, $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that claim their real estate operations are a trade or business (including for the 20% federal tax deduction for trade or business income) should prepare them anyway. See your tax advisor for details.

Return to Table of Contents

Budget Act includes major retirement account provisions.

Congress has passed and President Biden has signed the Consolidated Appropriations Act of 2023. Division T of the Act is SECURE 2.0 Act of 2022, which includes many important changes for retirement plans, including 401(k)s, Roths and IRAs. I discuss a few highlights in this blog post. http://www.michaelgraycpa.com/posts/budget-act-includes-major-retirement-account-provisions/

Return to Table of Contents

Budget Act limits deductions for qualified conservation easements.

The Consolidated Appropriations Act of 2023 also includes provisions to disallow charitable contribution deductions for contributions exceeding 2.5 times the sum of each partner's basis in a partnership. Exceptions would apply for contributions of property with a holding period of at least 3 years and for family partnerships. The provisions are effective for contributions made after December 29, 2022.

(SECURE 2.0 Act of 2022, Section 605.)

Return to Table of Contents

Backdoor Roths are OK, for now.

There no prohibitions against "backdoor Roth" contributions in SECURE 2.0. Remember, deferred income in regular IRAs will be triggered for a rollover to a Roth. See your tax advisor.

Return to Table of Contents

2023 standard mileage rates announced.

The standard mileage rate for business mileage as of January 1, 2023 is 65.5 per mile. It was 62.5 per mile for the last half of 2022. The rate for medical or moving purposes for active-duty members of the Armed Forces is unchanged at 22 per mile. The rate for mileage in service of charitable organizations is unchanged at 14 per mile.

Remember miscellaneous itemized deductions for employee business expenses aren't allowed for federal tax reporting for 2022.

(Notice 2023-03, IR-2022-234 December 30, 2022.)

Return to Table of Contents

IRS issues procedure for change in accounting method for research and experimental expenditures.

The Tax Cuts and Jobs Act of 2017 generally requires that research and experimental costs should be amortized over 5 years, or 15 years for foreign research. Software development is a research and experimental cost for this purpose. The expenses for the research and experimental costs continue to be amortized, even if the research is disposed, retired or abandoned. The new requirement applies to research and experimental expenditures paid or incurred in taxable years beginning after December 31, 2021.

The change in method of accounting is applied on a cut-off basis to expenditures paid or incurred in taxable years beginning after December 31, 2021, so no adjustment is required under Internal Revenue Code Section 481(a). The change is deemed to be made with the automatic consent of the Commissioner of Internal Revenue. Instead of filing Form 3115, the taxpayer should include a statement for the first taxable year beginning after December 31, 2021. The Section 3 of Revenue Procedure prescribes the information to be included in the statement.

Representatives of Congress and the American Institute of Certified Public Accountants have been trying to repeal this change without success so far. Watch for developments.

(Revenue Procedure 2023-8.)

Return to Table of Contents

Guidance issued for broker reporting of cryptocurrency transactions.

The IRS has issued transitional guidance for brokers of digital assets (cryptocurrency) requiring reporting of sale and basis information for assets acquired on or after January 1, 2023. This reporting, similar to the reporting of sales of stock, should make reporting easier for taxpayers and their tax return preparers in the future.

(Announcement 2023-2.)

Return to Table of Contents

IRS delays implementing lower threshold for reporting third-party settlement transactions.

The IRS has announced a delay in the requirement for third-party settlement organizations like Venmo, PayPal and CashApp to report business transactions on Form 1099-K. Currently, these transactions are required for a payee when there are more than 200 transactions and payments exceed $20,000 per year. The American Rescue Plan of 2021 changed the threshold to $600 per year, effective January 1, 2023 for transactions paid in 2022. The IRS will continue to apply the former threshold for 2022 and apply the new threshold for 2023.

(Notice 2023-10.)

Return to Table of Contents

IRS issues a Fact Sheet for residential energy credits.

The IRS has issued a fact sheet with frequently asked questions about energy efficient home improvements and residential clean energy property credits. https://www.irs.gov/pub/taxpros/fs-2022-40.pdf

(FS-2022-40, December 2022.)

Return to Table of Contents

Income returned during the year received isn't taxable.

A taxpayer received disability payments from Hartford Life Insurance Co. that was repaid to Hartford in the same year. The Tax Court upheld the taxpayer's claim that the amount received shouldn't be included in taxable income.

(Severance v. Commissioner, T.C. Summary Opinion 2022-23, November 21, 2022.)

Return to Table of Contents

Proposed regulations would require disclosure of syndicated conservation easement transactions as listed transactions.

The IRS lost cases about requiring disclosure of a syndicated conservation easement as a listed transaction. The Tax Court and Sixth Circuit Court of Appeals said it didn't meet the administrative requirements to list the transaction. To remedy this, the IRS has issued proposed regulations to list these transactions as potentially abusive and require disclosure.

(A-2022-28 (Announcement 2022-28), December 6, 2022)

Return to Table of Contents

'Tis the season to exercise ISOs?

Since stock received from exercising an incentive stock option has to meet two holding period tests (more than two years after grant and more than one year after exercise) to avoid having the excess of the fair market value over the option price taxed as ordinary income, exercising early in the year can be advantageous when you decide to hold the stock after exercise. The reason is you have the alternative of selling the stock before the end of the year of exercise and possibly avoiding the alternative minimum tax if the value of the stock drops after exercise. I call this tax strategy the "escape hatch."

If the company's stock isn't publicly traded and you can't sell the shares, this strategy won't work.

Be careful about blackouts. I have had some individuals call me who wanted to use the escape hatch during December, only to discover they were prohibited from selling their shares because they were subject to an employee blackout. Sometimes blackouts can happen unexpectedly, like when an employer becomes a party to a lawsuit. There's no magic solution in these cases - you could be stuck with a significant tax liability.

For many people, the exercise and immediate sale of the shares is the most comfortable alternative, even if the tax bill is higher.

Also remember the wash sale rules can spoil an "escape hatch" transaction. You can't repurchase the shares or even receive an employee stock option or buy a put option during the period starting 30 days before the sale to 30 days after the sale.

Another advantage of an exercise early in the year is to be able to meet the holding period requirements and sell the shares before the tax is due on April 15. But check the estimated tax payment requirements to avoid penalties for late estimated tax payments. (The alternative minimum tax liability should be included in estimated tax payments.)

Return to Table of Contents

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.

Return to Table of Contents

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.

Return to Table of Contents

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.

Return to Table of Contents


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.

Return to Table of Contents


Visit our new article!

Return to Table of Contents

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+.

Return to Table of Contents

Check out my blog.

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

Return to Table of Contents


Home    Newsletter Archive    Introducing Michael Gray, CPA    Articles    Tax FAQ   Need Help?    Other Links


Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

Find us on Facebook
Follow me on Twitter
Connect on LinkedIn
Connect on Google+
Our Blog

Subscribe to Michael Gray, CPA's
Tax & Business Insight


We respect your email privacy