Please note that the question and answer provided does not take into account all options or circumstances possible.
This week's question is brought to you by Sheri Fronsee, CPA, from our Tax Knowledge Center.
November 26, 2014
Question: Delaney owns a business where she uses the services of several independent contractors. In addition to paying the contractors for their services, she also reimburses them for travel and meals while working. Her company has an accountable plan and the contractors submit expense reports with receipts and documentation for their reimbursable expenses. Does she have to include the reimbursed expenses on Form 1099-MISC at the end of the year?
Answer: No. Provided there is an accountable plan in place and the contractors adequately account to the company for business expenses, the company should not report the expense reimbursements on Form 1099-MISC. Delaney will be able to deduct the reimbursements as business expenses with meals and entertainment being subject to the 50% limitations [Reg. 1.274-2(f)(2)(iv)(C)(2)].
However, if the contractors are not required to adequately account to the company, the company has a nonaccountable and plan the reimbursements would be included on Form 1099-MISC. In this case the company deducts the expense reimbursements and the fees paid for services in full as non-employee compensation. The company’s reimbursements for meals and entertainment would not be subject to the 50% limitations. All record keeping responsibilities fall to the contractor in this case and he or she is subject to the 50% limitation on meals and entertainment deductions [Reg. 1.274-2(f)(2)(iv)(C)(1)].
November 20, 2014
Question: The client has been hearing information about the 2014 individual shared responsibility penalty for those who do not have health insurance coverage all year. He’s heard that for 2014 the maximum penalty is $95 per month. Has the client received the correct information?
Answer: No. The $95 penalty is per year but only if that amount is less than 1% of household income. For 2014, the annual penalty payment amount is the greater of:
- One percent of your household income that is above the tax return filing threshold for your filing status; or
- Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285, but capped at the cost of the national average premium for a bronze-level health plan available through the Marketplace in 2014.
For 2014, the annual national average premium for a bronze-level health plan available through the Marketplace is $2,448 per individual ($204 per month per individual), but $12,240 for a family with five or more members ($1,020 per month for a family with five or more members).
A worksheet to determine the penalty can be found in the instructions for Form 8965,
Health Coverage Exemptions.
November 13, 2014
Question: Amanda walks into your office and asks you if a person over age 70½ who’s taking required minimum distributions (RMDs) from an IRA can have it paid directly to her church and completely avoid paying federal income taxes on the withdrawal for 2014. What do you tell her?
Answer: Before 2014, eligible taxpayers (70½ and older) could donate up to $100,000 to qualified charities and exclude such amount from gross income. This was called a qualified charitable distribution, which counted as a distribution for purposes of the taxpayer’s required minimum distribution. Unfortunately, the provision for qualified charitable distributions expired at the end of 2013. Unless this provision is extended, taxpayers can no longer make qualified charitable distributions for 2014 and beyond.
November 6, 2014
Question: Your self-employed client would like to establish a SEP in his sole proprietorship. He went to the bank to open a SEP-IRA and was told he cannot open an IRA and contribute since he is over age 70½. Is this true?
Answer: This is not true for a SEP-IRA. According to §219(b)(2), the rule that disallows IRA contributions after an individual turns age 70½ does not apply to SEP-IRA contributions. Publication 560,
Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans), is very clear in its explanation, it says, “unlike regular contributions to a traditional IRA, contributions under a SEP-IRA can be made to participants over age 70½. If you are self-employed, you can also make contributions under the SEP-IRA for yourself even if you are over 70½.” Pub. 560 also explains the only caveat, which is that “participants age 70½ or over must take required minimum distributions” as well.
October 30, 2014
Question: Carl owns a commercial rental property that he no longer wants. If he sold the building there would be a $150,000 taxable gain. Instead of selling the building, his realtor suggests a §1031 like-kind exchange for a residential rental property to defer the gain. The realtor further suggests that he should only rent it out for a year or so, then move in and treat it as a personal residence. By doing this the realtor insists that the deferred gain of $150,000 on the §1031 like-kind exchange would be excluded under §121 once Carl lives in the home as a principal residence for two years. Is the realtor correct?
Answer: Yes and no. Some of the gain may be excluded, but not all of it. Carl can exchange the commercial rental for a residential rental and defer the $150,000 gain. However, if he plans on using the §121 exclusion by converting the rental to a personal residence there are three issues.
- Carl must own the property for at least five years from the date of acquisition and he must live in it personally two of those five years.
- Depreciation taken during the period of rental use is not excluded.
- Since the property was acquired after December 31, 2008, and started out as a rental, the property is “tainted” with nonqualified use. Any gain would have to be allocated between qualified and nonqualified use. Only gain allocated to qualified use can be excluded while gain relating to nonqualified use is not excluded.
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