Tom Talks Taxes - June 10, 2022

Important California PTET update plus the taxation of collectibles

Suppose you have a pass-through entity client that is either resident in California or does business in California. In that case, you must consider whether or not to elect into California’s relatively new pass-through entity elective tax.

To make the election for tax year 2022, the entity must make the required estimated tax payment on or before June 15, 2022. Please watch this short 5-minute video on the issue.

Key point: if the entity did not make the tax year 2021 election, it should pay $1,000 on or before June 15, 2022 to preserve the right to do so for tax year 2022. If the entity eventually does not elect into the tax, the tax can be refunded when the entity files its returns, or it can be applied to other taxes owed.

Collectibles 101

The tax law generally gives taxpayers preferential rates on the gain from the sale of capital assets: for most taxpayers, it is either 0% or 15%, while the highest-income taxpayers pay 20%.

Certain types of capital gain are subject to higher maximum capital gains rates. One example is gain from the sale of collectibles, which has a maximum 28% rate.

The amount subject to the 28% rate is collectibles gain plus qualified small business stock gain less the sum of:

• Collectibles loss,

• Net short-term capital loss, and

• Long-term capital loss carried over to the tax year.

With the increased reporting on the sales of personal property due to the upcoming change in Form 1099-K reporting and the proliferation of non-fungible tokens (NFTs), it is essential to get this classification correct on the tax return.

Collectibles gain arises from the sale of a collectible that is a capital asset held for more than one year. As a reminder, inventory held for sale in a trade or business activity is not a capital asset and generates ordinary gain or loss.

§408(m)(2) provides the following list of collectibles:

• Any work of art,

• Any rug or antique,

• Any metal or gem,

• Any stamp or coin,

• Any alcoholic beverage, or

• Any other tangible personal property specified by the Secretary for purposes of this subsection.

This includes any items mentioned above made into jewelry. See Notice 87-16, Sec. V.

Neither the IRS nor Treasury has used its statutory authority to expand the list of collectibles. The IRS did issue Prop. Treas. Reg. §1.408-10 in 1984 to add “any musical instrument” or “any historical objects (documents, clothes, etc.)” to the collectible list; however, it never became final, and current IRS instructions and publications do not reference those two types of items.

Collectibles gain also includes gain from the sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles. See §1(h)(5)(B) and Treas. Reg. §1.1(h)-1(b)(2)(ii) for allocation rules.

Mileage Rate Goes Up

In Announcement 2022-13, the IRS increased the standard business mileage rate to 62.5 cents per mile, effective July 1, 2022. The prior 58.5 cents per mile rate applies from January 1, 2022, through June 30, 2022.

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Upcoming Events

I’m doing the following live webinars in 2022 through Compass Tax Educators:

• Tax Credits

• Filing Status: Rules and Planning

• Reasonable Compensation Issues & Planning

• Representation Panel Discussion

• 2022 Individual Tax Update

• 2022 Business Tax Update

Here are the on-demand webinars I did in 2022 through Compass Tax Educators:

• S Corporation Series

• Roth IRA Fundamentals

Here are my upcoming in-person events for 2022 (more to be announced later):

Florida Society of Enrolled Agents - June 17, 2022 - Orlando, FL

• Tax Planning - Individuals (2 CE); Mastering the Tax Research Process (2 CE); Rental Property Taxation (2 CE)

California Society of Enrolled Agents Super Seminar - June 21-23, 2022

• Tax Planning for Sole Proprietorships (2 CE); California Pass-Through Entity Elective Tax Fundamentals (2 CE)

National Association of Enrolled Agents 2022 Tax Summit - July 26, 2022 - Las Vegas, NV

• Examination Issues for Pass-Through Entities (2 CE); Panel Discussion on Working with the IRS in 2022

National Association of Tax Professionals 2022 Taxposium - July 25-28, 2022 - Las Vegas, NV

• Rolling the Dice: Gambling Tax Issues (2 CE); Ethical Issues in Pricing Tax Engagements (2 CE)