Michael Gray, CPA's Tax and Business Insight

January 6, 2022

© 2022 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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Mike and Janet at Tunnel View in Yosemite.
Janet and me at Tunnel View at Yosemite

Happy New Year!

Happy New Year!

Who would have thought a year ago that we would be having another surge of the coronavirus now? I'm hoping this Omicron variant turns out to be a blessing in disguise. It appears to be milder than earlier versions of the virus and to provide some protection from reinfection. It might actually work out for those who haven't been vaccinated.

It's still nasty and we don't want to get it, so take precautions that you believe are appropriate, with your medical doctor's guidance and consideration for the health and safety of others.

I'm very hopeful this pandemic will be behind us by the end of this year.

Best wishes to you and your family for you to accomplish your dreams and to be safe in turbulent times.

Your CPA, enrolled agent and financial planner should be working with you to help you achieve your financial goals, but it's up to you to ask for that help.

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January celebrations.

My son in law, Dan Baker, is celebrating his birthday this month. Happy birthday Dan!

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 18.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 18, 2022. (January 15 falls on Saturday and January 17 is Martin Luther King's birthday.) Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

See your tax advisor.

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Tax preparation materials will soon be on the way.

ATL-CPAs & Advisors, Inc. is in the process of mailing instructions for sending their 2021 tax return preparation instructions. If you haven't received instructions by January 20 or you would otherwise like to receive instructions, contact Thi Nguyen at thi@atl-cpa.com.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2020 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Contact Ms. Thi Nguyen, CPA at thi@atl-cpa.com.

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Estates and trusts should plan distributions.

The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. For 2020, they apply when the undistributed estate or trust income exceeds $13,050. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, January 31, 2022) as distributed for a taxable year (for example 2021).

In most cases, capital gains don't qualify for the distribution deduction. See your tax advisor.

The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) to avoid unpleasant surprises.

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Remember to take a physical inventory as of January 1.

Calendar year businesses with inventories should take a physical count as of January 1. This creates a "clean" record for the income tax return.

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W-2s, 1099s and DE 542 reminder.

Remember that most 2021 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by February 28, 2022, including electronically filed forms, except Form 1099-NEC and Form W-2 should be submitted by January 31, 2022. If you have a California business, be sure to send Form 1099-NEC to the Franchise Tax Board.

Amounts paid using a credit card or a payment service like PayPal should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that claim their real estate operations are a trade or business (including for the 20% federal tax deduction for trade or business income) should prepare them anyway. See your tax advisor for details.

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Manchin scuttles Build Back Better proposed legislation.

Senator Joe Manchin says he won't vote in favor of passing President Biden's Build Back Better proposed legislation. Without his support, it won't pass in the Senate. The Build Back Better proposal is President Biden's social spending and climate change plan, which includes financial support for families and tax provisions like a corporate alternative minimum tax based on financial statement income. The legislation also included $80 billion of additional funding for the IRS over 10 years.

President Biden says he will continue to negotiate with Senator Manchin and other members of Congress during 2022.

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Standard mileage rate for 2022.

The standard business mileage rate for 2022 is 58.5 per mile, increased from 56 per mile for 2021. The medical mileage rate is 18 per mile for 2022, increased from 16 per mile for 2021. The mileage rate for moving is also 18 per mile for 2022, increased from 16 per mile for 2021 and now only applies for military personnel, because the deduction has been repealed for everyone else starting 2018. The charitable mileage rate is 14 per mile, unchanged.

I expect many taxpayers will be electing to claim bonus depreciation or the expense election for their business vehicles purchased during 2021. The standard mileage rate will NOT apply for those vehicles.

(Notice 2021-251.)

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2022. Be sure you have installed those updates before processing your first payroll for 2022.

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No California FUTA makeup payment for 2021.

California employers will NOT have an additional tax for a credit reduction on their Federal Unemployment Tax Return, Form 940, for 2021.

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Federal estate tax and gift tax exemptions increase.

The IRS has announced increases in estate and gift tax exemptions for 2022. The lifetime exemption equivalent of the unified credit for federal estate and gift tax is increased to $12,060,000 for 2022, or $24,120,000 for a married couple. It was $11,700,000 for 2021. The annual exclusion for gifts is increased from $15,000 for 2021 to $16,000 for 2022.

(IR-2021-219, Revenue Procedure 2021-45.)

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California employers - are you required to register for the CalSavers program?

California employers with 5 or more employees and don't have a retirement plan (like a Simplified Employee Pension (SEP) or a 401(k) plan, are required to register for the CalSavers program. Under the program, an IRA is set up for employees that is funded with amounts withheld from employees' paychecks. Employees may elect out of the program, but employers are still required to register. Here's a link to the CalSavers web page. CalSavers | Employer Information Here's a link to the forms, including the employee opt-out form. Forms | CalSavers

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How to prepare an Offer in Compromise yourself.

The IRS has unveiled a new how-to video series about qualifying for an offer in compromise (settle with the IRS for a lesser amount) and how taxpayers can apply for offers in compromise themselves. The IRS is concerned that taxpayers are being scammed by some promoters who offer to process an offer in compromise. https://www.irsvideos.gov/OIC

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California Covered California reconciliation.

Taxpayers who subscribe to their health insurance using Covered California are required to reconcile the subsidies received for paying premiums. Any excess subsidy is repaid with the California individual income tax return. The reconciliation is done using Form 3849, Premium Assistance Subsidy, based on information provided on Form 3895, California Health Insurance Marketplace Statement. If you have health insurance coverage through Covered California, remember to include Form 3849 with your 2021 California income tax return.

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PPP loan forgiveness might be taxable for California taxpayers.

California hasn't conformed to the federal exclusion of cancellation of indebtedness income relating to Paycheck Protection Plan loan forgiveness. PPP loans that were approved after March 31, 2021 don't qualify. Loans forgiven after March 31, 2021 can still qualify, when the loans were approved by March 31, 2021.

Note the California legislature might revisit this exclusion, so be alert for developments.

(Spidell's California Taxletter, January, 2022, p. 1, "Which forgiven PPP loans qualify for California exclusion?")

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Business expenses disallowed - business didn't start operating.

The Tax Court disallowed about $25,000 of business deductions of a Southern California couple. The couple intended to operate an organic farm. The court found the farm hadn't become an active business during the tax year the expenses were incurred. They might be able to deduct the expenses in a future year as start-up costs.

(Antonyan and Safaryan v. Commissioner, T.C. Memo 2021-138, December 13, 2021.)

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'Tis the season to exercise ISOs?

Since stock received from exercising an incentive stock option has to meet two holding period tests (more than two years after grant and more than one year after exercise) to avoid having the excess of the fair market value over the option price taxed as ordinary income, exercising early in the year can be advantageous when you decide to hold the stock after exercise. The reason is you have the alternative of selling the stock before the end of the year of exercise and possibly avoiding the alternative minimum tax if the value of the stock drops after exercise. I call this tax strategy the "escape hatch."

If the company's stock isn't publicly traded and you can't sell the shares, this strategy won't work.

Be careful about blackouts. I have had some individuals call me who wanted to use the escape hatch during December, only to discover they were prohibited from selling their shares because they were subject to an employee blackout. Sometimes blackouts can happen unexpectedly, like when an employer becomes a party to a lawsuit. There's no magic solution in these cases - you could be stuck with a significant tax liability.

For many people, the exercise and immediate sale of the shares is the most comfortable alternative, even if the tax bill is higher.

Also remember the wash sale rules can spoil an "escape hatch" transaction. You can't repurchase the shares or even receive an employee stock option or buy a put option during the period starting 30 days before the sale to 30 days after the sale.

Another advantage of an exercise early in the year is to be able to meet the holding period requirements and sell the shares before the tax is due on April 15. But check the estimated tax payment requirements to avoid penalties for late estimated tax payments. (The alternative minimum tax liability should be included in estimated tax payments.)

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Do you sell 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.

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Do you love Disney?

I have created a Facebook group, called Disney Magic, for members to share Disney photos, experiences and tips. I am also posting developments for Disney films, television shows, and amusement parks there. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/2006739209578437/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a private group, and I will approve your membership.

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Attention Accountants! Speed up processing your 2020 business closings!

Do you still have 2020 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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Attention business owners with remote workers or remote customers!

Are you concerned about protecting your conversations and communications from hackers? Now there is a secure collaboration application including (unlimited) team member assignments, video conferencing (no Zoom bombing!), text messaging, voice messaging, PDF capture, electronic signature and large file transfer. Remote computer access feature is almost complete. Communications take place in a secure envelope. Cloud application so no installation is required on your computer network. Meets IRS security standards. http://www.securelycollaborate.com

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Check my blog for coronavirus-related tax developments.

We have been sending most of my blog posts relating to coronavirus-related tax developments to you. You can find them at www.michaelgraycpa.com.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm<. Some of the sites where you can share your experiences include yelp.com and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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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.

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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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Visit our new article!

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Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Want to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

I'm also on Facebook, LinkedIn, and Google+.

you can also follow me on other social media sites, Facebook, LinkedIn, and Google+.

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml

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Real estate investors, have you subscribed to Michael Gray, CPA's Real Estate Tax Letter at no charge or obligation?

For details, visit www.realestatetaxletter.com

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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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P.S.

My daughter and her husband, Holly and Dan Baker, have a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs and their website address is marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at www.taxtrimmers.com/directions.shtml.

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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