Michael Gray, CPA's Tax and Business Insight

June 3, 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
Janet and I spent the morning of Sunday, May 29, 2022 at Lake Vasona in Los Gatos, California

Happy Fathers' Day!

Fathers' Day will be celebrated on Sunday, June 19 this year. Remember to express your appreciation to your father and other fathers who have contributed to your life.

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Michael Gray to be honored by CalCPA chapter.

Michael Gray will be honored with a Distinguished Achievement Award by the Silicon Valley, San Jose chapter, California Society of CPAs, in recognition to Michael's contribution to the CPA profession in Silicon Valley. Only one person receives this award each year, so this is a significant event. The award will be presented at the chapter's annual Honoree's Night at The Ranch at Silver Creek, near the Villages in San Jose, at 5:30 p.m. on Wednesday, June 15, 2022. Registration is open to anyone who wants to come and advance reservations are required. Here is a URL for details and to register for the event. https://community.calcpa.org/s/detail?recId=a0M6R00000iq6gdUAA

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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.

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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 2018 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 2021.

The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2018 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 2022.

If you want help computing your second quarter estimated tax payments, contact Ms. Thi Nguyen at thi@atl-cpa.com to make an appointment for a consultation.

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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 15 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.

(Spidell Publishing Company Podcast: "Estimated gross receipts fee for LLCs due soon", May 29, 2022.)

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Critical payment date approaches for California passthrough entity tax.

For taxable years 2021 through 2025, a qualified S corporation, partnership, LLC taxed as a partnership or S corporation, or certain single-member LLCs can elect to pay a California passthrough entity tax equal to 9.3% of its qualified net income. The purpose of the passthrough entity tax is to avoid the $10,000 annual limit for itemized state tax deductions on the Federal income tax returns for individuals, estates and trusts.

The election is made with a timely-filed income tax return for the tax year that it applies.

In addition, in order to qualify for the 2022 through 2025 taxable years, the entity is required to make two payments. The first payment is due by June 15 of the taxable year. The amount due is the greater of:

The remaining amount due must be paid by the entity's filing date deadline (March 15 for calendar-year taxpayers). If the June prepayment is underpaid, the taxpayer is ineligible to make the election for that taxable year.

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.

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, because underpayments will result in the election being disallowed for 2022, and the taxpayer won't be able to get a refund until it files its 2022 income tax return.

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 Publishing Company Podcast, "Passthrough entity tax payments due soon". May 1, 2022.)

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Due date for U.S. citizens and resident aliens living and working outside the U.S.

The IRS has issued a reminder that the due date for 2021 Form 1040 for U.S. citizens and resident aliens, including those with dual citizenship, living and working outside the United State is June 15, 2022. These taxpayers must file to claim tax benefits like the foreign earned income exclusion or the foreign tax credit, even if the tax benefits wipe out their U.S. federal tax liability.

(IR-2022-112, May 31, 2022.)

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CalSavers registration deadline is June 30, 2022.

California employers that don't have a qualified retirement plan (such as a 401(k) plan) and have five or more employees are required to register for the CalSavers program. Penalties apply for failure to register.

Here's a URL for the CalSavers web page. https://www.calsavers.com/

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Interest rates for tax underpayments and overpayments increased.

The IRS has announced that interest rates for Q3 2022 are increased 1% from Q2 2022. The new rates are as follows:

(IR 2022-107 May 20, 2022, Rev Rul 2022-11.)

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Employer leave-based donations for Ukraine aren't wages.

The IRS has announced that amounts paid to qualified charities for Ukraine relief beginning February 24, 2022 and before January 1, 2023 at the request of employees instead of paying wages for vacation, sick pay personal leave to employees are excluded from employee wages. The employer may deduct the payments either as charitable contributions (Section 170) or a business expenses (Section 162).

(Notice 2022-28.)

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IRS audit rate is way down.

On May 17, the U.S. Government Accountability Office (GAO) reported that IRS audits of individual income tax returns declined 44% between fiscal years 2015 and 2019. The audit rate for taxpayers with $1 million or more declined 75%.

(GAO-22-104960.)

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IRS issues proposed updated actuarial tables for valuing annuities.

The IRS has issued proposed regulations with updated actuarial tables for valuing annuities, interests for life or a term of years, and remainder or reversionary interests. The tables have been updated based on the 2010 census. Although the effective date for using the tables is when final regulations are issued, taxpayers may optionally use the tables in the proposed regulations for gift tax reporting for transfers on or after January 1, 2021 and before the effective date of the final regulations.

(REG-122770-18.)

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Remember this AMT adjustment for disqualified dispositions of ISO shares after the year of exercise.

For regular tax reporting, there is a disqualified disposition of shares acquired by exercising an incentive stock option (ISO) when the shares sold within the later of two years after the options were granted or one year after the exercise. Transactions involving ISO shares are reported differently for the alternative minimum tax (AMT). Adjustments for differences between the two systems are reported on Form 6251. For example, ordinary income for exercising vested ISO shares is reported for the year of exercise on Form 6251 on line 2i. Differences in capital gains and losses due to basis adjustments for ordinary income reported for AMT are reported at line 2k.

When there is a disqualified disposition in the year of exercise, there is no AMT adjustment, subject to a wash sale exception. (Internal Revenue Code Section 56(b)(3).) The disposition in the year of exercise takes the transaction out of the AMT.

Since there is no separate line on Form 6251 identified for an adjustment relating to a disqualified disposition after the year of exercise, the adjustment is commonly missed. It should be reported at Form 6251, line 3. The adjustment is a subtraction of the ordinary income reported as a part of wages on line 1 of Form 1040 for the disqualified disposition of the ISO shares for the year of the disqualified disposition. Those wages are a duplication of the ordinary income reported on Form 6251, line 2i for the year of exercise. Making this adjustment should enable the taxpayer to use his or her minimum tax credit to offset the regular tax for the ordinary income on the wages from the disqualified disposition.

The rules for income tax reporting for employee stock options are very confusing. It can be a worthwhile investment to have your income tax returns prepared by a professional income tax return preparer who knows the rules.

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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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