Michael Gray, CPA's Tax and Business Insight
August 9, 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
- School days, school days...
- Family celebrations
- October 15 will soon be here!
- Need help with getting your extended tax returns, amended returns, and elections done?
- Deduction for research expenses not yet restored.
- Cancellation of debt exclusion allowed.
- Residential mortgage interest deduction incorrectly computed.
- FICA tax refund denied for Australian.
- California Middle Class Tax Refunds ending.
- California retroactively changes tax rules for incomplete gift grantor trusts.
- California replaces Uniform Principal and Income Act.
- Taxpayer taxed twice on security deposits.
- California Other State Tax Credit disallowed.
- Do you sell services or software to CPAs?
- Attention CPAs-would you like help with marketing your services?
- Attention CPAs-do you need support for tax issues?
- Attention Accountants! Speed up processing your business closings!
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: The Artist's Way
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Janet at the San Jose Municipal Rose Garden School days, school days...
It's hard to believe, but summer vacation is almost over and most children will be back in school by the end of August! Please drive carefully with those kamikaze kids out there!
Family celebrations.
Janet and I are celebrating our wedding anniversary this month (52 years!). Our other August family celebrations include my granddaughter, Minerva Siemer's birthday and Janet's sister, Gail Johnston, is celebrating a birthday. Happy birthdays!
October 15 will soon be here!
The extended due date for 2022 individual income tax returns is October 16, 2023. Most California residents automatically received that extension as disaster relief. If you've been putting off getting your tax returns finished, now is the time to get in motion.
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.
Deduction for research expenses not yet restored.
The deduction for research expenses was replaced with five-year amortization, effective for expenditures after December 31, 2021, by the Tax Cuts and Jobs Act of 2017. This was a budget-balancing measure that Congress intended to repeal later. That hasn't happened. There is proposed legislation in the House of Representatives to delay the effective date, but it isn't expected to be enacted until late this year, if at all. That means tax return preparers will have to comply with the change.
Remember that not all states automatically conform to federal tax law changes, so some states will still allow a current deduction for 2022 research expenses.
Cancellation of debt exclusion allowed.
The Tax Court ruled that a taxpayer was entitled to exclude cancellation of indebtedness income resulting from a discharge of a small business loan. The taxpayer was insolvent immediately before the debt discharge. The court rejected an IRS argument that a debt relating to a breach of a lease on commercial real estate was not bona fide.
(White v. Commissioner, T.C. Memo. 2023-77.)
Residential mortgage interest deduction incorrectly computed.
Taxpayers owned two residences during 2019. The mortgages for the residences were acquired before 2018, so the interest deduction was subject to a $1 million principal balance limitation.
One of the residences was sold about May 10, 2019. The taxpayers computed the average principal balance using a 12-month period, instead of the five months they owned the home.
The Tax Court upheld the IRS in finding the average principal balance should have been computed for the five-month period they owned two homes, exceeding the $1 million principal limit for that period, reducing the maximum mortgage interest deduction by $9,140. ($39,226 was originally claimed.)
(McNamara v. Commissioner, T.C. Summary 2023-22.)
FICA tax refund denied for Australian.
The Court of Federal Claims held the IRS properly denied a refund of Federal Insurance Contributions Act (FICA) (social security) taxes to an Australian national whose employer withheld U.S. FICA taxes from his wages. His wages were also subject to Australian social security taxes. The taxpayer submitted an affidavit with his U.S. tax return stating the facts necessary to show that he was subject to double taxation. The court found that Rev. Proc. 80-56 and other government guidance, the taxpayer was required to get an official certificate of coverage either from the social security agency of Australia or the U.S. Social Security Administration to qualify for an exemption from FICA tax.
(Bond v. United States, United States Court of Federal Claims, June 20, 2023.)
California Middle Class Tax Refunds ending.
The Franchise Tax Board is prohibited from issuing any new Middle Class Tax Refunds after September 30, 2023. The Franchise Tax Board and their third-party vendor may reissue stale, dated or replacement warrants or debit cards.
(SB 131, Welf. & Inst. Code § 8161.)
California retroactively changes tax rules for incomplete gift grantor trusts.
An incomplete nongrantor trust is a complex trust designed to meet two conflicting goals:
- Avoid gift tax on the loss of the gift tax exclusion by ensuring not all control over the trust assets is transferred; and
- Avoid being classified as a grantor trust by ensuring the settlor cannot exercise so much control they are still considered the trust owner for income tax purposes.
The IRS has recognized this can be done.
For taxable years beginning on or after January 1, 2023, the income of an incomplete gift nongrantor trust (ING) will be taxed on the grantor's income tax return as a nongrantor trust. California is the second state to adopt this position. New York did in 2014.
Some taxpayers established INGs in non-tax or low-tax states to avoid California taxation.
An ING may avoid California taxation as a grantor trust for a tax year provided:
- The trust fiduciary makes a timely, irrevocable election on a California trust return to be taxed as a resident nongrantor trust, under a procedure to be determined by the Franchise Tax Board.
- The ING trust is a nongrantor trust pursuant to Revenue and Taxation Code § 17731; and
- At least 90% of the trust's distributable net income is distributed or treated as being distributed to an Internal Revenue Code § 501(c)(3) charitable organization.
Taxpayers with an ING should consult with their estate planning attorney about any action to take. They should also plan for paying additional individual income tax returns.
(SB 131 (Chapters 23-55); Revenue and Taxation Code § 17082.)
California replaces Uniform Principal and Income Act.
California has replaced the Uniform Principal and Income Act with the Uniform Fiduciary Income and Principal Income Act (UFIPA), effective January 1, 2024.
California follows Arkansas, Colorado, Kansas, Utah, Virginia and Washington to make the change.
The UFIPA has provisions giving greater flexibility in creating, terminating and modifying unitrusts and making adjustments between the trust or estate's principal and income.
Consult with your estate planning attorney about any adjustments to be made for your estate planning trusts.
(SB 522 (Chapters 23-28.)
Taxpayer taxed twice on security deposits.
In most cases, security deposits are reported as income at the termination of a lease, unless they are returned to the lessee.
A taxpayer erroneously reported security deposits as income when received at the inception of leases. The security deposits were later applied to reduce the selling price of property.
The Office of Tax Appeals upheld the Franchise Tax Board in finding the security deposits were taxable at the lease termination, when they were applied to reduce the selling price of the property, despite the taxpayer's previously reporting them.
The Office of Tax Appeals said it was bound by law, regardless of double reporting, and it didn't have the authority to reverse the requirement when the taxpayer included the income in a prior year.
(Appeal of Shaprow Funding, Inc., 2023-OTA-283, June 2023.)
California Other State Tax Credit disallowed.
A California resident taxpayer sold his interest in an LLC. He apportioned 50% of the gain to Massachusetts under its sourcing rules. As a California resident, he was taxable on 100% of the gain in California.
He claimed a State Tax Credit for $390,000 of Massachusetts tax on the double-taxed income.
The Office of Tax Appeals upheld the Franchise Tax Board in disallowing the Other State Tax Credit.
California's Other State Tax Credit only applies if the income would also be taxable for a nonresident under California's tax law. In this case, the gain was for the sale of an intangible asset, an LLC ownership interest. A nonresident taxpayer's income from the sale of an intangible asset isn't taxable income California, so no Other State Tax Credit was allowed.
(Appeal of Buehler, 2023-OTA-215P, May 2023.)
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.
Attention CPAs-would you like help with marketing your services?
Maybe I can help with writing promotional material and marketing ideas, including encouraging referrals from your current clients. Call me, Michael Gray, at 408-918-3161 or email mgray@profitadvisors.com.
Attention CPAs-do you need support for tax issues?
Michael Gray, CPA can help you with research and guidance on complex tax planning and tax return reporting issues. mgray@profitadvisors.com.
Attention Accountants! Speed up processing your 2019 business closings!
Do you still have 2019 business income tax returns on extension that need to be done? Check out this trial balance software, EZ Trial Balance, that's super-easy to set up and use. There is a desktop version and an online version. The online version includes consolidations and ratio analysis for analytical review. http://www.eztrialbalance.com
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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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