Michael Gray, CPA's Tax and Business Insight
November 4, 2024
© 2024 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy Thanksgiving!
- Family celebrations
- Make your year-end planning appointment now.
- If you have a small business, have you filed a Business Ownership Information Report?
- Foreign bank account form due October 15.
- Do you have an identity protection personal identification number (IP-PIN)?
- Victims of Hurricane Helene get filing relief.
- Final regulations make Syndicated Conservation Easements listed transactions.
- Farmers and ranchers get extended replacement period for livestock sales under Internal Revenue Code Section 1033.
- California doesn't conform to Opportunity Zone gain deferral.
- Student attending out-of-state college was a California resident.
- Uber and Lyft workers may soon receive back pay and benefits.
- Federal estate tax exemption amount for 2025.
- Federal gift tax exclusion amount for 2025.
- Social Security COLA increase.
- Social Security wage increase.
- You have to start a business to claim business deductions.
- Year-end planning - Roth conversions.
- Year-end planning - Seniors should consider making donations from their IRAs.
- Does your business have unclaimed property to report?
- If you exercised ISOs during 2024, should you use the "escape hatch"?
- Year end planning - should you "harvest" losses before the year end?
- 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 Brand Gap
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
The root cluster of a fallen tree at Henry Cowell Redwoods State Park in Felton, California. Happy Thanksgiving!
Thanksgiving falls late on November 28 this year. This is one holiday people of all faiths or no faith can share. Being thankful and counting your blessings is one of the best things you can do for your emotional health. Even when things aren't working out, you can still be thankful for past good memories.
Family celebrations.
My brother, Steve, and I are celebrating our birthdays this month. Thank goodness we are both healthy and enjoying spending time with our family.
Make your year-end planning appointment now.
Halloween has passed and the Holidays are here! Now would be a good time to review your tax situation with Ms. Thi Nguyen, CPA. Write to her at thi@atl-cpa.com to make an appointment.
If you have a small business, have you filed a Business Ownership Information Report?
Entities that register with a Secretary of State, including most single-member LLCs, LLCs, partnerships, S corporations and corporations are required to file by the end of the year. New entities formed during 2024 are required to file within 90 days after formation. See your attorney or tax advisor. Here's a URL for the FinCEN website with details. https://www.fincen.gov/boi
Business Ownership Information Report filing relief.
FinCEN has announced a six-month postponement for filing a BOI report for certain businesses formed during 2024 when the principal place of business located in an area when both:
- The Federal Management Agency (FEMA) as qualifying for individual or public assistance (www.fema.gov/disaster/current) and
- The IRS as eligible for tax filing relief (www.irs.gov/newsroom/tax-relief-in-disaster-situations).
Only Hurricane Milton victims qualify for relief from the original filing deadline of January 1, 2025 for businesses formed before January 1, 2024.
(FIN-2024-NTC11, FIN-2024-NTC10, FIN-2024-NTC9, FIN-2024-NTC8, FIN-2024-NTC7.)
Do you have an identity protection personal identification number (IP-PIN)?
The IRS is encouraging all taxpayers to safeguard their identity by signing up for an IP-PIN.
This an added layer of security to protect against tax-related identity theft. The IP-PIN will be included with your identifying information when you efile your income tax returns.
The best way to sign up is through an IRS Online Account. Here's a URL about the IRS Online Account. https://www.irs.gov/payments/online-account-for-individuals
Here's a URL about applying for an IP-PIN. https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin
The IRS encourages signing up before November 23, 2024. After that date, the IP-PIN system will be shut down for maintenance until early January 2025.
(IR-2024-278, October 23, 2024.)
Victims of Hurricane Helene get filing relief.
The IRS has announced tax relief, including extending the filing date for 2024 income tax returns to May 1, 2025 for victims of Hurricane Helene.
(IR 2024-253, 10/1/2024)
2025 retirement plan limitations announced. The IRS has published the 2024 retirement plan limitations with cost of living adjustments.
- The maximum annual benefit for a defined benefit plan is increased from $275,000 to $280,000.
- The limitation for contributions to defined contribution plans (including 401(k) plans) is increased from $69,000 to $70,000.
- "Catch up" contributions to defined contribution plans for individuals aged 50 or over remains $7,500.
- The maximum SIMPLE contribution is increased from $16,000 to $16,500.
- The maximum IRA (including Roth IRA) contribution remains $7,000.
- The maximum "catch up" IRA contributions to IRAs for individuals aged 50 or over is unchanged at $1,000.
- The maximum SEP contribution is increased from $69,000 to $70,000.
(Notice 2024-80.)
Final regulations make Syndicated Conservation Easements listed transactions.
The IRS has issued final regulations that identify Syndicated Conservation Easements as listed transactions. That means material advisors and participants in these activities are required to file disclosures using Form 8918, Material Advisor Disclosure Statement, and Form 8886, Reportable Transaction Disclosure Statement.
Tax practitioners questioned whether the regulations were necessary, considering Section 605 of the SECURE 2.0 Act, adding Internal Revenue Code Section 170(h)(7), disallows the vast majority of the syndicated conservation easement transactions identified in proposed regulations.
Section 170(h)(7) is not effective for transactions occurring before December 22, 2022. The final regulations require that taxpayers who previously didn't disclose their transactions in compliance with Notice 2017-10 do so now.
(T.D. 10007, October 7, 2024.)
Farmers and ranchers get extended replacement period for livestock sales under Internal Revenue Code Section 1033.
The IRS has extended the time that farmers and ranchers in 41 states and the District of Columbia have to replace livestock sold because of weather-related conditions as involuntary conversions. See the Notice for details.
(Notice 2024-70.)
California doesn't conform to Opportunity Zone gain deferral.
The Office of Tax Appeals required California resident taxpayers to recognize $1.5 million in capital gains on their 2019 California income tax return. The taxpayers elected to defer the gain on their federal income tax return by making an Opportunity Zone investment. California hasn't conformed to that federal tax break.
This case illustrates how errors can happen because of state tax nonconformity with federal tax laws.
(Appeal of Pinto, 2024-OTA-572.)
Student attending out-of-state college was a California resident.
The California Office of Tax Appeals found a student attending an out-of-state college was still domiciled in California and was located outside the state for a temporary, transitory purpose and therefore was subject to California income tax as a California resident.
(Appeal of Ajith, 2024-OTA-521.)
Uber and Lyft workers may soon receive back pay and benefits.
The U.S. Supreme Court refused to hear Olson, et. al. v. State of California.
California legislation AB5 was enacted during 2019 and effective January 1, 2020. Under AB5, many contract workers, including those hired by Uber and Lyft, are classified as employees and therefore subject to minimum wage laws and employee benefit requirements.
Proposition 22 was approved by voters in the 2020 election and took effect on December 17, 2020 to allow app-based drivers to be treated as independent contractors.
The issue for Olson was how to treat app-based drivers from January 1, 2020 through December 16, 2020. The court in Olson ruled the drivers should receive back wages and benefits for that period. The drivers wouldn't be able to report their business expenses on Schedule C for that period.
Now it appears the rideshare companies will have to make payments for back pay and employee benefits.
(Spidell's California Taxletter®, November 2024, p. 11, "Uber/Lyft workers may soon receive back pay and benefits.")
Federal estate tax exemption amount for 2025.
The IRS has announced the exemption equivalent of the Unified Credit for federal estate and gift tax will be increased from $13,610,000 for 2024 to $13,990,000 for 2025. NOTE: The exemption equivalent was doubled by the Tax Cuts and Jobs Act of 2017 and that change will expire after 2025, so it is scheduled to be about $6,500,000 or so for 2026. Consider making estate planning moves before December 31, 2025. See your estate planning attorney and tax advisor.
Federal gift tax exclusion amount for 2025.
The IRS has announced the annual federal gift tax exclusion will increase from $18,000 for 2024 to $19,000 for 2025 per donor, per donee.
Social Security COLA increase.
The Social Security Administration has announced a 2.5% increase for Social Security benefits for 2025.
Social Security wage increase.
The Social Security Administration has announced the wage threshold for Social Security taxes and the self-employment income for Self-Employment Tax will increase from $168,600 for 2024 to $176,100 for 2025. Remember there is no threshold for Medicare tax withholding.
You have to start a business to claim business deductions.
Kwaku Eason and Ashley Lesner claimed business deductions on their 2016 federal income tax return for a new business to provide advice and guidance to real estate investors, based on courses they took from Advanced Real Estate Education. They didn't report any income from the business.
They also formed an S corporation. They claimed the business deductions on Schedule C and not on the S corporation income tax return.
The Tax Court upheld the IRS in disallowing the business deductions because the taxpayers weren't carrying on an active trade or business.
(Eason et. al v. Commissioner, T.C. Summary Opinion 2024-17, August 13, 2024.)
Year-end planning - Roth conversions.
Taxpayers who have traditional retirement accounts should consider switching contributions to Roth (if their employer plan offers that option) and converting their traditional retirement accounts to Roth. To avoid creating a huge tax obligation, the conversion can be staged over several years. Federal tax rates are currently "on sale" thanks to the Tax Cuts and Jobs Act of 2017. Those tax rate cuts will expire after 2025. The federal government currently has a huge deficit that will eventually have to be paid. See your tax advisor before going ahead with a conversion to find out how much to convert and have a tax bill you can afford. (Note - No custodians for Simplified Employee Pension (SEP) plans are offering a Roth option at this time.)
Year-end planning - Seniors should consider making donations from their IRAs.
Many of us make a lot of donations during the holiday season. With a $32,200 federal standard deduction for married couples over age 65, $16,550 for singles for 2024, most taxpayers get no federal tax benefit from making charitable contributions. (Especially when their home mortgage has been paid off!) A better approach for individuals age 70 ½ or greater is to make donations to "50% charities" (not a donor advised fund) directly from their traditional IRA.
An individual age 70 ½ or older may distribute up to $100,000 for 2024 to qualified charities each year without including the distribution in taxable income. (The limit is indexed for inflation after 2023.) In addition, the distribution "counts" as part of any required minimum distribution for the year.
In order to qualify, a qualified receipt is required to be kept by the taxpayer. The donation must be made directly by the IRA to the charity.
My IRA custodian gave me a checkbook for the purpose of making donations from my account.
Most seniors who make significant charitable contributions should consider making this their regular practice.
See your IRA custodian and your tax advisor for guidance with this important tax planning strategy.
Does your business have unclaimed property to report?
California's Unclaimed Property Law requires organizations to review their records annually to determine if they are holding any funds, securities, or other properties that have been unclaimed for the required dormancy period. A common item would be checks issued but uncashed by the recipient.
There is a question on California business entity tax returns about compliance with the Unclaimed Property Law. Remember these questions are answered under penalties of perjury and the responses are shared with the State Controller's office.
The State Controller's office may waive interest for organizations that participate in its Voluntary Compliance Program. Get the details here. https://sco.ca.gov/upd_vcp.html
If you exercised ISOs during 2024, should you use the "escape hatch"?
Remember if you exercised ISOs during 2024 and didn't sell the stock, your AMT adjustment will be based on the fair market value of the stock on the date of exercise. However, if you sell the stock before the end of the year of exercise, the AMT adjustment is eliminated. Ordinary income is reported for the excess of the selling price over the option price. I call this strategy "the escape hatch."
For example, Jean Employee exercised an ISO for 1,000 shares of XYZ stock on March 1, 2024. The fair market value of the shares on March 1, 2024 was $55 per share and the option price was $5 per share. If Jean didn't sell the stock, she would report additional AMT income of $55 - $5 = $50 X 1,000 shares = $50,000. On December 15, 2024, Jean sells the stock for $15 per share. The AMT adjustment is eliminated and Jean reports $15 - $5 = $10 X 1,000 shares = $10,000 of ordinary income for regular tax and AMT.
There is an important requirement to get this tax benefit. A loss would have to be "allowable" if the stock was sold at a loss. A common transaction that would disqualify an escape hatch is a wash sale. A wash sale happens when replacement shares or an option to acquire replacement shares are acquired during the period 30 days before or 30 days after the sale.
For example, if, in the above example, Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2024, she would still have a disqualifying disposition of the ISO shares, but she would have $50,000 of ordinary income because the escape hatch wouldn't apply. Her short-term capital loss of $15 - $55 = $40 X 1,000 shares = $40,000 would be disallowed as a current deduction. The disallowed loss would be added to the tax basis of the replacement shares. Therefore, the tax basis of the replacement shares would be $16 + $40 = $56 X 1,000 shares = $56,000.
If you are going to use this "escape hatch" strategy, I suggest not waiting until the last minute. One of my clients was thinking of doing this, and an employee unexpectedly sued the company for an employment-related matter. The company's stock was locked up for employees because of the lawsuit. My client wasn't able to use the "escape hatch" strategy.
Year end planning - should you "harvest" losses before the year end?
The stock market has been very active this year, and some individuals have experienced lost value in their investments. Review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains plus $3,000. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.
Remember the wash sale rules. If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.
Consult with your tax advisor.
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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