Michael Gray, CPA's Tax and Business Insight

April 6, 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!

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Easter decorations on Mike's mantel.
Here are Janet's Easter decorations for this year.

Happy Easter!

Easter falls early, this year next Sunday, April 9. If you celebrate this holiday, I hope you are able to do it family and/or friends.

Passover begins Wednesday, April 5 and ends Thursday, April 13. For our friends who observe Passover, enjoy this season of rememberance.

I think we can all celebrate the end of rainy season. Spring is busting out all over!

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Family celebrations.

April is a big birthday month for my family. My daughter and office manager, Dawn Siemer, her husband John and her daughter, Kara, all have April birthdays! Allen Le, Thi Nguyen's husband, is also celebrating his birthday this month. Happy Birthdays!

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Reminder: tax return filing deadlines have been extended for some taxpayers.

I sent a separate notice that the IRS has announced the federal filing deadline for tax returns and tax payments for residents of certain disaster areas in California, Alabama and Georgia has been extended to October 16, 2023, so the reminders listed below won't apply to those taxpayers. Most California residents should qualify for the extension due to flood damage in their areas. Here's a link to the IRS web site to find the affected areas. https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

California has announced that it will conform to the federal extension.

New York residents in certain counties impacted by winter storm and snowstorms that occurred between December 23 and December 28, 2022 have also been given relief from filing tax returns and making tax payments until May 15, 2023. The relief is for individuals and households that reside or have a business in Erie, Genesee, Niagara, St. Lawrence and Suffolk counties. The relief applies for tax-related items normally due from January 17, 2023 to May 15, 2023. Here's a link to IRS announcement. https://www.irs.gov/newsroom/irs-new-york-storm-victims-qualify-for-tax-relief-april-18-deadline-other-dates-extended-to-may-15

Arkansas residents in certain counties as a result of tornadoes and severe storms that occurred March 31, 2023 have also been given relief from filing tax returns and making tax payments that are due from March 31 through July 30, 2023 to July 31, 2023. Here's a link to the IRS announcement. https://www.irs.gov/newsroom/irs-arkansas-storm-victims-qualify-for-tax-relief-april-18-deadline-other-dates-extended-to-july-31

You can check the IRS Tax Relief in Disaster Situations page to check if you are in a disaster area that qualifies for relief. https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

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Due date for 2022 individual, calendar year estates and trusts, and calendar year corporation income tax returns is April 18, 2023.

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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 16, 2023 for most individuals.

Remember the payment date has also been extended for taxpayers who are residents in a disaster area where the IRS has announced filing relief, so late payment penalties won't apply provided the balance of the tax is paid by October 16, 2023.

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 April 18, 2023, 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 6% for individuals.)

If a 2023 individual income tax return isn't filed by April 18, 2023 and a valid extension isn't filed by that date or the due date hasn't been extended as disaster relief, 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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Remember that an estimated tax payment is also due on April 18.

The first 2023 estimated tax payment for individuals and most other calendar year entities is also due on April 18, 2023. The penalties for late payment of estimated taxes are computed as simple interest, but the interest rate has been increasing. The federal estimated payment can be based on 25% of last year's tax liability. California "front loads" the first estimated tax payment as 30% of last year's tax liability. California taxpayers with taxable income of $1 million or more must make their estimated tax payments based on their actual income and deductions.

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Remember the second California real estate tax payment is due April 10.

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Remember the Foreign Financial Accounts Report, FinCEN Form 114, is also due on April 18 with an automatic extension (no form required) to October 16.

Here's a link to an IRS explanation for when you are required to report ($10,000 or more of foreign financial accounts). https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar

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EDD gives relief to Silicon Valley Bank customers.

The EDD is exercising its authority to waive penalties of Silicon Valley Bank customers who weren't able to timely make their payroll tax payments because of the bank's failure. Employers may submit a waiver request through e-Services for Business or in writing.

(EDD news Release 23-10, March 10, 2023.)

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Michael Gray's tax update presentation for Santa Clara County Estate Planning Council on April 24, 2023.

Michael Gray is giving a tax update presentation for the Santa Clara County Estate Planning Council on April 24, 2023. The presentation will include highlights of IRS Proposed Regulations for inherited retirement account distributions under the SECURE Act of 2019 and highlights of SECURE Act 2.0, enacted December 29, 2022. The dinner meeting will be at Delta Hotels by Marriott - 2151 Laurelwood Rd, Santa Clara from 5:30 p.m. to 8:00 p.m. Here is a link with details and for registration. https://www.sccepc.org/events/event/23029

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The IRS issues guidelines that will knock out the qualification of many electric vehicles, effective April 18, 2023.

The IRS issued a proposed regulation, to be published in the Federal Register on April 17, 2023, outlining the requirements to be met for critical minerals and battery components for the clean vehicle credit.

New clean vehicles placed in service on or after April 18, 2023, are subject to the requirements, even if the vehicle was ordered or purchased before April 18, 2023.

The IRS has also updated frequently asked questions for new, previously owned and qualified commercial clean vehicles.

Here's a link to announcement IR-2023-64, which includes links to the proposed regulations and the FAQs. https://www.irs.gov/newsroom/irs-issues-guidance-and-updates-frequently-asked-questions-related-to-the-new-clean-vehicle-critical-mineral-and-battery-components

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No basis adjustment for property of a trust not included in a decedent's estate.

In a ruling that should surprise no one, the IRS said the property of a trust not included in a decedent's estate doesn't receive a "fresh start" or "stepped up" basis to the date of death value when the decedent died. A common example would be a bypass trust holding property from a pre-deceased spouse. Another example would be most irrevocable trusts created as a gift by the decedent.

(Rev. Rul. 2023-2.)

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IRS warns about Employee Retention Credit scams.

You've probably noticed advertisements on television and promotional emails offering to apply for the federal Employee Retention Credit. In many cases, bogus companies are applying for the credit when the business didn't qualify. The IRS has issued several warnings to be sure your business qualified when you prepare a claim. You can't rely on what the service company tells you, despite saying it is an "Employee Retention Credit Expert."

Here's a link to an IRS alert issued March 7, 2023. https://www.irs.gov/newsroom/irs-issues-renewed-warning-on-employee-retention-credit-claims-false-claims-generate-compliance-risk-for-people-and-businesses-claiming-credit-improperly

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Donation deduction denied and transfer taxable - timing and documentation SNAFU.

A taxpayer contributed stock almost contemporaneously with the sale of the company. The donation deduction was $3,282,511. The sale was closed on July 15, 2015. The taxpayer claimed the transfer happened on June 11, 2015. The Tax Court found the action for the transfer of the shares didn't happen until the charity received the shares via an email on July 13, 2015. The taxpayer kept an incomplete stock certificate in his office desk until July 9 or 10, when he delivered the certificate to his estate planning attorney.

The Tax Court upheld the IRS in finding that, since the sale was virtually complete at the time of the contribution of the stock, the gain was taxable to the donor taxpayer as an anticipatory assignment of income. In addition, the taxpayer failed to comply with the requirement to attach a qualified appraisal to his income tax return, so the charitable contribution deduction was disallowed.

(Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34.)

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Poor trust wording loses deduction for bequest of a CRAT interest.

A decedent made a bequest to a charitable remainder annuity trust. An annuity was to be paid to the decedent's sister, succeeded by the decedent's spouse, if she survived the sister. The remainder was to be paid to a qualified charity.

According to the trust, the annuity amount would be "equal to the greater of: (a) all net income, or (b) the sum of Fifty Thousand Dollars ($50,000), at least annually."

The Internal Revenue Code requires a charitable remainder annuity trust to pay a sum certain annually. (IRC § 664(d)(1).)

An initially nonfixed interest will be excused if, within 90 days after the due date for the estate tax return, a judicial proceeding is commenced that results in the trust qualifying as a CRAT (or CRUT), retroactive to the date of the decedent's death. (IRC § 2055(e)(3)(C)(ii).)

When the IRS initiated an audit of the decedent's estate tax return, the co-trustees executed an amendment to the Trust instrument, retroactively effective to the date of death to remove the "all net income" provision. They didn't seek a judicial reformation.

The Tax Court ruled the CRAT was invalid, so the charitable deduction of the federal estate tax return was disallowed.

(Estate of Block v. Commissioner, T.C. Memo 2023-30.)

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Federal tax liens allowed a Chapter 7 trustee to void a disclaimer of an inheritance.

In 1995, John Spencer's parents established an irrevocable trust for the benefit of their descendants. Upon the death of the last grantor, the assets of the trust, consisting of $1,500,000 of life insurance proceeds were to be divided equally among the Spencers' four children.

In January 2019, John's father died. Three beneficiaries received $375,000. John Spencer disclaimed his inheritance, so his share was distributed in equal shares to his children.

John filed for chapter 7 bankruptcy in July 2020. The IRS was an unsecured creditor in the bankruptcy. In 2022, the bankruptcy trustee filed an adversary complaint seeking to void John's disclaimer as a fraudulent transfer under Section 544(b) of the bankruptcy Code and 28 U.S.C. Section 3304, the Federal Debt Collection Procedures Act (FDCPA).

Under 11 U.S.C. Section 544(b)(1), a bankruptcy trustee may avoid a transfer of the debtor of property if the transfer is voidable under "applicable law" by an unsecured credit. The trustee "steps into the shoes" of an unsecured creditor to recover transfers the creditor would be able to recover but for the bankruptcy petition. In this case, the trustee "stepped into the shoes" of the IRS.

John and his children filed a motion to dismiss the adversary complaint, claiming that, under Illinois law, he never possessed an interest in the property.

The bankruptcy court rejected the argument that John never possessed an interest in the property. The court found the FDCPA took precedence over definitions in Illinois law. Under the FDCPA, the definition of "property" is defined broadly to include any present or future interest in property, including property held in trust.

The court also held, despite of split of authority, the FDCPA constitutes "applicable law" for purposes of Section 544(b)(1) of the Bankruptcy Code.

(In re Spencer, 2023 PTC 62 (Bnkr. S.D. III, 2023).)

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Rule change makes it easier for grandparents to set up and fund Section 529 plans.

Under current financial aid rules, distributions from Section 529 (education funding) plans owned by anyone other than a parent or student are treated as cash support, reducing a student's eligibility for financial aid by as much as 50% of the distributed amount. New rules, effective for the 2024-25 school year eliminate the problem. Students will no longer have to report distributions from nonparent-owned Section 529 plans when filling out the Free Application for Financial Aid, or FAFSA. Cash gifts from nonparent family members also won't have to be reported.

(The Kiplinger Tax Letter, March 16, 2023, p. 1.)

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Alternative submission to the IRS wasn't "filing" the tax return.

A partnership faxed a copy of its tax return to an IRS revenue agent and mailed a copy to an IRS attorney.

The Ninth Circuit ruled these actions didn't qualify as "filing" the tax return. The tax return had to be mailed to the designated place for filing under Reg. Sec. 1.6031(a)-1(e)(1).

The three-year statute of limitations never began to run.

This en banc ruling supercedes and overrules a previous ruling by the Ninth Circuit (Seaview Trading, LLC v. Commissioner, 34 F. 4th 666, 129 AFTR 2d 2022-1757, May 2022) and upholds a ruling by the Tax Court (Seaview Trading, LLC v. Commissioner, TC Memo 2019-22).

In his dissent, Judge Bumatay observed the IRS has long told taxpayers they can file late or untimely tax returns with requesting IRS officials. (Chief Counsel Advice No. 19993039.) With the ruling, the IRS can now claim those returns were invalid, and the statute of limitations might never be closed for those tax returns.

(Seaview Trading, LLC v. Commissioner, 131 AFTR 2d 2023-988, March 10, 2023.)

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Large employers should prepare for the SDI tax change starting 2024.

Effective January 1, 2024, the wage cap for SDI tax, set at 0.9% for 2023, will be eliminated. Employers with many high-wage employees should consider substituting a voluntary disability insurance plan. Such a plan requires written approval from the majority of employees eligible for coverage. Employees may still elect to choose SDI coverage. Consult with your employee benefits insurance agent and your employee benefits attorney.

(Spidell's California Taxletter, April, 2023, p. 14, "How to minimize the impending SDI tax increase.")

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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
(408) 918-3162
FAX: (408) 938-0610
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