Michael Gray, CPA's Tax and Business Insight
March 3, 2026
© 2026 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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Table of Contents
- Happy St. Patrick's Day!
- Daylight Savings Time reminder.
- Family celebrations.
- Introductory offer for 2026 edition of Employee Stock Options.
- Trust distribution deadline is March 6, 2026.
- Have you received your tax preparation materials?
- Make your tax return preparation interview appointment now.
- Remember federal income tax returns for calendar-year S corporations and partnerships are due March 16.
- The election to be an S corporation for calendar-year corporations is generally March 16, 2026; see your tax advisor for new corporations.
- Due date for 2025 individual, calendar year estates and trusts, and calendar year corporation income tax returns is April 15, 2026.
- Remember that an estimated tax payment is also due on April 15.
- Remember the second California real estate tax payment is due April 10.
- California updates minimum tax credit instructions.
- Consider having an IRS individual online account.
- IRS issues preliminary guidance for depreciation of qualified production property.
- IRS issues guidance for energy tax credits regarding material assistance provided by prohibited foreign entities.
- IRS issues guidance for corporate alternative minimum tax.
- IRS issues guidance on how to request a private letter ruling to make a retroactive qualified electing fund election.
- Department of Homeland Security funding shutdown.
- Delayed effective date announced for future required minimum distribution regulations.
- Divorced S shareholder was taxable on her share of the S corporation's income.
- No employee retention credit for a marijuana business.
- Attorney held liable for a client's tax liability.
- Did you sell shares received from exercising nonqualified stock options during 2025?
- Remember this AMT adjustment for disqualified dispositions of ISO shares after the year of exercise.
- 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: Without Precedent
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Wetlands at Alviso Marina County Park in San Jose, California on February 20, 2026 Happy St. Patrick's Day!
St. Patrick's Day is the occasion when all Americans celebrate being Irish! This year it falls on Tuesday, March 17. It's time for the wearin' of the green! The luck of the Irish be with ye!
Will you be droppin' by the pub for a pint of green beer? Or maybe a Guinness?
Daylight Savings Time reminder.
Daylight Savings Time starts at 2 a.m. on Sunday, March 8, 2026. Remember to "spring" your clocks forward one hour.
Family celebrations.
My sister Arlene Gray McLean and my brothers-in-law Wade Allison and Lane Johnston, are celebrating birthdays this month. Happy Birthdays!
Introductory offer for 2026 edition of Employee Stock Options.
Our new edition of Employee Stock Options - Executive Tax Planning by Michael Gray, CPA and Thi Nguyen, CPA has just been released. The book has been updated for the One Big Beautiful Bill Act and includes a new chapter for Qualified Small Business Stock. The book is 77 pages of hard-hitting information for employees who receive employee stock options and restricted stock units. (The update for our more comprehensive book for advisors, Secrets of Tax Planning for Employee Stock Options, will be released later this year.)
As an introductory offer to subscribers of this newsletter, we are offering it for half-price during March, 2026. The investment is only $19.99 + $6.00 shipping and handling + $2.43 sales tax for California residents.
Order the book online at https://www.siliconvalleypublishingcompany.com/products/employee-stock-options-executive-tax-planning-2026-edition
Trust distribution deadline is March 6, 2026.
Estates and irrevocable trusts for which the trustee has discretion for making distributions can elect to treat distributions made within 65 days after the year-end as made during the previous year. Distributions generally reduce taxable income for the estate or trust and carry taxable income to the beneficiaries of the estate or trust, who might have a lower marginal tax bracket. For 2025 calendar year trusts and estates, the deadline for making a distribution to make the election is March 6, 2026. Trustees and executors should consult with their tax advisor about whether their trust or estate and its beneficiaries would benefit from making such an election.
Have you received your tax preparation materials?
If you are having your income tax returns professionally prepared and haven't received an organizer from your preparer, you should contact them now and request one.
Make your tax return preparation interview appointment now.
Most personal interview appointments for preparing 2025 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.
Remember federal income tax returns for calendar-year S corporations and partnerships are due March 16.
(Federal income tax returns for calendar-year C corporations are due April 15.)
The election to be an S corporation for calendar-year corporations is generally March 16, 2026; see your tax advisor for new corporations.
Due date for 2025 individual, calendar year estates and trusts, and calendar year corporation income tax returns is April 15, 2026.
Remember that an estimated tax payment is also due on April 15.
The first 2026 estimated tax payment for individuals and most other calendar year entities is also due on April 15, 2026. The penalties for late payment of estimated taxes are computed as simple interest, but the interest rate has been increasing. The federal estimated payment can be based on 25% of last year's tax liability. California "front loads" the first estimated tax payment as 30% of last year's tax liability. California taxpayers with taxable income of $1 million or more must make their estimated tax payments based on their actual income and deductions.
Remember the second California real estate tax payment is due April 10.
There is a nasty penalty for paying real estate taxes late, and the date slips past us because we're thinking about April 15. Why not make this payment now, so you don't forget it?
California updates minimum tax credit instructions.
The Franchise Tax Board has issued an alert that the instructions for minimum tax credits, including Schedule P for Forms 100 and 100W and Form FTB 3510, have been changed. https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/flash/2026/02.html
Consider having an IRS individual online account.
The IRS is encouraging taxpayers to create an IRS Individual Online Account to access their tax account information securely online and help protect against identity theft and fraud.
Among other things, taxpayers can check the status of their refund, get account transcripts, and access their information returns (W-2s and 1099s) online.
Here's a URL to set up an IRS individual online account. https://www.irs.gov/your-account
(IR-2026-21, February 3, 2026, "Create an IRS Individual Online Account today for security and convenience.")
IRS issues preliminary guidance for depreciation of qualified production property.
The One Big Beautiful Bill Act included a special 100% depreciation allowance for qualified production property. In general, qualified production property is nonresidential real property used by a taxpayer as an integral part of a qualified production activity. A qualified production activity is a manufacturing, chemical production, agricultural production or refining activity that results in the substantial transformation of property that is a qualified product.
The special depreciation allowance only applies to qualified production property placed in service after July 4, 2025 and before January 1, 2031.
The IRS has issued preliminary guidance for the special depreciation allowance. Here is a URL for Notice 2026-16, with the guidance: https://www.irs.gov/pub/irs-drop/n-26-16.pdf The Notice also includes an announcement that proposed regulations will eventually be issued.
(IR-2026-25, February 20, 2026.)
IRS issues guidance for energy tax credits regarding material assistance provided by prohibited foreign entities.
The IRS has issued Notice 2026-15, providing guidance for determining whether electricity-producing qualified facilities, energy storage technologies or eligible components are receiving material assistance from a prohibited foreign entity and would be ineligible for certain energy tax credits under the One Big Beautiful Bill Act. The Notice also includes an announcement the IRS will provide proposed regulations and further guidance for the definition of a prohibited foreign entity and the material assistance rules, including new safe harbor tables. Here is a URL for Notice 2026-15: https://www.irs.gov/pub/irs-drop/n-26-15.pdf
IRS issues guidance for corporate alternative minimum tax.
Applicable corporations with a three-year average of applicable financial statement income exceeding $1 billion are subject to a 15% federal alternative minimum tax.
The IRS has issued Notice 2026-7, providing interim guidance for adjustments to compute the corporate alternative minimum tax. Here is a URL for Notice 2026-7: https://www.irs.gov/pub/irs-drop/n-26-07.pdf
IRS issues guidance on how to request a private letter ruling to make a retroactive qualified electing fund election.
Special taxation rules apply for Passive Foreign Investment Companies (PFICs). A gain on the sale of an interest in a PFIC is taxed as ordinary income unless the taxpayer elects to have its share of PFIC income taxed each year. The election is a qualified electing fund (QEF) election. The annually-taxed income is added to the taxpayer's tax basis in the QEF.
The IRS has issued Revenue Procedure 2026-10, guidance for how a taxpayer may request a private letter ruling permitting a retroactive QEF election. Here is a URL for Revenue Procedure 2026-10: https://www.irs.gov/pub/irs-drop/rp-26-10.pdf
(Guidewire for Revenue Procedure 226-10, January 7, 2026.)
Department of Homeland Security funding shutdown.
Congress has funded most government agencies through September 30, 2026. The Democrats in Congress are refusing to fund the Department of Homeland Security (DHS) until new safeguards are adopted for ICE. Funding for DHS stopped on Saturday, February 14, 2026.
Public safety DHS workers, including the Federal Emergency Management Administration, the Coast Guard, the Cybersecurity and Infrastructure agency, ICE and the Transportation Security Administration (TSA), are required to continue working without pay. This will likely result in longer lines at airports from TSA agents calling in sick.
Delayed effective date announced for future required minimum distribution regulations.
The IRS has announced final regulations to be issued in the future won't apply until the distribution calendar year that begins no earlier than 6 months after the date that final regulations are issued in the Federal Register. In the interim, taxpayers must continue to apply a reasonable, good-faith interpretation of the statutory provisions underlying the regulations.
(Announcement 2026-7 https://www.irs.gov/pub/irs-drop/a-26-07.pdf)
Divorced S shareholder was taxable on her share of the S corporation's income.
The Second Circuit Court of Appeals upheld the Tax Court in finding a divorced S corporation shareholder who stopped receiving distributions after her divorce was taxable on her share of the S corporation's income. The taxpayer claimed she was no longer an owner of the S corporation after a bankruptcy proceeding. The Court found she was still a shareholder.
(Veeraswamy v. Commissioner, Second Circuit Court of Appeals No. 25-102, February 20, 2026.)
No employee retention credit for a marijuana business.
The Court of Federal Claims ruled that a marijuana dispensary wasn't entitled to claim refundable employee retention credits. The Court said the prohibition against claiming tax deductions and credits under Internal Revenue Code Section 280E applies to employee retention credits.
(Gravenstein v. U.S., U.S. Court of Federal Claims No. 25-997, January 30, 2026.)
Attorney held liable for a client's tax liability.
An attorney advised an insolvent corporate client to transfer its remaining cash to its creditors. The IRS assessed income taxes plus penalties of $1.9 million against the corporate client. A U.S. District Court in Maryland ruled in favor of the IRS that the attorney was a responsible person subject to the tax liability plus penalties.
(U.S. v. Neuberger, United States District Court, Maryland, Civil Action No. EA-22-2977, January 23, 2026.)
Did you sell shares received from exercising nonqualified stock options during 2025?
Don't pay tax on the income twice. For employees, ordinary income from exercising a nonqualified stock option should be included on Form W-2 and, for independent contractors, on Form 1099NEC. The tax basis (cost for computing gain or loss) for the shares should be increased for the ordinary income reported for the exercise. The adjustment is reported at column (g) on Form 8949 with code "B" at column (f). When the option is exercised and sold on the same day, the gain or loss should be close to zero on Form 8949.
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.
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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- Without Precedent Book Review at www.profitadvisors.com/precedent.shtml
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Michael Gray, CPA2482 Wooding Ct.San Jose, CA 95128(408) 918-3162FAX: (408) 938-0610email: mgray@taxtrimmers.comHours: 8am - 5pm PDT Monday - Friday
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