|       |    Find a Tax Pro
Tax Information

You Make the Call

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

March 23, 2017

Question: Joe sold rental real estate for $300,000. He had an adjusted basis in the property of $100,000. After Joe deposited the money into his bank account, he subsequently purchased rental real estate property for $350,000. What is Joe’s basis in the purchased property?

Answer: $350,000. Joe received cash proceeds upon the sale of the first property, which resulted in $200,000 of recognized gain. The subsequent purchase is simply a purchase. While the real estate Joe sold and purchased is otherwise qualifying property, it does not qualify as a like-kind exchange because he first received cash. Had he utilized a qualified intermediary—and the transaction qualified as a like-kind exchange—the adjusted basis would have been $150,000 ($350,000 purchase - $200,000 deferred gain).

March 16, 2017

Question: The sole shareholder of an S corporation is going to sell all his stock to an unrelated individual who is otherwise an eligible S corporation shareholder on June 30, 2017. Is the S corporation required to file a short-year return?

Answer: No. An S corporation does not terminate when the stock is sold from one eligible shareholder to another. A corporation, including an S corporation, is an entity that continues to exist, despite the change in ownership, and its tax filing is unaffected by the sale of stock. The shareholders may, however, elect under §1377 to “close the books” of the S corporation to report the first six months of operation to the seller and the latter six months to the buyer. Otherwise, the general rule for an S corporation is that the income and loss must be reported by each shareholder on a per-share-per-day calculation. In this case, the general rule would render a 50/50 allocation to each shareholder due to the sale in the middle of the year, regardless of when the income or loss occurred.

March 9, 2017

Question: Lloyd’s IRA was invested in a Ponzi scheme. Lloyd made deductible and nondeductible contributions to this IRA; he doesn’t have any other IRAs. Can he claim a theft loss on his personal income tax return?

Answer: Unfortunately, Lloyd cannot claim a theft loss on his personal income tax return because it's an economic loss within a tax-deferred IRA. Lloyd cannot claim a loss for amounts he deducted or excluded from gross income. However, Lloyd can take a miscellaneous itemized deduction, subject to the 2% of AGI limit, to the extent he has unrecovered basis after the distribution of his entire interest in the IRA (INFO 2010-0234).

March 2, 2017

Question: Adam and Sara are married and have a 3-year-old son, Kyle. Both Adam and Sara work and they hired Sara’s father, Fred, to babysit for Kyle and do household work, such as landscaping and floor washing. They paid Fred a total of $8,000 for the year, withheld no taxes and had no other household employees. Will Adam and Sara need to file Schedule H and provide Form W-2 to Fred for the year?

Answer: No. Schedule H and Form W-2 only need to be filed if the household employee is subject to social security and Medicare taxes and/or had federal taxes withheld. In this case, Fred being a parent meets the exceptions (below) and is therefore not subject to employment taxes. Adam and Sara will not need to file Schedule H or Form W-2 with regards to Fred because he was not subject to employment tax withholding and he did not have any federal taxes withheld.

The exception rules state if the household employee is your spouse, your child under age 21, your parent or an employee under the age of 18 at any time during the year and none of the following apply, then you do not have to withhold or pay employment taxes.

  1. Your child is under 18 and lives with you or had a physical or mental condition that requires personal care of an adult for at least four continuous weeks during the calendar quarter in which the services are performed.
  2. You were divorced and not remarried, a widow(er) or married to and living with a person whose physical or mental condition prevents him or her from caring for the child during the four-week period of time.

Additionally, if the questions on lines A, B and C on Schedule H are answered no, Schedule H will not need filing.

However, Fred is still obligated to pay federal and state (if applicable) taxes on the earnings. To do so, report the amount on Form 1040, Line 7, with HSH on the dotted line next to line 7. This is very much like reporting a taxable scholarship. See Form 1040 instructions for Line 7. When the exceptions do not apply, taxpayers paying more than $2,000 to a household employee will need to withhold and pay FICA and Medicare employment taxes, file Schedule H and file Form W-2.

February 23, 2017

Question: Aunt Sally’s estate contained both recourse and nonrecourse debt on real properties. You are preparing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Are the recourse and nonrecourse debts reported the same way on Schedule A, Real Estate?

Answer: No. The full value of the properties subject to recourse debt would be reported on Schedule A, with the amount of the liabilities included on Schedule K, Mortgages and Liens. Only the equity (FMV less outstanding debt) of the properties subject to nonrecourse debt would be reported on Schedule A [Reg. §20.2053-7].

February 16, 2017

Question: A taxpayer called and asked if he needed to save receipts for the year because he had heard that Congress passed a $42.4 billion rebate program on purchases made in 2016. Is this true?

Answer: With the 2015 PATH Act, Congress did make the option to claim a state and local general sales tax deduction permanent. Therefore, taxpayers who would benefit from claiming an itemized deduction for state and local general sales taxes rather than state and local income taxes can elect to do so on Schedule A, Itemized Deductions. Saving receipts to prove purchases would only be necessary when a taxpayer uses the actual expense method or for large purchases allowed in addition to the applicable amount obtained from the optional sales tax tables.

February 9, 2017

Question: A client owns a small resale shop downtown. Over the past year, the owner paid independent contractors for minor repairs, window washing and snow removal. The payments were made using a combination of either cash, check or credit card. As the accountant issuing Forms 1099-MISC, do you include the amounts paid by credit card with the cash and check payments to these independent contractors?

Answer: According to the 2016 Instructions for Form 1099-MISC, no. The instructions specifically state the payment settlement entity is the responsible party for reporting such payments using Form 1099-K, Payment Card and Third Party Network Transactions. Some accounting software has integrated these instructions so that a company using the software in real time, meaning the bookkeeper tracks all payments live, cannot include the credit card payments in a report for independent contractors. If the client did not track how payments were made, either by cash, check or credit card, a thorough reconciliation of the bank and credit card statements should provide this information.

February 2, 2017

Question: What are the procedures when an employee loses his/her Form W-2?

Answer: An employer who provides a new Form W-2 to an employee who has lost or destroyed his/her original form should mark the new Form W-2 "Reissued Statement." A copy of the reissued statement should not be filed with the Social Security Administration.

Per IRS Service Center Advice 1997-013, the employer is permitted to charge a fee for the replacement W-2.

It would be a good idea that the request be in writing.

January 26, 2017

Question: Jamal owns a residential rental investment property. This year he paid a landscaping company $750 to plow the parking lot during the winter months. Is Jamal required to issue a Form 1099-MISC to the landscaping company because he paid them more than $600 during the year?

Answer: No. Because Jamal is not in a real estate trade or business, a payment of $600 or more is not required to be reported on a Form 1099-MISC to the landscaping company. Section 6041(h) requiring reporting for all payments for rental property expenses of $600 or more was repealed under §3(a) of the 2011 Taxpayer Protection Act. Jamal can deduct the $750 paid in the current year; no Form 1099-MISC is required. The 2011 Taxpayer Protection Act retroactively repealed §6041(h), which had been enacted by the 2010 Small Business Jobs Act.

January 19, 2017

Question: Adam is 21 years old and attended college full-time all year in 2016. His qualified tuition and related expenses were $6,000 and his room and board was about $9,000. In 2016, Adam received a $4,200 Pell Grant and his parents paid the remaining $10,800. The college applied the grant against the tuition and related expenses. Adam’s Form 1098-T reflects $6,000 in Box 1, Payments received for qualified tuition and related expenses, and it reflects $4,200 in Box 5, Scholarships or grants. Assuming Adam’s parents are within AGI limits, can they claim the maximum $2,500 of American Opportunity Tax Credit (AOTC) in this fact set?

Answer: Yes, it is possible. Typically, in this fact set the scholarship is tax-free to the student because it is offset by qualified tuition and related expenses (QTRE) and the balance of QTRE, $1,800 ($6,000 - $4,200), is all that is left to claim the AOTC. This would yield only a $1,800 AOTC. Adam’s parents need QTRE of $4,000 to claim the full $2,500 [$2,000 + ($2,000 x .25)] AOTC.

However, according to Treasury Fact Sheet 20151109, students are free to treat their Pell Grants as paying for QTRE or living expenses under current law. Therefore, Adam is free to allocate $2,200 of the Pell Grant as payment of room and board, and the remaining $2,000 of the grant as payment of QTRE. He can do this regardless of how the institution applied the grant monies. This means that Adam must pick up the $2,200 as taxable income on his personal return. Allocating the $2,000 to Adam’s QTRE leaves $4,000 ($6,000 - $2,000) remaining for his parents to use to claim the maximum AOTC.

January 12, 2017

Question: Jerome is a tax professional who electronically files tax returns. He has a long-time client who is divorced. Per the divorce decree, the taxpayer is allowed to claim his son as a dependent every other year. However, for many years, his ex-spouse filed her tax return first and claimed their son, despite the divorce decree or signing Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. Jerome’s client simply never challenged it because he didn’t want to deal with the hassle of filing a paper tax return or going to family court again. This year, once again, it’s the taxpayer’s turn to claim the child. He approaches Jerome on January 3 and asks, “Can I file my tax return without waiting for my Form W-2, Wage and Tax Statement, in order to claim my son before my ex-spouse does?” What can Jerome say?

Answer: Since Jerome participates in the IRS’ electronic filing program as an electronic return originator (ERO), he cannot file the tax return before receiving Form W-2 (Pub. 1345, page 24). Jerome should make this clear to his client and suggest that they wait to file until they receive Form W-2, electronically file the tax return without claiming his son if the ex-spouse claims the child and then file an amended tax return immediately providing additional documentation to state that he is allowed to claim his son for the current tax year. While the IRS may not process the amended return as fast as an original tax return, he will at least receive the refund he is otherwise entitled to in the meantime without claiming the son and obtain the remaining amount at a later date.

Have a question that needs an answer? Contact our Research team!

Members must be logged in to access:

All 2017 You Make the Calls
All 2016 You Make the Calls
All 2015 You Make the Calls
All 2014 You Make the Calls
All 2013 You Make the Calls
All 2012 You Make the Calls
All 2011 You Make the Calls
All 2010 You Make the Calls

eweb keepalive image