Michael Gray, CPA's Tax and Business Insight
May 5, 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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Table of Contents
- Happy Mothers' Day!
- Happy Memorial Day!
- Family celebration.
- California personal property tax form is due May 8, 2023.
- Due date for calendar-year tax-exempt organizations.
- Introductory offer for our updated book about Roth and IRA accounts.
- Due date approaches for claiming 2019 tax refunds.
- Critical payment date approaches for California passthrough entity tax.
- California LLC estimated fee due date approaches.
- Florida storm victims get tax relief.
- S corporation allowed to fix a late election to be a qualified subchapter S trust.
- Beware tax scams.
- The IRS issues guidelines that will knock out the qualification of many electric vehicles, effective April 18, 2023.
- What's the IRS going to do with the $80 billion?
- IRS can't assess penalties for failure to report interests in foreign corporations.
- Washington resident tax return preparer taxed by California for income from California clients.
- Deadlines extended for nonresident withholding.
- Do you sell services or software to CPAs?
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: Time's Up!
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
We saw this windsurfer during our San Francisco Bay Cruise on April 30, 2023. Happy Mothers' Day!
Mothers' Day will be celebrated on Sunday, May 14 this year. Remember to express your appreciation to your mother and other mothers who have contributed to your life.
Happy Memorial Day!
Memorial Day will be celebrated on Monday, May 29 this year. Memorial Day is the unofficial beginning of summer. Please honor those who died defending our country.
Family celebration.
My daughter Holly Baker and her husband Dan are celebrating their wedding anniversary during May. Happy anniversary!
California personal property tax form is due May 8, 2023.
California personal property tax Form 571 for 2023 is due May 8, 2023. If the form is filed late, a 10% penalty is assessed.
Due date for calendar-year tax-exempt organizations.
The due date for IRS forms for 2022 calendar-year tax-exempt organizations is May 15, 2023. A six-month extension of time to file can be applied for using Form 8868.
Introductory offer for our updated book about Roth and IRA accounts.
The 2023 Edition of How to Use Roth and IRA Accounts To Provide A Secure Retirement is now available! As an introductory offer, you can order the book at our web site, siliconvalleypublishingcompany.com, for half price, $17.49, plus $5 shipping and 9.375% California sales tax for California residents. This offer expires May 31, 2023. You can also get the introductory offer by calling your order weekdays at 408-918-3162, or order it for full price at Amazon.com.
Why get this update? Congress passed the SECURE 2.0 Act on December 29, 2022 and the IRS issued proposed regulations for the SECURE Act of 2019 on February 24, 2022. There are many changes, including changing the age at which required minimum distributions must start and rules relating to designating beneficiaries and when distributions are required after a death. Includes a Retirement Plan Calendar checklist for after a death and IRS tables for computing required minimum distributions.
Due date approaches for claiming 2019 tax refunds.
The normal due date for filing a late 2019 income tax return and claim a federal tax refund would normally be April 18, 2023. The three-year window for 2019 income tax returns was postponed to July 27, 2023. The IRS estimates $1.5 billion of 2019 refunds haven't been claimed.
(IR-2023-79, April 12, 2023.)
Critical payment date approaches for California passthrough entity tax.
(See below about storm relief extending these payments for many taxpayers.) For taxable years 2021 through 2025, a qualified S corporation, partnership, LLC taxed as a partnership or S corporation, or certain single-member LLCs can elect to pay a California passthrough entity tax equal to 9.3% of its qualified net income. The purpose of the passthrough entity tax is to avoid the $10,000 annual limit for itemized state tax deductions on the Federal income tax returns for individuals, estates and trusts.
The election is made with a timely-filed income tax return for the tax year that it applies.
In addition, in order to qualify for the 2022 through 2025 taxable years, the entity is required to make two payments. The first payment is due by June 15 of the taxable year. The amount due is the greater of:
- 50% of the elective tax paid for the prior year; or
- $1,000.
The remaining amount due must be paid by the entity's filing date deadline (March 15 for calendar-year taxpayers). If the June prepayment is underpaid, the taxpayer is ineligible to make the election for that taxable year.
The June 15 payment deadline applies to both calendar-year and fiscal-year taxpayers. Remember, taxpayers that didn't pay the tax in the prior year are only required to pay $1,000.
When the prior-year income tax return is on extension and hasn't been filed, the prior year tax must be estimated. To be safe, estimate high, because underpayments will result in the election being disallowed for 2022, and the taxpayer won't be able to get a refund until it files its 2022 income tax return.
Payments made by check are sent to the Franchise Tax Board with Form FTB 3893, Pass-Through Entity Elective Tax Payment Voucher. Alternatively, tax payments can be made using Web Pay and no Form 3893 is required.
See your tax advisor to get assistance with the passthrough entity tax.
Here is the URL for the Franchise Tax Board web page about the passthrough entity tax. https://www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/index.html Taxpayers residing in California counties except Lassen, Modoc, and Shasta are eligible for relief for payments due on March 15, 2023 and June 15, 2023. These payments may be made without penalty up to October 16, 2023. https://www.ftb.ca.gov/file/when-to-file/help-with-disaster-relief.html
(Spidell Publishing Company Podcast, "Passthrough entity tax payments due soon". May 1, 2022.)
California LLC estimated fee due date approaches.
The 2023 estimated fee for calendar-year LLCs would normally be due June 15, 2023. For California LLCs located in California counties other than Lassen, Modoc, and Shasta, the fee for 2023 will be due October 16, 2023. The fee is paid online using Web-Pay or may be mailed using Form FTB 3536.
See the instructions for the form or your tax advisor for how to compute the required payment. It's generally 100% of the current taxable year fee or the prior-year fee.
There is no penalty for the LLC's first-year payment in California and there is no requirement that the prior tax year be 12 months.
(Spidell's California Taxletter, May 2023, p. 8, "Calculating the estimated gross receipts fee for LLCs.")
Florida storm victims get tax relief.
2023 has been a big year for storm relief. Now victims of tornadoes that hit Broward County, Florida from April 12 to 14 may file their income tax returns and make income and estimated tax payments normally due on April 18 and June 15, 2023 by August 15, 2023. The August 15 deadline also applies for quarterly payroll and excise tax returns normally due on May 1 and July 31, 3023. Payroll and excise tax deposits due on or after April 12 and before April 27 may be made without penalty by April 27, 2023.
If your home or work is located in a federal disaster area, check the IRS's emergency relief page to find out what relief you might qualify for. https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
(IR-2023-94, May 2, 2023.)
S corporation allowed to fix a late election to be a qualified subchapter S trust.
Shares of an S corporation were transferred to a trust. The trust was eligible to be a qualified subchapter S trust, but the beneficiaries failed to make a timely election. Therefore, the trust wasn't a qualified shareholder, and the subchapter S election was terminated. The IRS allowed the corporation to treat the termination as unintentional, continuing the S election, provided the trust filed an election to be a qualified subchapter S trust, signed by the beneficiary, within 120 days of the date of the ruling.
The lesson is an unintentional termination of a Subchapter S election can be cured, provided action is taken soon after the termination is discovered. This is an expensive process, so avoid the issue by making a timely election to be a qualified subchapter S trust when shares are to be transferred to a trust. (Note this doesn't apply for a transfer to a revocable living trust when the grantor(s) are still living. It may apply after the grantor(s) death.)
(Private letter ruling 202315002, January 13, 2023.)
Beware tax scams.
The IRS issued an alert to taxpayers and tax professionals to watch out for common tax scams. Highlighted scams included inaccurate or misleading tax information on social media, offers of online account help by third-party scammers, phishing (fake email notices asking for a click-through), unscrupulous tax return preparers, and offer in compromise mills.
(Tax Tip 2023-56, April 25, 2023.)
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
What's the IRS going to do with the $80 billion?
The IRS has released its Strategic Operating Plan, it's intentions for transforming itself to dramatically improve service to taxpayers and the nation during the next decade.
The 150-page plan encompasses five objectives:
- Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
- Quickly resolve taxpayer issues when they arise.
- Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
- Deliver cutting-edge technology, data and analytics to operate more effectively.
- Attract, retain and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.
(IR-2023-72, April 6, 2023.)
IRS can't assess penalties for failure to report interests in foreign corporations.
The Tax Court ruled the IRS doesn't have the statutory authority to assess penalties for failure to report interests in foreign corporations using Form 5471.
The penalty is substantial. $10,000 for each accounting period for which a failure exists plus a continuation penalty for each 30-day period (or fraction thereof) during which the failure continues after an initial 90-day notice period, with a maximum of $50,000.
It seems likely Congress will eventually enact legislation to give the IRS authority to assess the penalty.
(Farhy v. Commissioner, 160 T.C. No. 6, 2023.)
Washington resident tax return preparer taxed by California for income from California clients.
A sole proprietor Washington accountant didn't file California income tax returns to report income received from California clients from 2013 through 2015.
The taxpayer admitted she was liable for the tax, and asked to be excused from the penalties for failure to file due to the reasonable cause of not knowing she was required to file a California income tax return until she received a notice from the Franchise Tax Board during 2017. In fact, she prepared Forms 1099 for clients reporting payments to her that the Franchise Tax Board used to establish her California income.
The California Office of Tax Appeals ruled that, as a professional tax return preparer, the taxpayer should have known the filing requirement. The request to waive the penalties was denied.
The Office of Tax Appeals refused to consider an earlier ruling that taxpayers who performed work for California clients that was performed solely outside California weren't subject to tax. The issue wasn't clear until the Office of Tax Appeals issued its precedential case, Appeal of Bindley, in 2019.
Tax return preparers should be aware there is no statute of limitations for unfiled income tax returns. The Franchise Tax Board can go back as far as 2013 to request unfiled returns for out-of-state service providers with California clients.
(Appeal of Loober, 2023-OTA-170.)
Deadlines extended for nonresident withholding.
The filing and payment deadline for taxpayers located in California counties other than Lassen, Modoc, and Shasta has been extended to October 16, 2023 for the following forms:
- Form 592, Resident and Nonresident Withholding Statement
- Form 592-F, Foreign Partner or Member Annual Return
- Form 592-PTE, Pass-Three Entity Annual Withholding Return
- Form 593, Real Estate Withholding Statement
(Spidell's California Taxletter, May 2023, p. 16, "Deadlines extended for nonresident withholding.")
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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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