Michael Gray, CPA's Tax and Business Insight
May 2, 2024
© 2024 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 celebrations.
- California personal property tax form is due May 7, 2024.
- Due date for calendar-year tax-exempt organizations.
- Critical payment date approaches for California passthrough entity tax.
- California proposed passthrough entity tax relief proposal
- California LLC estimated fee due date approaches.
- IRS guidance for employer-subsidized work-life referral services.
- Need help with extended income tax returns?
- Effective date for required distributions from inherited retirement accounts further extended.
- Remember the Tax Cuts and Jobs Act of 2017 will generally sunset December 31, 2025.
- President Biden's Tax Reform Wish List.
- Truck drivers are subject to AB 5 treatment as employees.
- Assessor loses on revaluation of land following construction.
- Do you sell products, 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: No B.S. Guide to How to Succeed in Business By Breaking All The Rules
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Janet and me at Hakone Gardens in Saratoga, California on April 5, 2024. Most of the cherry blossoms are probably gone, by now. Happy Mothers' Day!
Mothers' Day will be celebrated on Sunday, May 12 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 27 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 25th (!) wedding anniversary during May. Happy anniversary!
California personal property tax form is due May 7, 2024.
California personal property tax Form 571 for 2024 is due May 7, 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 2023 calendar-year tax-exempt organizations is May 15, 2024. A six-month extension of time to file can be applied for using Form 8868.
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. Since June 15 falls on Saturday this year, the due date is June 17. 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 17 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 2024, and the taxpayer won't be able to get a refund until it files its 2024 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.)
California proposed passthrough entity tax relief proposal
In response to the $10,000 federal itemized deduction limitation for state income taxes and other allowed taxes, California has adopted an entity-level tax, called the passthrough entity tax.
The tax is allowed as a business tax deduction for the passthrough entity, such as a partnership, S corporation or a limited liability company taxed as a partnership or S corporation. The owner gets a tax credit for the entity level tax on its California individual income tax return.
One of the requirements has been tripping up some taxpayers. The entity must make a payment for the year of the greater of (1) $1,000 or (2) 50% of the passthrough entity tax for the prior year by June 15 of the taxable year.
Taxpayers might not have the information to make the 50% payment because the income tax return for the previous year hasn't been completed as of June 15.
Senator Steve Glazer, chair of the California Senate's Revenue and Taxation Committee, has introduced California SB 1501, which would allow entities to qualify for the passthrough entity election, even if they do not satisfy the June 15 prepayment requirement.
The legislation would be effective retroactively to taxable years beginning on or after January 1, 2024.
If the prepayment isn't made by June 15, the taxpayer would pay a penalty of 5% of the elective tax plus interest. The penalty would be due on the due date of the original return, without extensions.
Here's a link to SB 1501: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB1501
(Spidell's California Taxletter, April 2024, p. 1, "Bill introduced to ease passthrough entity tax June 15 prepayment requirement.")
California LLC estimated fee due date approaches.
The 2024 estimated fee for calendar-year LLCs is due June 17, 2024. 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.")
IRS guidance for employer-subsidized work-life referral services.
The IRS has posted FAQs about the taxability of work-life referral services provided as an employee benefit. These services include assisting employees in finding resources and support for personal, work or family challenges through informational and referral consultations. Examples would be guidance in accessing child and elder care, heal care, and financial and legal services, usually provided by third-party providers engaged by the employer. According to the guidance, these benefits are de minimis fringe benefits and aren't taxable to the employee.
(IRS FS-2024-13, April, 2024.)
Need help with extended income tax returns?
Please don't wait until the extended due date to get your 2023 income tax returns in process. Make an appointment now with Ms. Thi Nguyen, CPA at thi@atl-cpa.com or your tax return preparer and submit as much documentation as possible. You can give them late-received documents like partnership K-1s when you receive them.
Effective date for required distributions from inherited retirement accounts further extended.
Under proposed regulations implementing the SECURE Act of 2019 issued by the IRS on February 24, 2022, when a defined contribution retirement account, including a traditional IRA or a 401(k), is inherited and the deceased participant has died after 2019 and after the required beginning date, annual required minimum distributions should continue starting the first year after the death of the decedent, with any undistributed amount distributed during the year that includes the tenth anniversary of the death of the decedent.
This rule was unexpected by the community of tax advisors, because annual distributions weren't required under a previous five-year rule.
The IRS has previously postponed the effective date for the annual distribution requirement, so it didn't apply for 2021 (under the CARES Act) through 2023.
On April 16, 2024, the IRS announced it was further postponing the effective date until January 1, 2025. The IRS also announced it expected final regulation for inherited required minimum distributions under the SECURE Act of 2019 will be issued to be effective January 1, 2025.
(Notice 2024-35, April 16, 2024.)
Remember the Tax Cuts and Jobs Act of 2017 will generally sunset December 31, 2025.
There are many tax increases that are scheduled to happen, including cutting the lifetime exemption amount for estate and gift taxes about in half.
It's likely Congress will take up tax reform after the election. President Biden would prefer to see tax increases. Donald Trump and the Republicans in Congress would prefer for the tax cuts to be extended.
It's possible the tax law will simply become a pumpkin and return to what is was before 2017.
If you are in a high tax bracket or have significant assets, it would be wise to meet with your tax advisor this year to discuss any defensive planning moves for 2024 and 2025.
President Biden's Tax Reform Wish List.
President Biden and his advisors have published a list of proposals for raising revenue that will raise the hair and create nightmares for very wealthy and very high-income taxpayers.
My personal opinion is most of them have very little chance of making it into federal tax law. They are an attack on capital formation that is essential to our economy. I can't see even the majority of Democrats supporting them.
I've been wrong before.
Here are a few of them:
- Tax unrealized capital gains at death over $5 million of gain. Death and gifts would be a realization event. Property left to a surviving spouse wouldn't be taxed until that spouse's death (carryover basis for the surviving spouse). Gifts to charity wouldn't be subject to the tax. Gifts and bequests of family-owned businesses would be exempt from the tax, provided the family continues to run them. Gains over the $5 million "lifetime exclusion" would be taxed at the 39.6% tax rate. Since the income would be included on the final income tax return of the decedent, the income tax would be a deduction on the federal estate tax return. Still, there would be a huge chunk a tax to pay at death, which will be a hardship on families. Heirs may elect to pay the decedent's income tax over 15 years for nonliquid assets.
"Opportunity shifting" of growth assets to children and grandchildren would be important strategies.
Charitable trust planning would also be a key to direct the benefits of one's efforts vs. Uncle Sam.
- 39.6% tax rate on capital gains over $1 million. (Same as ordinary income.)
Discourages long-term investment. Encourages short-term speculation. Taxes inflation-based growth (actually, capital).
- Expand the investment income tax base to active passthrough income.
Active passthrough income isn't "investment income" and shouldn't be subject to the investment income tax as tax policy.
Will encourage doing business as C corporations, instead of passthrough entities.
Creates a conflict between the basis increase advantages of passthrough entities (thanks to the repeal of the General Utilities doctrine, which avoided a double tax for some corporate liquidations, in the Tax Reform Act of 1986) and the exclusion of current C corporation income from the tax. (Corporate dividends are subject to the net investment income tax.)
I still give the edge to passthrough entities to avoid double taxation.
- Raise the net investment income tax rate from 3.8% to 5.0%.
- Raise the additional Medicare tax from 0.9% to 2.1%.
- Make permanent the limit on excess business losses for passthrough firms.
- Limit 1031 like-kind exchanges to $500,000 in gain deferral.
(Practically eliminates an old tax policy of preserving investment in like-kind property.)
- Tax carried interest as ordinary income.
An attack on partners in investment capital businesses. Discourages capital formation for new businesses.
- Create new limitations on high-income taxpayers with large retirement account balances and increasing minimum required distributions and miscellaneous tax increases on saving.
"Punishing" successful investing and potentially exposing individuals to depleted assets needed for their retirement.
- Raise the corporate tax rate from 21% to 28%.
- Raise the corporate alternative minimum tax from 15% to 21%.
- Impose a 25% minimum tax on unrealized gains for taxpayers with net wealth over $100 million.
Would there be a basis adjustment for the unrealized gain that's taxed? Otherwise, the tax could accumulate to more than 100%. Would the gain be added to the $5 million lifetime exemption, eventually to a tax rate of 39.6%?
This could be a "full employment act" for appraisers.
How could the IRS reliably identify taxpayers with a net worth exceeding $100 million every year?
Taxing unrealized gains violates a tax principle that income should only be taxed when realized. Once this rule is in place for taxpayers with a net worth exceeding $100 million, it could be expanded to taxpayers with lower net worths as a revenue-raising measure.("Details and Analysis of President Biden's Fiscal Year 2025 Budget Proposal", The Tax Foundation, March 22, 2024, The Kiplinger Tax Letter, March 14, 2024, p. 1 (Analysis of President Biden's tax proposals for inherited property and capital gains.))
Truck drivers are subject to AB 5 treatment as employees.
A federal district judge dismissed a challenge by the California Trucking Association, claiming truck drivers should qualify as independent contractors, not employees. It appears AB 5's "ABC classification test" applies and truck drivers should be classified as employees.
The California Trucking Association says it will appeal this ruling.
(Spidell's California Taxletter, May 2024, p. 14, "AB 5 trucking exemption update", California Trucking Association v. Bonta, U.S. District Court, Southern District of California, Case No. 3:18-cv-02458-BEN-DEB, March 15, 2024.)
Assessor loses on revaluation of land following construction.
Taxpayers tore down their existing house and built a new one. When they originally purchased the house in 2014, the Los Angeles County Assessor allocated the $900,000 purchase price $540,000 to the land and $360,000 to the improvements.
In 2016, the taxpayers demolished the house, except for the garage and built a new home on the property.
Generally, the value of any structure removed by a homeowner should be deducted from the prior base year value (Revenue and Taxation Code Section 51(b)). The value of new construction is appraised and assigned a new value going forward.
The Los Angeles County Assessor added the $360,000 previously assessed for the improvements to the assessed value of the land, less a $40,000 "credit" for the garage, reallocating $860,000 of the original purchase price to land and $40,000 to improvements. The appraised value of the new construction, $1,183,130 was added to the reallocated land and improvements.
Los Angeles County claimed it didn't have to give the taxpayers credit for the demolished residence due to the policy of the County Assessor allowing an assessor to reallocate to land any portion of the property substantially renovated within two years of the purchase date, based on the assumption the owner purchased the property for land value alone. Their authority was Revenue and Taxation Code Section 51.5, which requires county assessors to correct errors or omissions made in the determination of new based-year values.
The California Court of Appeal, Second District, ruled the automatic reallocation of the appraised value of improvement to land was contrary to Revenue and Taxation Code Section 51 and 75.10, and that the value of the improvements, less $40,000 for the garage, should be subtracted from the assessed value of the property.
California real estate owners who demolished and rebuilt their improvements should review their property tax statement to determine whether the assessed value of demolished improvements was reallocated to the assessed value of land. Depending on when this happened, the taxpayer might be entitled to refunds and prospective relief.
(Spidell's California Taxletter, May 2024, p. 15, "Base-year value change following new construction". Greenspan v. County of Los Angeles, California Court of Appeal, Second District, Case No. B323864, December 21, 2023.)
Do you sell products, 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@taxtrimmers.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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