You Make the Call

You Make the Call

​Please note that the question and answer provided does not take into account all options or circumstances possible.

October 19, 2017

Question: A client owns rental cottages and maintains a swimming lake on the property. During the last year, the taxpayer spent time and money creating a dam for the swimming lake, which will help attract new customers. Is the dam a depreciable and what is the class life?

Answer: Yes. The dam is depreciable property as a land improvement. A dam is generally considered a depreciable land improvement under MACRS with a 15-year recovery period under Asset Class 00.3 (Land Improvements) unless described in another asset class [e.g., dams are described in Asset Class 49.11 (Electric Utility Hydraulic Production Plant)]. An earthen dam used by a farmer may qualify as a currently deductible soil and water conservation expenditure.

October 12, 2017

Question: Pat and Betsy are married and have one son, Presley. Presley, age 19, is a full-time student at the local university, and received a non-compensatory taxable scholarship of $8,500. Is Presley’s taxable scholarship subject to kiddie tax?

Answer: Yes. A non-compensatory taxable scholarship is subject to kiddie tax. A non-compensatory taxable scholarship is unearned income and not reported on Form W-2. Scholarship and fellowship income reported on Form W-2 is earned income when the student provided services to earn the income.

October 5, 2017

Question: In 2017, Larry, lost his job and obtained COBRA health insurance in order to maintain his families’ health insurance coverage until he obtained another job. After several months and not obtaining another position as an employee, Larry decided to start his own Schedule C business. Can Larry treat the COBRA premiums paid as self-employed health insurance starting with the creation of his Schedule C business until the end of the tax year?

Answer: Yes. According to FSA 3402, COBRA continuation coverage obtained after a taxpayer leaves employment and paid during the time they are self-employed will not be considered subsidized health insurance and thus is deemed eligible self-employed health insurance deduction on Form 1040, Line 29.

September 28, 2017

Question: Jeremy, a U.S. citizen, accepted a three-year assignment at a research post on Antarctica. Jeremy is single and has no children. He does not own his current residence or any other real property in the U.S. He is giving up the townhouse that he rents and plans to sell any personal property that he does not need before relocating to Antarctica. He will keep virtually no ties to the U.S. and does not intend to come back to the U.S. for more than 14 days each year. Jeremy comes to you for confirmation that he will be able to use the foreign-earned income exclusion to exclude the earned income while stationed in Antarctic. What do you tell him?

Answer: Jeremy's earned income is not eligible for the foreign earned income exclusion. Income eligible for the exclusion must be earned in a foreign country, as defined in Reg. §1.911-2(h). The term "foreign" country includes any territory under the sovereignty of a government other than that of the United States. It includes the territorial waters of the foreign country (determined in accordance with the laws of the United States), the air space over the foreign country, and the seabed and subsoil of those submarine areas that are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources.

Antarctica is not a foreign country because it is not under the sovereignty of any foreign nation. This means that even though Jeremy will be earning income outside the U.S., the earnings are not foreign-earned income for the purposes of the exclusion.

September 21, 2017

Question: During 2016, Elliott and Olivia paid joint estimates. A joint extension, with a payment, was also filed. The 2016 tax returns were filed as married filing separate (MFS). Elliott and Olivia do not have an amicable relationship. On Olivia’s 2016 return, the preparer took half of the extension and estimates payments. Olivia received a notice from the IRS showing no payments were made for 2016. How does the preparer respond?

Answer: The answer is in Reg. §1.6015(b)-1(b), which provides that when a joint declaration of estimated tax is made, but a joint return is not filed for the same tax year, the payments may be treated as being made by either spouse, or may be divided between them in any manner agreeable to them.

However, if the spouses do not agree to a division, the payments are to be allocated to each of them in the ratio of each spouse’s separate tax to the aggregate tax imposed.

Example 1. Elliott’s 2016 tax bill, using MFS filing status, is $16,000; Olivia’s 2016 tax bill, using the same filing status, is $24,000. Their total 2016 estimated tax payments were made jointly and totaled $22,000. They agree to divide the payments evenly. Thus, Elliott and Olivia can each apply $11,000 of the payments to their 2016 tax bills.

Example 2. The facts are the same as in Example 1, except that Elliott and Olivia do not agree on an allocation ratio. Thus, under Reg. §1.6015(b)-1(b), 40% ($16,000/$40,000) of the $22,000 total payment, or $8,800, applies to Elliott; 60% ($24,000/$40,000), or $13,200, applies to Olivia.

September 14, 2017

Question: Samantha received a Form 1099-A, Acquisition or Abandonment of Secured Property, in 2017 reporting the foreclosure of her principal residence. The debt outstanding was $130,000, the FMV was only $110,000, and her adjusted basis in the home was $150,000 at the time of foreclosure. She was personally liable for the debt, but didn’t receive a Form 1099-C, Cancellation of Debt, for 2017. Does Samantha have to report anything on her 2017 Form 1040, U.S. Individual Income Tax Return?

Answer: Yes. Samantha must report the deemed sale of her principal residence on Form 8949, Sales and Other Dispositions of Capital Assets. Her basis is $150,000 (obtained from client’s records, not Form 1099-A since the lender is not responsible to keep track of basis) and the sales price is $110,000 (the lesser of the debt outstanding or the FMV because she was personally liable). Thus, she has a $40,000 (110,000 – 150,000) nondeductible loss on sale because it was personal use property. Samantha still owes $20,000 (130,000 – 110,000) of the debt outstanding since $110,000 was satisfied when the bank took the home. However, she does not have any cancellation of debt income to report on her 2017 return since the remaining debt was not canceled in 2017.

September 7, 2017

Question: The taxpayers have been funding a §529 qualified tuition plan (QTP) for their child. Recently they learned the child has autism and severe learning disabilities that will prevent attendance at any post-secondary educational facility. The taxpayers have established an ABLE account for the child. They would like to rollover the money from the §529 QTP to the ABLE account. Can this be done tax-free within the 60-day rollover period?

Answer: No, the §529 QTP cannot be rolled over to an ABLE account tax-free. The reason is because the distribution from the §529 QTP would not be for qualified higher education costs as required [Preamble to Prop Reg., 6/19/2015].

The earnings portion of the distribution from the §529 plan is taxable, to the extent not used for qualified higher education expenses to the taxpayer who receives the Form 1099-Q. Who receives the Form 1099-Q depends on how the funds are distributed from the §529 plan. When funds are paid directly to the educational facility, the beneficiary will receive the Form 1099-Q and will be liable for reporting the taxable portion. However, if the account owner takes a distribution directly, he or she will receive the Form 1099-Q and will be liable for reporting the taxable portion.

August 31, 2017

Question: Your clients filed as married filing jointly in 2015. Jill met with you today and would like to change her filing status to head of household on the 2015 return. Bill, her husband, did not live in the same household as Jill in 2015, and she meets the requirements to be considered unmarried for tax purposes. They were neither divorced at the end of the year nor was there a separation agreement in place. Based on state law, they were still legally married on December 31, 2015. Can the 2015 joint return be amended to change Jill’s filing status?

Answer: No. Separate returns replacing the joint return must generally be filed by the unextended due date for either spouse’s return [§1.6013-1(a)(1)]. Head of household (HOH) is considered to be a separate status for filing returns; therefore, Jill is not able to amend the 2015 return to change to head of household status. The exceptions under IRM 21.6.1.4.7 also do not apply as Bill did not forge her signature and they were legally married on December 31, 2015.

August 24, 2017

Question: I filed a Form SS-4, Application for Employer Identification Number, for a business and I put down a calendar year. Is the business locked into that now?

Answer: No. A taxable year of a new taxpayer is adopted by filing its first federal income tax return using that taxable year. The filing of an application for automatic extension of time to file a Federal income tax return (e.g., Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information), the filing of an application for an employer identification number (i.e., Form SS-4, Application for Employer Identification Number), or the payment of estimated taxes, for a particular taxable year do not constitute an adoption of that taxable year [Reg. 1.441-1(c)(1)].

August 17, 2017

Question: A business client has just brought in all the information about the company payroll. Since the business began, payroll was done in-house. Before filing the 3rd quarter Form 941, Employer's Quarterly Federal Tax Return, you discover an error. During preparation, a printed history of payments from the Electronic Federal Tax Payment System® (EFTPS) reflects a double deposit made during the 2nd quarter but not reflected on the 2nd quarter Form 941. Is it possible to correct this mistake on the 3rd quarter payroll report?

Answer: The proper method for correcting an error in a previous quarter is to file Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund. File Form 941-X for the 2nd quarter report to show the overpayment. The overpayment is either applied to the 3rd quarter or refunded. If correct amounts have been deposited for the 3rd quarter, file Form 941-X to claim a refund for the overpayment. Part I, Line 2 is checked and Part II, Line 5d: The claim is for federal income tax, social security tax, Medicare tax, or Additional Medicare Tax that I didn't withhold from employee wages.

August 10, 2017

Question: Robert purchased shares in a solar farm where he will receive a credit on his electric bill. The solar energy will generate electricity for use in a dwelling unit that is used as a residence by Robert. Can he use the purchase of the shares as a qualified expense for the energy credit?

Answer: Yes. Solar panels not directly located on the taxpayer's home (off-site community solar arrays) still qualify as long as they use solar energy to generate electricity directly for the taxpayer's home (Notice 2013-70, Q&A 25).

The credit will be limited since he is selling some of the electricity to the solar farm (Notice 2013-70, Q&A 26 and 27).

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