Michael Gray, CPA's Tax and Business Insight
June 5, 2023
© 2023 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy Fathers' Day!
- School's out!
- Need help with getting your extended tax returns, amended returns, and elections done?
- Second estimated tax payment due.
- Estimated fee payment due June 15 for some calendar year LLCs.
- Critical payment date approaches for California passthrough entity tax.
- Due date for U.S. citizens and resident aliens living and working outside the U.S.
- Modoc county, California gets disaster relief extension.
- California doesn't extend FTB installment agreement payments.
- House passes budget agreement.
- Certain foreign retirement accounts must be disclosed on FBAR and Form 8938 (Specified Foreign Assets).
- Want the $7,500 EV credit?
- California enacts tax relief for students.
- Travel expense deduction denied for long-term job site.
- Medical assistants were employees.
- Receipt of profits interest in a partnership interest for services rendered wasn't taxable income.
- IRS will send letters to taxpayers when it suspects identity theft.
- Art of exchange of farm was taxable.
- SECURE 2.0 Act drafting error for 401(k) catch-up contributions.
- Remember this AMT adjustment for disqualified dispositions of ISO shares after the year of exercise.
- 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: Peak
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
View from the balcony of our room at the Spyglass Inn at Pismo Beach, California on May 19, 2023 Happy Fathers' Day!
Fathers' Day will be celebrated on Sunday, June 18 this year. Remember to express your appreciation to your father and other fathers who have contributed to your life.
School's out!
Most schools will be out by early in June. Congratulations graduates! Watch out for kids out for summer vacation!
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.
Second estimated tax payment due.
The second estimated tax payment for most individuals and calendar year corporations and fiduciaries is June 15. (Note this due date has been extended to October 15, 2023 for most California taxpayers. Check the IRS website for extensions for other states with disaster areas for recent storms.)
For individuals, federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2021 tax on your income tax return if your adjusted gross income exceeds $150,000. Alternatively, you can make payments based on your income and deductions for 2022.
The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2021 tax, unless your adjusted gross income is $1 million or more. In that case, your estimated tax payments should be based on your actual income and deductions for 2023.
If you want help computing your second quarter estimated tax payments, contact Ms. Thi Nguyen at thi@atl-cpa.com to make an appointment for a consultation.
Estimated fee payment due June 15 for some calendar year LLCs.
California LLCs pay two items to the Franchise Tax Board: an annual tax of $800 and an annual fee based on the gross receipts of the LLC. The estimated annual fee is paid with Form 3536 by June 15 for calendar year LLCs or online using WebPay at https://webapp.ftb.ca.gov/webpay/login/belogin?Submit=Use+Web+Pay+business. There is no fee when the gross receipts for the LLC are less than $250,000. The estimated fee can be based on last year's income tax return. Unlike the exception for corporate franchise taxes, there's no requirement that the prior year be a full 12 months. The prior-year exception applies to a new LLC, so no estimate is required for the first year.
(This deadline has been extended for most California taxpayers as disaster relief.)
Note that capital gains and losses and Section 1231 gains and losses aren't netted when computing gross receipts for the fee. Only capital gains and Section 1231 gains, not reduced by capital losses or Section 1231 losses, are counted.
According to the Franchise Tax Board, expense reimbursements, including expenses paid directly by a customer, must be included in gross income.
(Spidell Publishing Company Podcast: "Estimated gross receipts fee for LLCs due soon", May 29, 2022.)
Critical payment date approaches for California passthrough entity tax.
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.
(As disaster relief, the June 15, 2023 deadline has been extended to October 15, 2023 for most California taxpayers. See your tax advisor for details. This is such a sensitive due date, you might want to make the payment by June 15, 2023 to avoid correspondence with the Franchise Tax Board.)
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
(Spidell Publishing Company Podcast, "Passthrough entity tax payments due soon". May 1, 2022.)
Due date for U.S. citizens and resident aliens living and working outside the U.S.
The IRS has issued a reminder that the due date for 2022 Form 1040 for U.S. citizens and resident aliens, including those with dual citizenship, living and working outside the United State is June 15, 2023. These taxpayers must file to claim tax benefits like the foreign earned income exclusion or the foreign tax credit, even if the tax benefits wipe out their U.S. federal tax liability.
(IR-2023-106, May 30, 2023)
Modoc county, California gets disaster relief extension.
The IRS has announced the residents of Modoc County, California qualify for a disaster relief extension for most IRS filing and payment requirements, except for employer payroll tax deposits, for deadlines that fall between February 21, 2023 and August 15, 2023 to August 15, 2023. Note the deadline for the other qualified counties is October 15, 2023. California will probably conform to this extension.
Only two California counties, Lassen and Shasta, currently do not qualify for a disaster extension.
(IRS CA-2023-04.)
California doesn't extend FTB installment agreement payments.
The Franchise Tax Board has notified Spidell Publishing that installment agreement payments to the Franchise Tax Board are not extended by disaster relief. This does not conform to the IRS policy of suspending installment agreement payments during disaster relief periods.
(Spidell's Flash E-mail, "No disaster relief for FTB installment payments", May 2, 2023.)
House passes budget agreement.
The House of Representatives has passed the budget agreement negotiated by President Biden and Speaker of the House, Ken McCarthy. The Senate is expected to pass it this week and President Biden is expected to sign it. The text won't be released until Sunday. The main tax-related item that has been disclosed is to reduce an allocation of $80 billion to the IRS for modernization and enforcement to $60 billion.
(H.R. 3746.)
Certain foreign retirement accounts must be disclosed on FBAR and Form 8938 (Specified Foreign Assets).
Spidell Publishing reminded subscribers in a Federal Tax Minute that certain foreign retirement assets must be disclosed on an Foreign Bank Account Report, Form 114 and Specified Foreign Assets Report, Form 8938. When the benefit is an account with a balance, it should be disclosed. When the benefit is a stream of payments with no balance, like a foreign version of Social Security or a stream of payments pension, it's not required to be disclosed.
When a foreign retirement account is held inside a U.S. IRA, it doesn't have to be disclosed.
(Spidell's Federal Tax Minute, May 30, 2023, "Do you have to file an FBAR for a foreign retirement plan?")
Want the $7,500 EV credit?
Leasing is probably the way to go. New domestic content requirements disqualify most purchases of electric vehicles from the EV credit. There is a loophole. Under the rules, leased vehicles are considered commercial vehicles and are not subject to the domestic content requirement! Be aware nondeductible finance charges are wrapped into the lease payments, so compare the additional expense with the tax benefit.
The leasing company receives the credit and may apply it to reduce the lease payments. The credit is nonrefundable, so the leasing company must have federal income tax to apply it to for a tax benefit.
(Note the maximum credit for vehicles exceeding 14,000 pounds is $40,000.)
(FS 2022-42, December, 2022.)
California enacts tax relief for students.
California has enacted legislation to conform to federal exclusions enacted in COVID-19 relief legislation. The relief is retroactive and Tax Year 2022 California income tax forms haven't been updated for the changes at this time.
Taxpayers who are eligible for the exclusions should file amended California income tax returns.
California has conformed to the cancellation of debt exclusion for forgiven qualified post-secondary education student loans for 2021 through 2025. Qualified loans include loans made, insured or guaranteed by the federal, state or territorial governments, the District of Columbia, or an eligible education institution. (Since Form 1099-C wasn't supposed to be issued for this debt cancellation, many taxpayers probably missed making the adjustment on their California income tax returns, anyway.)
Effective for taxable years beginning on or after January 1, 2020 and before January 1, 2028, California conforms to the exclusion of higher education emergency grant funds received by students in post-secondary education to support their expenses and financial need related to the COVID-19 pandemic. The federal exclusion was enacted in the Consolidated Appropriations Act of 2021.
Effective for tax years beginning on or after January 1, 2022 and before January 1, 2027, the legislation also excludes any cancellation of debt income relating to a community college student's discharge of any unpaid fees due or owed to a community college for COVID-19 relief.
(AB 111, Spidell's California Taxletter®, June, 2023, p. 1, "Current and former students get tax relief.")
Travel expense deduction denied for long-term job site.
The Tax Court upheld the IRS in finding the cost of transportation of a union sheet metal worker to and from a job site where he worked continuously for seven years wasn't tax deductible. The job site wasn't a temporary assignment.
(Ledbetter v. Commissioner, T.C. Summary 2023-19.)
Medical assistants were employees.
A doctor with a solo medical practice classified medical assistants as independent contractors. The Tax Court upheld the IRS in finding they were employees and the doctor owed back employment taxes. The doctor wasn't eligible for Section 530 relief because he didn't consistently file all required returns and didn't have a reasonable basis for not treating the workers as employees.
(Cardiovascular Center, LLC v. Commissioner, T.C. Memo 2023-64.)
Receipt of profits interest in a partnership interest for services rendered wasn't taxable income.
The Tax Court ruled in favor of a taxpayer, finding the taxpayer received a profits interest, not a capital interest in a partnership in exchange for cash and services, under Revenue Procedure 93-27.
(ES PA Holding, LLC v. Commissioner, TC Memo. 2023-55.)
IRS will send letters to taxpayers when it suspects identity theft.
The IRS has announced it will send letters to taxpayers when it suspect identity theft. The tax return won't be processed until the taxpayer responds to the letter.
(Tax Tip 2023-74, May 31, 2023.)
Art of exchange of farm was taxable.
A couple sold rental property consisting of land, hog buildings and equipment and replaced it with real estate. The hog structures and the equipment were fully depreciated and subject to recapture under Internal Revenue Code Section 1245. The Tax Court upheld the IRS in finding the hog structures and equipment weren't like kind with the real estate received. Since the gain was less than the depreciation recapture, the gain was all currently taxable as ordinary income.
(Gladys Gerhardt, et al v. Commissioner, 160 TC No. 9, April 20, 2023.)
SECURE 2.0 Act drafting error for 401(k) catch-up contributions.
Due to a drafting error in SECURE 2.0 Act, no catch-up contributions to 401(k) plans are allowed effective 2024. The error should be corrected in a technical corrections act soon.
Remember this AMT adjustment for disqualified dispositions of ISO shares after the year of exercise.
For regular tax reporting, there is a disqualified disposition of shares acquired by exercising an incentive stock option (ISO) when the shares sold within the later of two years after the options were granted or one year after the exercise. Transactions involving ISO shares are reported differently for the alternative minimum tax (AMT). Adjustments for differences between the two systems are reported on Form 6251. For example, ordinary income for exercising vested ISO shares is reported for the year of exercise on Form 6251 on line 2i. Differences in capital gains and losses due to basis adjustments for ordinary income reported for AMT are reported at line 2k.
When there is a disqualified disposition in the year of exercise, there is no AMT adjustment, subject to a wash sale exception. (Internal Revenue Code Section 56(b)(3).) The disposition in the year of exercise takes the transaction out of the AMT.
Since there is no separate line on Form 6251 identified for an adjustment relating to a disqualified disposition after the year of exercise, the adjustment is commonly missed. It should be reported at Form 6251, line 3. The adjustment is a subtraction of the ordinary income reported as a part of wages on line 1 of Form 1040 for the disqualified disposition of the ISO shares for the year of the disqualified disposition. Those wages are a duplication of the ordinary income reported on Form 6251, line 2i for the year of exercise. Making this adjustment should enable the taxpayer to use his or her minimum tax credit to offset the regular tax for the ordinary income on the wages from the disqualified disposition.
The rules for income tax reporting for employee stock options are very confusing. It can be a worthwhile investment to have your income tax returns prepared by a professional income tax return preparer who knows the rules.
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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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