Michael Gray, CPA's Tax and Business Insight
July 2, 2024
© 2024 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy July 4!
- Family celebrations
- Need help with getting your extended tax returns, amended returns, and elections done?
- U.S. Supreme Court rules the President of the U.S. is immune from prosecution for official acts.
- U.S. Supreme Court says courts may disregard federal regulations.
- Summer project - review your retirement plan beneficiary designations.
- Unused health reimbursement balance can't be paid to an employee's surviving spouse.
- IRS lists exceptions to the 10% penalty for retirement plan distributions before age 59 1/2.
- U.S. Supreme Court upsets corporate buy-sell plans.
- 11th Circuit says IRS designation of conservation easements as listed transactions was invalid.
- California budget legislation includes some tax provisions.
- EDD audits loan-out corporations.
- 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: The Retirement Savings Time Bomb Ticks Louder
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Happy July 4! Photo by Jill Wellington, used with permission. Happy July 4!
With this being an election year, I hope this July 4 will be an introspective one. Do we want to preserve the limited government established after the American Revolution? Many Americans are angry, and believe the federal government isn't serving them. They want to tear it down. What would be the consequence of doing that? What might our country look like?
Do we want a more authoritarian, autocratic Presidency and government?
Your vote will be critically important this year. Please vote thoughtfully and wisely.
Family celebrations.
My daughter, Dawn and her husband, John Siemer, celebrate their wedding anniversary this month. Happy anniversary, Dawn and John! My son, James is celebrating his birthday this month. Happy birthday, James!
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.
U.S. Supreme Court rules the President of the U.S. is immune from prosecution for official acts.
It also ruled the President can be prosecuted for unofficial acts. It remanded the case under review to a U.S. District Court in Georgia to determine whether the acts in question for Donald Trump's election interference case were official or unofficial acts.
It might be hard to tell where one ends and the other begins. Personally, I think interfering with a federal election is an unofficial act. A judge or jury might not agree with me.
If Donald Trump isn't elected this November, the Supreme Court will probably be reviewing the lower court's decision on that issue, to be made after the 2024 election.
If Donald Trump is elected this November, he will likely pardon himself and his codefendants and the case will be dismissed.
We have always known that Presidents have wide discretion for their actions, but not necessarily unlimited discretion.
Back in 1974, the Supreme Court unanimously ruled against President Richard Nixon. It ruled he did not have unlimited executive privilege and forced him to release of the Watergate tapes. It appears the Supreme Court that we now have would have ruled differently. (Imagine how history might have changed!)
There is a limit to Presidential power, which is conviction of a crime by Congress through the impeachment process. Congress has never successfully convicted a President, so this doesn't mean much.
What will a President do with this almost unlimited power?
What will Joe Biden do with the brakes off?
What will Donald Trump do if he is elected? (He has said he will seek retribution against his enemies and expel all undocumented aliens from the United States. He has said he will fire any federal employees who aren't loyal to him, expected to be about 20,000 federal employees. Trump is also friendly with Vladimir Putin and has expressed admiration for other autocrats. Will he disclose U.S. military secrets to countries most of us consider to be unfriendly to the U.S.? Will he abandon NATO and establish diplomatic relations in a new alliance with autocratic countries? Have you read or heard about Project 2025? It's intended to be a blueprint for what Trump will do if he becomes President of the U.S. Hopefully, it's all just hyperbole, but I don't think so.)
If Trump isn't elected and Congress can work together, new Constitutional limits can be enacted for Presidential power. The current Congress is dysfunctional and I don't see them reaching agreement on this issue.
(Trump v. U.S., U.S. Supreme Court, July 1, 2024.)
U.S. Supreme Court says courts may disregard federal regulations.
Forty years ago, the judges of the U.S. Supreme Court unanimously ruled that courts should give deference to federal regulators for interpreting the laws they administer in the Chevron decision.
Now the U.S. Supreme Court has reversed the Chevron decision and says federal courts should disregard federal regulations for their rulings and rely on their own judgment.
Congress enacts many laws that give federal regulators the discretion to fill in the details with regulations. Now it appears any regulation can be challenged, creating uncertainty as to what actions should be taken.
This is particularly the case for tax laws. For example, many of the details for the passive activity loss rules and for required minimum distributions for IRAs and qualified retirement plans are explained in regulations.
This decision calls into question every other decision made by the U.S. Supreme Court that cites the Chevron decision.
It will certainly burden judges to make rulings about matters they know little or nothing about.
The current U.S. Supreme Court seems determined to disregard precedent and reverse many existing legal rules, causing havoc in our legal system, including implementing our tax laws.
(Loper Bright Enterprises v. Raimondo, Supreme Court, June 28, 2024.)
Summer project - review your retirement plan beneficiary designations.
Many retirement plan accounts owners haven't designated plan beneficiaries. If there is no designation and the plan participant dies before the required beginning date for distributions, the account will probably be distributed to the plan participant's estate with total distribution required during the fifth year after the death of the plan participant.
Most commonly, the surviving spouse is named as the primary beneficiary. When the surviving spouse inherits the account, he or she generally has complete control, including the ability to roll it to his or her own IRA and the most flexibility for stretch distribution.
What if the plan participant has children from a previous marriage? Should a trust receive the account? With a trust, surviving spouses can receive distributions during the lifetimes and the plan participant can designate who the remainder beneficiaries will be. Trusts have complications and the account will generally be distributed over a shorter time than outright designation.
If you can structure your IRA as a trust, it will usually work more smoothly when a QTIP election is made than using a custodian arrangement with a trust beneficiary.
In addition to a primary beneficiary, contingent beneficiaries should be designated, in case the primary beneficiary dies before the plan participant.
If a designated beneficiary is a minor, consider designating a trust for the minor to receive distributions.
What if there are several beneficiaries and one of them predeceases the plan participant? Generally, the deceased beneficiary will be disregarded, which could result in disinheriting that person's family. Adding the words "per stirpes" after a beneficiary's name also designates their family in generation order. If a child predeceases the plan participant, grandchildren whose parent was the child will inherit, and so forth. If there is nobody else in the line of succession, heirs under state law will inherit the account.
Just leaving the account to a revocable living trust or to your estate usually isn't a good idea.
It's probably a good idea to get legal counsel when designating beneficiaries and consider how a beneficiary designation will fit in your overall estate plan.
Unused health reimbursement arrangement balance can't be paid to an employee's surviving spouse.
HRAs may only reimburse medical care expenses, as defined at IRC Section 213(d). A cash payment after an employee's death (or any other time) would disqualify the plan FOR ALL PARTICIPANTS and make all reimbursements paid from the HRA taxable. The balance can be used to pay qualifying medical expenses of the employee's surviving spouse, tax dependents and qualifying children.
(Checkpoint Newsstand, Week of June 17, 2024.)
IRS lists exceptions to the 10% penalty for retirement plan distributions before age 59 ½.
The exceptions for the 10% penalty for retirement plan distributions from qualified retirement plans and IRAs before age 59 ½ were modified by the SECURE 2.0 Act under IRC Section 72(t). The IRS has explained the exceptions in a Notice, including new exceptions for emergency personal expenses and for victims of domestic abuse.
(Notice 2024-55.)
U.S. Supreme Court upsets corporate buy-sell plans.
The U.S. Supreme Court has ruled that a redemption obligation under a buy-sell agreement doesn't offset a (life insurance) death benefit received by a company and used to redeem shares when valuing corporate stock for estate tax purposes after a death. Life insurance proceeds funding the buy-sell agreement are included in the fair market value of the stock. The ruling also affects the "stepped up basis" for the inherited stock. The value of the deceased owner's shares is as of the time of death, before the corporation spends the cash to redeem the shares.
The beneficiary of a deceased shareholder might experience a capital loss because the amount received under the buy-sell agreement is less than the estate tax value of the stock.
Business buy-sell agreements should be reviewed considering this opinion. Consider having a cross-purchase arrangement instead of a redemption of the stock. Cross-purchase arrangements become impractical for large groups of owners.
(Connelly v. United States, U.S. Supreme Court No. 23-146, June 6, 2024.)
11th Circuit says IRS designation of conservation easements as listed transactions was invalid.
The 11th Circuit Court of Appeals held that Notice 2017-10, which said syndicated conservation easement transactions were listed transactions, was invalid. The court said the notice was a legislative rule, requiring a notice of an opportunity for public comment, before issuing final guidance.
(Green Rock, LLC v IRS, 11th Circuit #23-11041, June 4, 2024.)
California budget legislation includes some tax provisions.
Governor Newsom has signed SB 167 and SB 175, which includes several tax provisions. Here are a few highlights.
- SB 167 suspends net operating loss deductions for taxable years beginning on or after January 1, 2024 and before January 1, 2027. The suspension doesn't apply to businesses subject to the personal income tax if they have net business income or modified adjusted gross income of less than $1 million, or to corporations subject to corporate franchise or income tax if their business income subject to California taxation is less than $1 million. Losses from a trade or business owned directly or indirectly by a taxpayer from a rental activity or attributable to a farming business also aren't subject to the suspension.
- SB 167 also limits the total amount of business credits (other than the Low-Income Housing Credit) that can be claimed against personal income and corporation franchise and income taxes during taxable years beginning on or after January 1, 2024 and before January 1, 2027. Business credits may not reduce a taxpayers "net tax" by more than $5 million.
The limitation on business credits does not include the Passthrough Entity Elective Tax Credit.
SB 175 allows a taxpayer to make an irrevocable election in which the $5 million credit limitation applies to treat the suspended credit amounts as a refundable credit. The election must be made on a timely-filed, original return. 20% per year of the refundable credit is claimed over a five-year period beginning with the third taxable year after the tax year the election is made. The refundable credit is not subject to the tentative minimum tax limitation.
A similar $5 million annual limit also applies to the Film and Television Credit against sales and use taxes that taxpayers may elect instead of personal income tax and corporation franchise and income tax credits for taxable years beginning on after January 1, 2020 and before January 1, 2023. Credits in excess of the $5 million cap may be carried over and applied against sales and use taxes for the following five years, including the reporting period beginning on or after January 1, 2027.- Effective for any federally declared disaster or Governor-proclaimed emergency made on or after June 27, 2024, SB 167 grants sole authority to the California Director of Finance to impose additional requirements to qualify for extended California tax return filing and tax payment deadlines.
- SB 167 codifies the Franchise Tax Board's position in Legal Ruling 2006-01 that a transaction or activity that generates income or loss that is excluded in the calculation of an entity's "net income" is excluded from both the numerator and denominator of the apportionment formula's sales factor. The legislation overturns an Office of Tax Appeal's decision in Appeal of Microsoft Corp. (2024-OTA-130.) The codification is a clarification of existing law, so it is retroactively effective.
(Spidell's California Taxletter, July, 2024, p. 1, "Tax Increases included in budget deal.")
EDD audits loan-out corporations.
Cast & Crew is a payroll company serving clients in the entertainment industry. It has announced the EDD is auditing over 2,000 of its loan-out company payees.
The enactment of the ABC test in AB 5 has raised the issue about whether the EDD and other tax and labor agencies would no longer recognize loan-out corporations and would treat the owners of those corporations as employees of the hiring entity and not employees of the loan-out corporation.
There is an exemption under Labor Code Section 2780 for directors, music engineers, etc. involved in the creation, marketing, production, or distribution of sound recordings or musical compositions.
There is another exemption for certain fine artists who create certain works of art. Photographers and videographers who don't work on motion pictures and freelance writers are exempt from the ABC test.
No exemption has been created for professional athletes or for other workers involved in the entertainment industry, other than the music industry, which could be fertile ground for finding revenue for the EDD and other agencies.
If you are a one-person shop, even if you're incorporated, you should consult with a labor lawyer about your exposure under AB 5 and the ABC test.
(Spidell's California Taxletter, July, 2024, p. 5, "EDD is auditing loan-out corporations.")
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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