You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
January, 16, 2020
Question: Bernard, a returning client, presented Form 1099-MISC, Miscellaneous Income, with his tax documents this year. The form was issued by the same business that had in the past issued Form W-2, Wage and Tax Statement, for Bernard’s services as a seasonal farm worker. After asking the client a few questions, you have determined the business incorrectly issued Form 1099-MISC. Will Bernard be subject to self-employment tax on the income or is there another option?
Answer: There is another option, but first Bernard is responsible for his share of unpaid FICA taxes (6.2% Social Security and 1.45% Medicare taxes). File Form 8919, Uncollected Social Security and Medicare Tax on Wages, with his income tax return. By filing Form 8919, Bernard’s earnings are credited to his social security record. Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is filed separately to request a worker classification by the IRS. The IRS will contact the business.
January, 9, 2020
Question: Barb received a Form 1099-A for a foreclosed rental property. On the Form 1099-A, Box 5 was checked, Box 2 was $22,000, and Box 4 was $2.5 million. How does Barb report this form on her income tax return?
Answer: The Form 1099-A is reported as a deemed sale of the foreclosed property. The sale of a rental property is reported on Form 4797. Since Box 5 was checked that the borrower was personally liable for repayment of the debt, the sales price is the lower of Box 2, Balance of Principal Outstanding, or Box 4, FMV of Property. However, in this case it looks like maybe Box 2 does not reflect all the mortgages on the property since it is smaller than the FMV of the property reported in Box 4.
After discussing the information with Barb, she explained that she has a second mortgage on the property at a different financial institution for $2.6 million that was not reflected on the Form 1099-A she received. Therefore, Barb should add the Form 1099-A, Box 2 amount to the $2.6 million to determine the sales price to report on the Form 4797. In this case the $2.5 million reported in Box 4 would be used as the sales price against her adjusted basis in the rental since it is the lower amount.
January, 2, 2020
Question: Genco, a C corporation, had a tough year and had to file Chapter 7 bankruptcy. Under title 11 of the bankruptcy statute, a bankruptcy trustee is required to file Form 1120 for Genco for the year of discharge. Genco’s shareholders are concerned that the corporation will be required to obtain a new EIN due to filing under Chapter 7 bankruptcy. Is Genco required to obtain a new EIN if the corporation does not liquidate in bankruptcy?
Answer: No. A corporation that declares bankruptcy is not required to obtain a new EIN. The corporation will continue to file a Form 1120 with the EIN that was obtained when the corporation was created.
December 26, 2019
Question: Your client Sue and her friend purchased a home together in 2019. They each own 50% of the home and are both jointly liable for the home’s $1 million mortgage. They want to know if the $750,000 debt limit for qualified residence interest applies per owner because owners are not married, or if the limit applies per residence. They each want to deduct the interest on $500,000 of indebtedness on their respective returns. What do you tell them?
Answer: Since 2016, the IRS has agreed to follow a 9th Circuit decision that the qualified residence interest limitation applies per taxpayer for unmarried individuals. For 2018 – 2025, the limitation is $750,000 per taxpayer. As such, interest on as much as $1.5 million of qualified residence indebtedness could be deducted with each co-owner deducting one-half on their respective returns.
This has not always been the case, however. In 2009, the IRS ruled in CCA 200911007 that the limit applied per residence.
December 19, 2019
Question: Hailey sold a commercial building in 2018 and is receiving payments over five years. She elected out of the installment method and reported the entire gain on her 2018 tax return. In 2019, she decided it would have been better if she reported the gain over 5 years. Can she amend her 2018 tax return and file Form 6252, Installment Sale Income, to report the gain under the installment method?
Answer: No. Hailey elected out of using the installment method by reporting all the gain in the year of sale. The election out of the installment method is only revocable with IRS consent [§453(d)(3)]. Thus, Hailey cannot amend her 2018 tax return and file Form 6252 to report the gain on sale under the installment method.
December 12, 2019
Question: Madeline lived abroad the entire year and meets the bona fide resident test. She is self-employed and has gross income of $100,000 of which $10,000 is U.S. sourced. She also has total business expenses of $40,000 of which $5,000 relates to the U.S. earnings.
For 2019, the foreign earned income exclusion is $105,900. Can Madeline exclude the entire amount of her earnings while living abroad or must she adjust for the U.S. sourced income?
Answer: She must adjust for the U.S. sourced income.
In this case, $100,000 gross income - $10,000 U.S. sourced income = $90,000 foreign sourced income eligible for the exclusion. Additionally, the expenses are also prorated. Of the total expenses of $40,000, only $35,000 are foreign sourced ($40,000 total - $5,000 U.S. sourced). Therefore, the taxpayer will exclude a net $55,000 ($90,000 - $35,000) as foreign sourced income. The remaining $5,000 net income, U.S. sourced ($10,000 U.S. sourced income - $5,000 U.S. sourced expenses) is U.S. taxable income.
If Madeline also paid foreign taxes on the $5,000 of U.S. sourced net income, she would be eligible to use Form 1116, Foreign Tax Credit, to claim a foreign tax credit or deduction, whichever is more appropriate.
December 5, 2019
Question: Lisa wants to complete a qualified charitable distribution (QCD) from her traditional IRA. If she contributes the money to a 501(c)3 education fund, she will receive a state tax credit of 50%. If she completes this transaction, will this reduce her federal charitable deduction amount? Does this transaction require the tax-free QCD to be reduced because of the state tax credit?
Answer: The qualified charitable distribution does not qualify as a federal charitable deduction on Form 1040 Schedule A. Under §408(d)(8), the qualified charitable distribution allows the taxable income distribution from her traditional IRA to be tax-free because the money is donated to a charity. She will not receive a federal charitable deduction for this donation because this would be considered a double deduction.
No reduction to the tax-free QCD is required. Under §170, the state tax credit was not given by the charity, so this is not a quid pro quo scenario requiring reduction of the tax-free amount for the QCD.
November 27, 2019
Question: Helen Nelson decided to run for a political office in her local community. For her campaign, she incurred the following expenses totaling $1,570 that she personally paid: $930 printing, yard signs $260, and $380 postage and mailings. Are these allowable deductions on her tax return?
Answer: No. The campaign expenses are not allowable deductions on Helen’s tax return. Taxpayers are normally allowed a deduction for ordinary and necessary business expenses. However, such political expenditures are generally not deductible as trade or business expenses. Under §162(e)(1)(B), no deduction is allowed for political expenditures and lobbying expenses, including amounts paid or incurred in connection with any political campaign on behalf of (or in opposition to) any candidate for public office. Under Reg. §1.276-1(f)(2), a political candidate is a person who, at the time of the event or publication with respect to which the deduction is being sought, has been selected or nominated by a political party for any elective office. It also includes an individual who is generally believed, under the facts and circumstances at the time of the event or publication, by the persons making expenditures in connection therewith to be an individual who is or who in the reasonably foreseeable future will be seeking selection, nomination, or election to any public office.
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