You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
January 17, 2019
Question: Martha’s daughter Rosie is 12-years-old. Martha is self-employed and files a Schedule C. Martha wants to employ her daughter and not pay FICA and Medicare tax on the wages. Can she do this?
Answer: Yes. The mother can pay Rosie a reasonable wage. A family business may be operated as a sole proprietorship (when income and expenses are reported by the sole proprietor on Schedule C of Form 1040). Another family member's employee service for the family's sole proprietorship may be considered exempt employment for FICA and/or FUTA purposes. Service performed by a child under 18 employed by a parent is exempt for FICA purposes [IRC Sec. 3121(b)(3)(A)]. A similar rule applies for FUTA purposes except that the age limit is increased to under 21 [IRC Sec. 3306(c)(5)].
January 10, 2019
Question: Your client comes to you with questions regarding the new §199A deduction or pass-through deduction. He is a shareholder in an S corporation who files on a fiscal year that ends on May 31 each year.
The S corporation filed its 2017 Form 1120S timely and issued a Schedule K-1 for the fiscal year ending on May 31, 2018, which he must include on his 2018 individual return. The business operates a trade or business that generates qualified business income (QBI) for purposes of the new qualified business income deduction (QBID).
This new code section, however, went into effect for tax years beginning on Jan. 1, 2018. Your client is anxious to understand whether a shareholder who receives a 2017 Schedule K-1 for a tax year ending after the effective date for the QBID is able to claim the QBID, assuming he otherwise qualifies to claim the deduction in terms of income limitations, and so on. What do you tell him?
Answer: The fact that the tax year for the S corporation began in 2017 does not prevent the shareholder filing his 2018 individual tax return from claiming the QBID. The QBI is not prorated either to include only QBI that occurred in 2018. According to Prop. Reg. §1.199A-1(f)(2), a taxpayer is permitted to take a full §199A deduction related to a fiscal-year qualified business whose tax year includes Jan. 1, 2018.
Therefore, on the client’s 2018 individual return, he can claim the §199A deduction for the QBI earned by the S corporation for its tax year beginning June 1, 2017, and ending May 31, 2018.
Note: The facts in this question strictly center around what happens when a pass-through entity operates on a fiscal year that straddles the effective date of the new QBID. It is not intended to focus on the qualifications to claim the QBID. The assumption is that the client qualifies to claim the QBID.
January 4, 2019
Question: Paul and Liz bought a home in California in 2011 for $750,000 and used it as their principal residence through June 30, 2016. They moved from California to South Carolina, so they decided to convert the property to a residential rental when it was worth $700,000. After renting it out for two years, they sold it in October 2018 for $650,000. They claimed $40,000 of depreciation while it was a rental. Can they claim a loss on the sale of this property? If so, how much can they deduct?
Answer: Paul and Liz can claim a loss attributable to the period it was rented out. In general, the basis of a converted personal residence for purposes of reporting a loss on sale is the lesser of: the original cost basis, or the FMV at the time it was converted to a rental, reduced by depreciation allowed or allowable [Reg. §1.165-9(b)(2)]. Thus, the basis for computing Paul and Liz’s loss on sale is $660,000 (lower of $750,000 or $700,000 less $40,000 depreciation). They can claim a loss of $10,000 ($650,000 sales price - $660,000 adjusted basis). The $50,000 decline in value while it was used as a personal residence is not deductible.
December 27, 2018
Question: The taxpayer gifted his daughter an apartment building. However, he is going to continue receiving the income from the property for the balance of his life. Is this a completed gift requiring the taxpayer to file Form 709,
United States Gift (and Generation-Skipping Transfer) Tax Return.
Answer: Yes. Because the taxpayer will continue to receive income from the property, he has created a life estate in the property. It is a completed gift of a remainder interest in the property to the daughter.
The father will file Form 709 for the value of the remainder interest in the property only. At the father’s passing, because he retained the right to the income from the apartment building for life, the fair market value of the entire property, as of the date of death, is included in his gross estate. The value of the building is reported on Schedule G, item B [§2036].
December 20, 2018
Question: Mom passed away and after dealing with probate and other legal issues, her husband David decided he would simplify the situation for their children when he passes away. David decided to add his daughter, Bonnie, to his bank account so that it becomes a joint bank account. When David needs something, Bonnie will purchase it for him and pay for it from the joint bank account or withdraw money to reimburse herself.
Unfortunately, Bonnie is having some financial challenges and David told her she could take $20,000 from the joint account. No bona fide loan is made and the plan is for Bonnie to settle up with her siblings when David passes away. She never added any contributions to the joint bank account and there is no intent to add any in the future. Do any of these transactions have any tax reporting consequences either before or after David passes away?
Answer: Before David passes away, none of the transactions from the joint bank account for David’s benefit are reportable to the IRS. The $20,000 that Bonnie withdrew from the joint bank account for her own personal benefit prior to David’s passing is a reportable gift on Form 709, United
States Gift (and Generation-Skipping Transfer) Tax Return.
A gift to Bonnie from David did not occur when the joint bank account was created because David could revoke it at any time. However, when Bonnie makes a withdrawal for her personal benefit then that amount becomes a gift from David because Bonnie did not contribute anything to the account and there was no consideration given for receiving the $20,000. When David passes away, the remaining balance in the joint bank account must be included in his gross estate.
December 12, 2018
Question: During 2018, Andrew filed his 2015 Form 1040 and mailed in a partial payment with the return. In the memo section of the check, Andrew wrote his social security number and labeled the payment “2015 Form 1040.” Andrew has an IRS payment plan in place for prior years and was making payments under the payment plan agreement. The IRS applied the 2015 payment to the prior year’s liability, not the 2015 liability. Can the IRS do this?
Answer: Yes, there is no code section that specifically states the remittance is a payment of tax for the year specified on the check. However, the taxpayer's intent in making a remittance is a crucial factor in determining whether the remittance is a payment of tax or a deposit.
The Code specifically provides that the following types of remittances are always payments of tax:
- Taxes withheld from wages,
- Estimated tax payments, and
- Taxes withheld at the source on a foreign taxpayer's income.
For all other remittances, the Code provides no rules, so the courts have come up with their own rules. The courts have often looked to the following three factors in determining whether a remittance was a payment: (1) the taxpayer's intent in making the remittance; (2) how the IRS treated the remittance and (3) when the IRS assessed the tax to which the remittance relates.
December 6, 2018
Question: Maria and Jose have three children: Alex, age 10, Gabriella, age 12, and Juan, age 17. Both Maria and Jose have full time jobs. They understand that they are eligible for the child tax credit for both Alex and Gabriella; however, they don’t know if they will receive a tax benefit for Juan. What would you tell the couple?
Answer: Jose and Maria can claim the other dependent credit for Juan. Taxpayers are allowed a $500 credit for dependents who are not eligible for the child tax credit [§24(h)(4)(A)].
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