Michael Gray, CPA's Tax and Business Insight

November 3, 2023

© 2023 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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Janet's dolls are ready to celebrate Thanksgiving!
Janet's dolls are ready to celebrate Thanksgiving!

Happy Thanksgiving!

Thanksgiving falls on November 23 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.

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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.

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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.

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Live Michael Gray, CPA lunchtime seminar about SECURE 2.0 Act.

SECURE 2.0 Act was enacted December 29, 2022. The Act included significant changes for retirement accounts, including increasing the applicable age for required minimum distributions from Roths, IRAs and qualified plans and making more Roth alternatives available. Michael Gray, CPA, past president and past chairperson for the Tax Interest Group of the Silicon Valley San Jose Chapter, CalCPA and co-author of How To Use Roth & IRA Accounts To Provide A Secure Retirement, 2023 Edition, will explain the highlights of the Act, including year-end planning considerations for 2023.

The lunchtime seminar for the Personal Financial Planning interest group of the Silicon Valley San Jose chapter of CalCPA will be at Marcum Accountants/Advisors, 111 W St John St. Suite 515, San Jose, CA 95113 from noon to 1:30 p.m. on Wednesday, October 18, 2023. Advance registration is required. (No walk-in registration.) Registration is $30 for CalCPA members and $65 for nonmembers. Registration includes lunch. Plan to pay a small fee for parking.

Here is a link to register. https://store.calcpa.org/catalog/activity/svsj-financial-planning-interest-group--secure-2-0-act---n2181123

Or call Anne Marie Naranjo at CalCPA at 650-522-3163.

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IRS last-minute additional extension for California storm victims for 2022 income tax returns and payments.

We thought tax season was finally behind us. Then, at the last minute, the IRS and Franchise Tax Board announced an extension to November 16, 2023 for most Californians. I hope your tax returns and payments are already done.

(IR-2023-189, https://www.ftb.ca.gov/about-ftb/newsroom/news-releases/2023-10-due-date-for-tax-returns-payments-moved.html.)

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Individual and C corporation tax returns due November 16.

The due date for 2022 individuals and calendar year corporations for which timely extensions were filed is November 16, 2023. Most California individuals and calendar corporations have a November 16, 2023 extended due date (no extension form was required to be filed) as disaster relief. If you haven't filed your 2022 income tax returns yet, see your tax advisor about whether you qualify for the November 16, 2023 filing date.

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Most California residents qualify for extended date to make 2022 IRA contributions.

Together with the disaster relief filing extension, most Californians also qualify to make 2022 IRA contributions by November 16, 2023.

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California passthrough entity payments due November 16, 2023.

Most California passthrough entities qualify for extended payments of their passthrough entity taxes on November 16, 2023 as disaster relief. The first payment is normally due on or before June 15 of the year of election. That payment is the greater of $1,000 or 50% of the elective tax paid for the prior year. The second payment is due on the due date of the business's income tax return, without extensions (March 15 for calendar-year S corporations and partnerships). The extension applies to applicable payments for 2022 and 2023. Be sure to use the correct form when mailing a payment or to correctly identify the year for electronic payments.

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Most California trust and estate tax returns due November 16, 2023.

Most California calendar-year trusts and estates have a November 16, 2023 due date as disaster relief.

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Watch estimated tax payments catch up for disaster relief.

As disaster relief, most California residents are required to "catch up" their Federal and California estimated tax payments for the first three quarters of 2023 by November 16, 2023. Be sure to correctly identify these payments and not combine them with your 2022 tax due payments. As a reminder, I'm repeating the next reminder about making smaller California estimated tax payments.

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Avoid California e-pay requirement by making smaller estimated tax payments.

California requires corporations and individuals to make their tax payments electronically after the taxpayer either has:

In 2023, taxpayers in 55 counties were granted disaster relief extending the tax return filing and estimated tax payment due date to November 16, 2023.

If a taxpayer makes a combined estimated tax payment exceeding $20,000, all future California tax payments will be required to be made electronically!

Taxpayers who don't expect to otherwise exceed the thresholds in the future can avoid exceeding the threshold during 2023 by breaking down their estimated tax payments and making several smaller payments instead of a big one. To avoid having your bank question whether your payments are fraudulent, consider making the payments a few days apart.

Taxpayers who exceed the thresholds may request a waiver from the requirement to make future payments electronically for a "reasonable cause." Why subject yourself to having to make that request when it can be easily avoided?

If you have any questions about this matter, consult with your tax advisor.

(Podcast: The e-pay mandate: don't combine California estimates, Spidell Publishing, September 3, 2023.)

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Louisiana disaster relief.

Individuals and businesses affected by seawater intrusion in parts of Louisiana qualify for an extended due date of tax returns and payments to February 15, 2024, including individuals who previously filed for an extension to file to October 16, 2023 for their 2022 income tax returns. See this announcement for details. California has conformed to this relief.

(IR-2023-184, September 29, 2023. https://www.ftb.ca.gov/about-ftb/newsroom/news-releases/2023-03-october-california-grants-tax-relief-for-hurricane-fire-and-seawater-intrusion-victims.html)

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Israel terrorist attack disaster relief.

Taxpayers determined to be affected by the terrorist attack in Israel on October 7, 2023 have received an extension for filing tax returns, making tax payments and performing time-sensitive acts normally due to be performed on or after October 7, 2023 and before October 7, 2024 to October 7, 2024.

(Notice 2023-71.)

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IRS provides a procedure to withdraw Employee Retention Credit claims.

The IRS has issued a procedure for taxpayers who submitted a claim for a refund from an employee retention credit and now believe the claim was improper to withdraw the claim, to avoid having to refund the improper amount to the IRS and avoid penalties and interest.

(FS-2023-24.)

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IRA rollover of proceeds of sale of distributed partnership disallowed.

The Tax Court ruled that a taxpayer who received a distribution of a partnership interest from the taxpayer's IRA wasn't eligible to rollover the proceeds from selling the partnership interest to another IRA. The IRA custodian distributed the partnership interest because the taxpayer refused to provide a fair market value for the custodian to report to the IRS. According to Internal Revenue Code Section 408(d)(3)(A)(i), "the entire amount received (including the same amount of money and any other property)" must be rolled over to the recipient IRA. In this case, the property was converted to cash.

This case illustrates a challenge for individuals who use self-directed IRAs to make alternative investments in their IRA that are hard to value. Getting a business appraisal each year can be prohibitively expensive.

(Estate of Caan v. Commissioner, 161 T.C. No. 6 (2023).)

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Make passthrough entity elective tax payments by the year-end.

Calendar-year end passthrough entities should make an effort to pay any remaining tax by December 31, 2023. According to IRS Notice 2020-75, the tax must be paid in order to claim a current tax deduction. The tax payments reduce the taxable income passed through to the owners.

See your tax advisor for details. The elective tax payment isn't a do-it-yourself project.

(Spidell's California Taxletter®, November, 2022, p. 9, "2022 passthrough entity elective tax payments.")

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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 $30,700 federal standard deduction for married couples over age 65, $15,600 for singles for 2023, 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 1/2 or greater is to make donations to "50% charities" (not a donor advised fund) directly from their traditional IRA.

An individual age 70 1/2 or older may distribute up to $100,000 for 2023 to qualified charities each year without including the distribution in taxable income. (The limit will be 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.

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Social Security threshold announced for 2024.

The Social Security Administration has announced that the threshold for Social Security tax for 2024 will be $168,600. Social Security benefits will also increase by a 3.2% cost of living adjustment for 2024.

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Required minimum distributions for 2023.

Participants in qualified plans (including 401(k) plans) and traditional IRAs must take required minimum distributions starting for the year the participant reaches age 73, effective 2023. Generally, the distribution is required to be made by December 31. There is an exception for participants whose 73rd birthday is during 2023. They may take the 2023 distribution by April 1, 2024. See your financial advisor for what make sense for you.

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Important December 31 deadline for inherited IRAs.

The beneficiaries of an inherited IRA must divide the account into separate accounts for each beneficiary by December 31 of the year of the decedent's death for favorable distribution rules. Otherwise, the distribution will generally be based on the life expectancy of the oldest beneficiary.

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2024 retirement plan limitations announced.

The IRS has published the 2024 retirement plan limitations with cost of living adjustments.

(Notice 2023-75.)

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California to require separate tax basis capital account reporting for 2023 partnership tax returns.

The IRS required tax basis capital account reporting starting in 2021. The Franchise Tax Board allowed taxpayers to use the Federal amounts on their Schedules K-1 (partner's information return) for 2021 and 2022. Effective for tax years beginning in 2023, California will require reporting California tax basis capital account reporting on California partnership Schedules K-1. The most common difference between California and Federal reporting is depreciation. There are many other potential differences.

Now that October 17 is behind us, it would be wise for California tax return preparers to assemble the information for California tax basis capital accounts now to prepare for next tax season.

Small partnerships are exempt from the requirement, provided the partnership:

(Spidell's Publishing Company California Podcast, October 29, 2023, "California tax basis capital account reporting is coming.")

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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.

Questions were added to 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

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If you exercised ISOs during 2023, should you use the "escape hatch"?

Remember if you exercised ISOs during 2023 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, 2023. The fair market value of the shares on March 1, 2023 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, 2023, 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 Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2023, 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.

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Year end planning - should you "harvest" losses before the year end?

The stock market has been very active this year, and many 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.

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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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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.

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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@profitadvisors.com.

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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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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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Check out my blog.

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

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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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