Michael Gray, CPA's Tax and Business Insight
October 4, 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
- Boo! The year is almost over!
- Family celebrations
- Attention CPAs, Enrolled Agents, tax advisors.
- Individual and C corporation tax returns due October 15.
- Foreign bank account form due October 15.
- Are you eligible for an extended due date as disaster relief?
- Need help with getting your extended tax returns, amended returns, and elections done?
- California employers plan on more FUTA tax due January 2024.
- Superior court upholds California's taxation of out-of-state sole proprietors.
- New York transportation district tax is eligible for California Other State Tax Credit.
- FTB says Accrued U.S. Treasury bond market discount interest is subject to California tax.
- Business has to start to deduct business expenses.
- IRS issues guidance for employer matching contributions for student loan payments.
- IRS issues final regulations about consistent basis reporting.
- 11th Circuit Court of Appeals rules some FBAR penalties violate the Eighth Amendment.
- Expiring tax cuts and SECURE 2.0 changes suggests changing retirement savings strategy.
- IRS modifies procedure for automatic consent of accounting change for research and experimental expenditures.
- 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: Made To Stick
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Hearst Castle at San Simeon, California on September 5, 2025. Architect was Julia Morgan. Only about a 3 hour drive from San Jose. For tour information, visit hearstcastle.org Boo! The year is almost over!
Halloween is already almost here! And after Halloween, the year roars to a close with the holiday season.
Halloween decorations are out in my neighborhood and in my home.
I expect more children will be out for tricks and treats this year. Hope your family has some fun.
Family celebrations.
My wife, Janet Gray, celebrates her birthday during October. Janet is a great blessing to me and our family. Happy birthday!
Attention CPAs, Enrolled Agents, tax advisors.
I have information about a valuable service that you're probably not providing for your clients. This is a way to generate additional revenue in you practice and really help your clients' families. No special licensing is required. To get the details, please send an email saying "Please send me the information" to mgray@taxtrimmers.com.
Individual and C corporation tax returns due October 15.
The due date for 2023 individuals and calendar year corporations for which timely extensions were filed is October 15, 2024. (The California extended due date for C corporations is November 15, 2024, one month later than the federal date. C corporations receive a seven-month extension from the original due date, April 15.)
Foreign bank account form due October 15.
FinCEN Form 114 is due April 15, and the due date is automatically extended to October 15, 2024 for 2023. FinCEN Form 114 is required to be filed when an individual has $10,000 or more of foreign financial assets, including foreign bank accounts and foreign brokerage accounts. See your tax advisor about foreign insurance policies, annuities and retirement accounts.
Are you eligible for an extended due date as disaster relief?
The IRS has a web site where you can look up disaster relief by state. https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
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.
California employers plan on more FUTA tax due January 2024.
California had to borrow from the federal Unemployment Insurance fund to pay unemployment claims during the pandemic. It currently owes about $19 billion.
This means an additional "credit reduction" Federal unemployment tax of .3% on the first $7,000 of wages paid each employee in California during 2024 will be added on Form 940 for 2024, due on January 31, 2025.
The credit reduction is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid.
(Spidell's California Taxletter®, October, 2024, p. 8, "FUTA payroll tax increase coming.")
Superior court upholds California's taxation of out-of-state sole proprietors.
A taxpayer, who was a Texas-resident radiologist, challenged California's taxation of out-of-state sole proprietors as unconstitutional.
Previous cases on this subject were heard by the California Office of Tax Appeals, which is a less formal venue than a county Superior Court.
The California Franchise Tax Board claimed the radiologist was subject to California income tax for radiology interpretation services provided to California hospitals, even though the radiologist was never physically in California.
The taxpayer also objected that corporations and partnerships had a higher threshold for apportioning income to California than individuals.
Here are the Court's responses to the taxpayer's Constitutional claims:
The Commerce Clause didn't apply because the taxpayer's activity had a substantial nexus to California. The taxpayer wasn't treated differently from California residents who performed similar services.
Due process didn't apply because there was at least a minimal connection between the interstate activities and California's tax treatment.
The taxpayer claimed the tax violated the Equal Protection Clause because corporations and partnerships had a different threshold than individuals. The court said differences are acceptable. For example, single member LLCs that do business in California are subject to an $800 annual tax, while individuals aren't.
The solution for this taxpayer might be to make an S election for his radiology business.
(Garcia-Rojas v. FTB, Superior Court, San Francisco County, Case No. CTC-23-606654, September 10, 2024.)
New York transportation district tax is eligible for California Other State Tax Credit.
The California Office of Tax Appeals has ruled in a precedential decision that California resident taxpayers may claim the Other State Tax Credit (OSTC) for the New York Metropolitan Commuter Transportation Mobility Tax (MCTMT). In that case, the taxpayers weren't able to show the amount of the credit they were entitled to.
In order to qualify for OSTC, the tax must be "imposed by and paid to another state." The MCTMT is a state-level law that imposed the MCTMT on certain employers, based on their payroll expense, and self-employed individuals, based on their net earnings. The businesses subject to the tax were conducting business within the metropolitan commuter transportation district encompassing New York City and surrounding counties.
The Office of Tax Appeals disallowed the OSTC for the New York City Unincorporated Business Tax because, although New York state law authorized the tax, it didn't mandate that New York City impose the tax.
(Appeal of Mather, 2024-OTA-377P, 2024-OTA-78P.).
FTB says Accrued U.S. Treasury bond market discount interest is subject to California tax.
In response to an inquiry by Spidell Publishing, the California Franchise Tax Board said accrued U.S. Treasury bond market discount interest is subject to California tax. The market discount interest isn't paid by the U.S. Treasury, so it isn't eligible for an exclusion. It is taxable as ordinary interest income. The income does not represent tax-exempt interest earned on a federal obligation.
(Spidell's California Taxletter, October 2024, p. 11, "California treatment of U.S. Treasury bond accrued discount income.")
Business has to start to deduct business expenses.
A husband and wife formed an S corporation during 2016 to provide real estate education and consulting services. The corporation went out of business during 2018. The Tax Court found they hadn't performed any services, so the corporation never conducted any business. The taxpayers claimed losses on Schedule C for their individual income tax returns and for passthrough losses from the S corporation.
Since the taxpayers and the S corporation didn't carry on a trade or business, their business deductions were disallowed and the Tax Court refused to impose an accuracy-related penalty because of the taxpayers' considerable investment in education to learn about the business.
(Eason v. Commissioner, T.C. Summary Opinion 2024-17, August 13, 2024.)
IRS issues guidance for employer matching contributions for student loan payments.
The SECURE 2.0 Act of 2022 includes a provision allowing employers to make matching retirement plan contributions (such as to a Section 401(k) plan or a Section 403(b) plan) for employees' qualified student loan payments. The IRS has issued guidance about how an employer matching plan would work.
The Notice is effective for plan years beginning after December 31, 2024. For plan years beginning before January 1, 2025, a plan sponsor may rely on a good faith, reasonable interpretation of Section 110 of the SECURE 2.0 Act of 2022.
(Notice 2024-63.)
IRS issues final regulations about consistent basis reporting.
The IRS has issued final regulations about consistent reporting of basis (cost for determining gain or loss or depreciation on a tax return) for valuation of assets on the Federal Estate Tax Return and by the beneficiaries for sale or depreciation of the assets. Notably, the final regulations didn't include the requirement to report zero as the tax basis for assets that weren't reported on the federal estate tax return, as the proposed regulations did. The consistent basis rule only applies to items included on the federal estate tax return.
The final regulations provide relief by eliminating the requirement that beneficiaries who subsequently transfer property send a report to the IRS. Trustees of trusts are still subject to the reporting requirement, when the value of the property was previously reported on Form 8971, Schedule A.
Since property received by a qualified charity isn't subject to federal estate tax, it also isn't subject to the consistent basis reporting requirement.
Tax advisors who work with taxpayers relating to estate and trust administration should study the final consistent basis regulations and educate executors, trustees and beneficiaries about them.
(T.D. 9991, September 16, 2024.)
11th Circuit Court of Appeals rules some FBAR penalties violate the Eighth Amendment.
The IRS claimed a taxpayer willfully failed to report his interest in many foreign bank accounts on a foreign account report (FBAR) and was subject to penalties of $12,555,813 for 2007 - 2009. The penalty for each tax year is the greater of $100,000 or 50% of the account balance.
The court found the penalty is a fine, because it is punitive in nature.
The taxpayer claimed he wasn't aware of the reporting requirements. CPAs who prepared his income tax returns erroneously advised him he wasn't required to report his foreign accounts and that the penalties were excessive under the Eighth Amendment of the U.S. Constitution.
$100,000 penalties were assessed for an account that never exceeded $16,000. The Eighth Circuit said that was clearly disproportionate. The court said the $100,000 was the maximum statutory penalty and nothing forbade the IRS from assessing a penalty proportionate to the nature and extent of the violation. The court found the $100,000 penalty was not disproportionate for other accounts, and struck that penalty, leaving $12,255,813 plus interest.
(Schwartzbaum v. U.S., U.S. Count of Appeals, 11th Circuit No. 22-14058, August 30, 2024.)
Expiring tax cuts and SECURE 2.0 changes suggests changing retirement savings strategy.
According to IRA planning expert Ed Slott, U.S. taxpayers should plan on higher income tax rates in the future. Even if Congress extends the 2017 tax rate cuts for individuals, rising federal deficits will eventually have to be paid, so higher tax rates are coming. That means tax deferral doesn't make sense.
We now have the alternative with the extension of Roth accounts to most employer plans and via Roth conversions of traditional IRA and employer retirement accounts, to shift to a tax-free savings strategy. Paying tax will probably be required to move tax-deferred savings to Roth accounts with tax-free growth.
Beneficiaries who inherit such accounts won't be subject to income taxes when they are distributed.
Focusing on required minimum distributions is taking your eye off the prize. It is probably preferable to accelerate tax via a conversion and change to retirement contributions to a Roth account instead of tax-deferred contributions to a traditional retirement account, like a traditional IRA or 401(k). In most cases, contributions for a Roth IRA will probably require an intermediate step of a non-deductible contribution to a traditional IRA followed by a Roth conversion. That two-step process might generate taxable income if there are other tax-deferred funds in the traditional IRA.
The conversion might be spread over several years to control the federal income tax rate that applies to the taxable income.
Life insurance might be purchased to compensate for the income taxes that are paid by the plan participant or to otherwise eliminate the issue of treating some beneficiaries unfairly.
Since taxes are still "on sale" for 2024 and 2025, now is the time to act.
Please add this item to your agenda for discussion with your tax advisor and financial planner. Don't take an action that will put you in financial distress (like creating a tax bill you can't pay).
IRS modifies procedure for automatic consent of accounting change for research and experimental expenditures.
The Tax Cuts and Jobs Act of 2017 included a provision disallowing a current deduction and requiring amortization of research and experimental expenditures, effective for tax years beginning after December 31, 2021. The amortization periods are five years for domestic research and fifteen years for foreign research.
The IRS has previously issued procedures about an automatic consent for changing the method of accounting for research expenditures on a cut-off basis.
The IRS has issued Revenue Procedure 2024-34, allowing taxpayers to get automatic consent to change their method of accounting to comply with Internal Revenue Code Section 174, as amended, using Revenue Procedure 2024-23 or to rely on interim guidance provided in Notice 2023-63 for tax years beginning after December 31, 2021.
Revenue Procedure 2024-34 also modifies the rules for changes made in successive tax years by providing that a taxpayer may make a change for a tax year beginning in 2022 or 2023, regardless of whether the taxpayer made a change for the same item for any previous tax year beginning in 2022 or 2023.
The Procedure also limits the audit protection for a change under Section 7.01 of Revenue Procedure 2024-23 if the taxpayer didn't change its method of accounting to comply with Section 174, as amended for the first tax year beginning after December 31, 2021.
Revenue Procedure 2024-34 is effective for Forms 3115 (Change of Accounting Method) filed on or after August 29, 2024.
Taxpayers that have research and experimental expenditures should consult with their tax advisors about whether any action is required under Revenue Procedure 2024-34.
(Revenue Procedure 2024-34.)
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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