Michael Gray, CPA's Tax and Business Insight
June 5, 2026
© 2026 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy Father's Day!
- School's out!
- Family celebrations.
- Second estimated tax payment due.
- Estimated fee payment due June 15 for some calendar year LLCs.
- Critical payment date approaches for California passthrough entity tax.
- Appeals court rules against Franchise Tax Board about taxation of nonresident sole proprietors.
- Credits for EV chargers expire soon.
- Simplified extension for pending Employee Retention Credit claims.
- Trump administration resists refunding tariffs.
- Loads of tax and financial planning ideas and information are included in the 2025 Edition of How to Use Roth & IRA Accounts to Provide a Secure Retirement.
- Loads of tax and financial planning ideas and information are included in the 2026 Edition of Employee Stock Options - Executive Tax Planning.
- Were you assessed penalties by the IRS during the COVID pandemic?
- Estates and Trusts are subject to itemized deduction reduction.
- Which fringe benefits offered to employees are taxable?
- Final regulations issued about information reporting for unrealized receivables in sales and exchanges of certain partnership interests.
- Taxpayer penalized for failing to report foreign gifts.
- 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: Marketing to the Affluent, Fourth Edition
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Redwood trees at Henry Cowell Redwoods State Park in Felton, California on May 1, 2026 Happy Fathers' Day!
Fathers' Day will be celebrated on Sunday, June 21 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!
Family celebrations.
My granddaughter, Minerva Siemer, is being promoted from Moreland Middle School in San Jose, California.
My grandson, Clive Baker, is graduating from San Rafael High School.
We're proud of our graduates.
Second estimated tax payment due.
The second estimated tax payment for most individuals and calendar year corporations and fiduciaries is June 15.
For individuals, federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2024 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 2025.
The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2024 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 2025.
If you need help, please see your tax consultant.
Estimated fee payment due June 15 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 16 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.
https://www.ftb.ca.gov/forms/misc/3556.html
Critical payment date approaches for California passthrough entity tax.
Since the federal government has extended the limitation for itemized deductions of state and local taxes, California has extended the passthrough entity tax.
The election is made with a timely-filed income tax return for the tax year that it applies to.
Passthrough entities that elect the passthrough entity tax are required to make a prepayment of the tax by June 15 of the current year. The required prepayment is equal to the greater of $1,000 or 50% of the passthrough entity tax due for the prior tax year.
Before 2026, a passthrough entity that failed to make the payment was ineligible to elect the California passthrough entity tax. California has enacted SB 132 effective for tax years beginning in 2026, permitting taxpayers that miss the payment to elect the passthrough entity tax. In that case, the credit owners can claim on their California return is reduced by 12.5% of the amount underpaid by the June 15 prepayment date.
The remaining amount due must be paid by the entity's filing date deadline (March 15, 2027 for calendar-year taxpayers).
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.
Passthrough entities formed after June 15, 2026 aren't subject to the prepayment requirement for years beginning in 2026.
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, to avoid the 12.5% credit "haircut."
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's California Taxletter®, May 2026, p. 1. "Passthrough entity tax: new laws, new year, new considerations.")
Appeals court rules against Franchise Tax Board about taxation of nonresident sole proprietors.
A California court of appeal has rejected an Office of Tax Appeal (OTA) ruling that nonresident sole proprietors who perform services strictly outside California for California customers are subject to California income tax.
The Office of Tax Appeal case, Appeal of Bindley, 2019-OTA-179P, related to an Arizona sole proprietor who wrote screenplays for two California customers. The work on the screenplays was all done outside California. The OTA previously ruled that, based on California's market-based sourcing rules, the income must be apportioned to California.
In the new case, the taxpayer provided radiology imaging reading and analysis services from his home in Texas for patients and hospitals throughout the country. All of the work was done in Texas.
The court of appeals rejected the Bindley ruling, based on other personal income tax allocation rules adopted by the Franchise Tax Board.
Based on the new ruling, nonresident sole proprietors who only performed work outside California for California customers should consider filing protective refund claims for income taxes that they previously paid.
This issue isn't finally resolved yet. Taxpayers may either cite the new ruling or follow the Franchise Tax Board's position on future tax returns. If they follow the Franchise Tax Board's position, they can file protective refund claims for when the issue is resolved.
(Garcia-Rojas v. FTB, California Court of Appeals, 1st Appeals District, Case No. 172054, May 1, 2026, Spidell's California Taxletter, June 2026, p. 1, "Appellate court rejects FTB's position on taxation of nonresident sole proprietors".)
Credits for EV chargers expire soon.
The federal tax credit of the lesser of 30% of the cost of equipment and installation of an EV charger in your home or $1,000 will expire for chargers purchased and installed after June 30, 2026.
The business credit of the lesser of 6 % of the cost (30% if certain project requirements are met) or $100,000 per charger will also expire for chargers purchased and installed after June 30, 2026.
(The Kiplinger Tax Letter, May 21, 2026, p. 4. "Thinking about installing an electric vehicle charger in your main home?")
Simplified extension for pending Employee Retention Credit claims.
The IRS has a big backlog of Employee Retention Credit (ERC) claims. Normally, taxpayers have two years after the IRS initially disallows a claim using Letter 105-C or 106-C to file a refund suit in a U.S. District Court or the Court of Federal Claims.
Filers of ERC refund claims with less than six months left in the two-year period that are waiting for the IRS to consider their responses to Letter 105_c or 106-C can electronically request an extension by using the IRS's document upload tool at www.irs.gov/DUTReply. They can select Notice CP320B from the dropdown menu and executer Form 907. The IRS will inform taxpayers in writing whether it agrees to the extension. If it does, the IRS will send them signed Forms 907.
(The Kiplinger Tax Letter, May 7, 2026, p. 3, "Filers get a simpler way to seek extensions to fight disallowed ERC claims".)
Trump administration resists refunding tariffs.
The Trump administration is resisting a court order requiring refunds of about $166 billion collected from illegal tariffs. The tariffs were struck down by the Supreme Court last February.
(San Jose Mercury News, June 4, 2026. "Trump administration is fighting court order to refund some tariffs.")
Loads of tax and financial planning ideas and information are included in the 2025 Edition of How to Use Roth & IRA Accounts to Provide a Secure Retirement.
For more information and a 25% discount go to www.rothirainvestingbook.com. Also available at www.amazon.com.
Loads of tax and financial planning ideas and information are included in the 2026 Edition of Employee Stock Options - Executive Tax Planning.
For more information and a 25% discount go to https://www.siliconvalleypublishingcompany.com/products/employee-stock-options-executive-tax-planning-2026-edition. Also available at www.amazon.com.
Were you assessed penalties by the IRS during the COVID pandemic?
In Kwong v. U.S., the United States Court of Federal Claims ruled that penalties assessed by the IRS for income tax and international information returns filed late and estimated tax payments missed between January 20, 2020 and July 11, 2023 were improper and the IRS should refund or abate those penalties.
The IRS is appealing the decision.
Meanwhile, taxpayers who want to claim refunds or abatements of penalties that they were charged must file claims for refund using Form 843. According to the IRS Taxpayer's Advocate, the claim must be mailed by July 10, 2026. (Remember to have the envelope date stamped at a post office window.) The form should be mailed to the IRS service center where they would be required to mail a current year tax return. Although I recommend getting help from a tax professional to prepare the form, the fee might exceed the requested refund amount.
(Kwong v. U.S., United States Court of Federal Claims, No. 23-267 filed November 25, 2025. San Jose Mercury News, May 5, 2026, "IRS may owe refunds for COVID-era fines".)
Estates and Trusts are subject to itemized deduction reduction.
The Joint Committee on Taxation has released the Blue Book for OBBBA. You can find the Blue Book online at https://aboutblaw.com/blRh.
The limitation on the tax benefit of itemized deductions (Act Section 70111 and IRC Section 68) is explained starting page 26. Footnote 102 on the bottom of page 26 says the 2/37 phaseout for itemized deductions applies to estates and trusts, including the deduction for distributions to beneficiaries. The phaseout starts when the 37% tax rate applies, which is $16,000 of taxable income for 2026.
Itemized deductions are reduced by 2/37 of the lesser of the amount of itemized deductions otherwise allowable for the year or the taxable income, without regard to the limitation and increased by the amount of otherwise allowable itemized deductions, that exceeds the amount where the 37% bracket starts to apply.
The limitation also applies for individuals, but the 37% bracket thresholds are much higher than for estates and trusts.
Which fringe benefits offered to employees are taxable?
The IRS has a helpful guide to employee benefits, including a table summarizing the withholding rules for various fringe benefits, Publication 15-B. https://www.irs.gov/pub/irs-pdf/p15b.pdf
Final regulations issued about information reporting for unrealized receivables in sales and exchanges of certain partnership interests.
When a partnership interest is sold, gain attributable to unrealized receivables is taxed as ordinary income. Unrealized receivables might be outstanding receivables of a cash-basis partnership or depreciation recapture for equipment.
Under the regulations, a partnership is required to make a separate return using Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, for each exchange that includes unrealized receivables. The report is required to be provided to transferors and transferees that are parties to the exchange by January 31 of the year following the calendar year during which the exchange occurs, or, if later, 30 days after the partnership is notified of the exchange.
Under proposed regulations, a partnership was required to furnish to a transferor (seller) partner the information necessary for the transferor to make the transferor's required statement disclosing the ordinary income information. The IRS has issued final regulations for the report that eliminates that requirement.
The final regulations are generally effective for tax returns filed for taxable years ending on or after May 20, 2026.
(T.D. 10048.)
Taxpayer penalized for failing to report foreign gifts.
Jinming Zhang received about $287,000 of wedding gifts from members of her family in China during 2017. When she moved to the United States, she met the substantial presence test, making her subject to U.S. tax reporting requirements.
She used TurboTax to prepare and file her 2017 U.S. income tax return, and did not include Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. She wasn't aware of the requirement to file the form.
When she learned about the requirement to file the form, she filed it late. The penalty for failure to report gifts from foreign donors is 5% of the gifts per month, to a maximum of 25%. The IRS billed Jinming about $72,000. After some correspondence back and forth, the IRS's Independent Office of Appeals reduced the penalty by 20% to $57,422, which Jinming paid.
Jinming then sued for a refund of the penalty due to reasonable cause, since she only recently moved to the United States and was unaware of the reporting requirement. She also claimed the IRS didn't have the statutory authority to assess the penalty.
In response to an IRS motion to dismiss, a federal district court made a partial ruling, upholding the statutory authority of the IRS. The reasonable cause claim remains to be resolved.
Note that the reporting requirement applies when a U.S. person receives more than $100,000 from a nonresident alien individual or a foreign estate. Gifts from foreign family members and related foreign estates are aggregated for the test. Although the form is required to be filed, gifts of $5,000 or less aren't required to be listed.
This is an information return and gifts from foreign donors who aren't U.S. citizens or residents aren't subject to U.S. estate and gift taxes and aren't taxable income.
(Zhang v. IRS, District Court, Northern District of California, Case No. 24-cv-08210-AMO, May 4, 2026, Instructions for Form 3520.)
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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