Michael Gray, CPA's Tax and Business Insight
June 6, 2024
© 2024 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 17 for some calendar year LLCs.
- Critical payment date approaches for California passthrough entity tax.
- San Diego County taxpayers must flag their returns for relief.
- Due date for U.S. citizens and resident aliens living and working outside the U.S.
- U.S. House of Representatives passes a disaster relief bill.
- Court of Appeals says IRS can collect penalties for unfiled foreign account report.
- Final regulations issued for Clean Vehicle Credits.
- IRS makes its free Direct File option permanent.
- IRS finalizes Generation-Skipping Transfer Tax Regulations.
- IRS issued final regulations for transfers of Energy Credits under the Inflation Reduction Act.
- Eighth Circuit disallows research credits for "funded" research.
- No gift by surviving spouse for termination of QTIP trust.
- 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: 10X Is Easier Than 2X
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Lotus blossom at the Rosecrucian Museum Peace Garden, June 1, 2024 Happy Fathers' Day!
Fathers' Day will be celebrated on Sunday, June 16 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 17.
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 2023 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 2024.
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 17 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.
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 17 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 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.
(Spidell's California Taxletter®, June 2024, p. 1 "Passthrough entity tax prepayment due June 17, 2024.")
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
San Diego County taxpayers must flag their returns for relief.
Taxpayers who qualify for the June 17, 2024 extended filing date must either follow the procedure for disclosing eligibility for electronic filing or, for paper filing, write "San Deigo County flood" in blue or black ink at the top of their tax return.
(Spidell's California Taxletter, June 2024, p. 6 "June 17 extended filing deadline for San Diego County storm victims.")
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 2023 Form 1040 for U.S. citizens and resident aliens, including those with dual citizenship, living and working outside the United State is June 17, 2024. 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.
U.S. House of Representatives passes a disaster relief bill.
The U.S. House of Representatives has passed the Federal Disaster Tax Relief Act of 2023 (H.R. 5863.) It's now up to the Senate whether to take action on the bill.
If enacted the bill would,
- Allow taxpayers who were subject to damages from hurricanes, wildfires and other federal declared disasters that occurred after February 25, 2021 to claim disaster-related losses separately from itemizing deductions.
- Remove the requirement that the losses must exceed 10% of the claimant's adjusted gross income to claim the losses.
- Exclude from gross income any amount received by an individual after 2019 and before 2025 as compensation for expenses or losses incurred due to a qualified wildfire disaster, to the extent the losses were not already covered by insurance or other sources; and
- Exclude specified relief payments received by taxpayers for losses resulting from the East Palestine, Ohio train derailment on February 3, 2023.
There were similar provisions in the Tax Relief for American Families and Workers Act, which the U.S. Senate hasn't taken any action on.
(Spidell's Flash E-Mail, May 24, 2024, "House passes disaster relief bill.")
Court of Appeals says IRS can collect penalties for unfiled foreign account report.
The U.S. Court of Appeals for the D.C. Circuit reversed a Tax Court decision that the IRS didn't have the authority to collect close to $500,000 in penalties assessed against a taxpayer for failing to file Form 5471, an information report for ownership interests in foreign corporations, for the 2003 - 2010 tax years. According to the Tax Court, the IRS would have to pursue a civil action by the Department of Justice to collect the penalties.
The Court of Appeals said the IRS can collect the penalties using its standard notice and demand procedures.
The taxpayer could still try appealing the decision to the U.S. Supreme Court.
(Farhy v. Commissioner, U.S. Court of Appeals for the D.C. Circuit, Case No. 23-1179, May 3, 2024.)
Final regulations issued for Clean Vehicle Credits.
The IRS has issued final regulations relating to changes in the Inflation Reduction Act of 2022 for Clean Vehicle Credits.
The regulations include guidance
- For taxpayers who purchase qualifying vehicles and intend to transfer the amount of any previously-owned clean vehicle credit or new clean vehicle credit to dealers that are entities eligible to receive advance payments of either credit;
- For dealers to become eligible entities to receive vehicle credits, and rules regarding recapture of the credits; and
- On the meaning of their new definitions added to the exclusive list of mathematical or clerical errors relating to certain assessments of tax without a notice of deficiency.
Notably, graphite was added to the definition of "impracticable-to-trace" battery materials, which makes vehicles with batteries containing graphite produced by China eligible to qualify for the clean vehicle credit until 2027.
Watch for updates to the list of qualified vehicles at the IRS's web site.
(T.D. 9995, May 6, 2024.)
IRS makes its free Direct File option permanent.
During tax season this year, the IRS initiated a pilot free Direct File option, allowing certain individual taxpayers to file their federal income tax returns online, without paying for tax return preparation software.
The pilot program was successful.
Now the IRS says it will make Direct File permanent, starting for the 2025 tax filing season, and expand the list of taxpayers who are eligible to use it.
More details will be announced in the coming months.
(IR-2024-151, May 30, 2024, "IRS makes Direct File a permanent option to file federal tax returns; expanded access for more taxpayers planned for the 2025 tax season.")
IRS finalizes Generation-Skipping Transfer Tax Regulations.
The IRS has issued final regulations relating to the circumstances and procedures under which an extension of time will be granted to make certain allocations and elections related to the generation-skipping transfer tax (GST). The guidance applies for individuals who failed to make a timely allocation of a GST exemption, a timely election out of the GST automatic allocation rules, or certain other timely GST elections.
The IRS finalized proposed regulations issued during 2008.
Beneficiaries who received inherited property or a gift from a grandparent or other ancestor, including a from a trust, should consult with their estate tax attorneys about these regulations.
(T.D. 9996, May 6, 2024.)
IRS issued final regulations for transfers of Energy Credits under the Inflation Reduction Act.
The IRS issued final regulations for the election to transfer certain tax credits, as enacted by the Inflation Reduction Act of 2022.
Under the regulations, taxpayers may transfer certain energy credits in exchange for cash. Transferring the credits can provide cash when the taxpayer doesn't have income taxes to apply the credits against.
Any amount of consideration paid by the transferee taxpayer is (1) required to be paid in cash, (2) is not included in the eligible (transferor) taxpayer's gross income, and (3) is not allowed as a deduction by the transferee taxpayer.
The transferee taxpayer claims the credit instead of the transferor taxpayer.
Eleven energy credits eligible for transfer are listed at Internal Revenue Code Section 6418(f)(1)(A).
See your tax advisor for details.
(T.D. 9993, April 30, 2024.)
Eighth Circuit disallows research credits for "funded" research.
The Eighth Circuit Court of Appeals upheld the Tax Court in finding research conducted by a structural engineering firm didn't qualify for the Research Credit.
The research was considered to be "funded" by a customer.
The taxpayer said it was entitled to the credits because (1) its right to payment was contingent on the success of the research and (2) its contracts had inspection, acceptance and quality assurance provisions.
The Court found the risk was not contingent on the success of the research itself because none of the contracts expressly or by clear implication made payment contingent on the success of the taxpayer's research.
(Meyer, Borgman & Johnson, Inc. v. Commissioner, 2024, No. 23-1523, 8th Circuit, May 6, 2024.)
No gift by surviving spouse for termination of QTIP trust.
The Tax Court ruled against the IRS and found the termination of a QTIP trust didn't result in a taxable gift for the surviving spouse beneficiary. She had an income interest for life in the property.
The termination of the trust resulted in a distribution of shares of stock. The taxpayer made gifts of some of the shares and sold the remaining shares to her deceased husband's children and grandchildren.
The surviving spouse reported the gifts of shares on a gift tax return, and subsequently died.
The IRS claimed the termination of the QTIP trust and sale of shares should be collapsed, resulting in a sale of her income interest in the QTIP, and her estate should be liable for gift tax on the value of the QTIP minus the value of the interest for life.
The Tax Court found the sale happened after the termination of the QTIP trust, so no gift tax applied to the sale of the stock.
I think the IRS missed a different gift tax issue. The termination of the QTIP trust should have resulted in a taxable gift of their remainder interests in the property to the surviving spouse by the remainder beneficiaries.
(Estate of Anenberg. v. Commissioner, 162 T.C. No. 9, May 20, 2024.)
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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Michael Gray, CPA2482 Wooding Ct.San Jose, CA 95128(408) 918-3162FAX: (408) 938-0610email: mgray@taxtrimmers.comHours: 8am - 5pm PDT Monday - Friday
