Please note that the question and answer provided does not take into account all options or circumstances possible.
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 22.214.171.124.7 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).
August 3, 2017
Question: Joe is the sole shareholder of an S corporation. The S corporation obtained a loan, but required Joe to guarantee the loan. The S corporation passed through losses that depleted Joe’s stock basis and you advise him that the losses in excess of the stock basis need to be suspended until his stock basis increases through additional contributions to the corporation or because of pass-through income. Joe argues that because he guaranteed the S corporation’s loan that this gives him additional basis to take the losses in excess of his stock basis. Is Joe correct?
Answer: No, a shareholder can only deduct pass-through losses to the extent of stock basis and to the extent the shareholder loaned funds to the corporation. The shareholder may not deduct losses, however, to the extent of the S corporation’s debt even if the shareholder guarantees the loan. This is because only when the S corporation defaults is the shareholder ultimately liable for repayment.
According to §1366(d)(1)(B) the shareholder only receives loan basis when using his own funds for which he is ultimately responsible, such as borrowing the funds personally from the bank.
The shareholder who borrowed the funds personally can in turn enter into a bona fide loan agreement with the S corporation. The S corporation makes payments on the loan directly to the shareholder and the shareholder makes payment on his personal loan. When structured in this manner, the shareholder has loan basis to claim losses.
July 27, 2017
Question: Patrick is an over the road truck driver. He is away from home 27 days and then home 3 days each month. He is a W-2 employee, and his employer does not offer him a per diem or reimbursement for the meals that he eats while away from home. He brings his tax preparer his meal receipts for the year totaling $11,000. He wants to claim the entire $11,000 on his income tax return. How do you explain the allowable deduction to him?
Answer: Truck drivers who are subject to the hours of service limitations can claim a meals and entertainment deduction of 80% of either the actual cost or the per-diem allowance for meals and entertainment. However, since Patrick is an employee, his allowable deduction is claimed on Form 2106,
Employee Business Expense, and is further limited by 2% of his adjusted gross income, and on Form 1040,
July 20, 2017
Question: The client's child was born in March 2015. No social security number was issued until 2016.The IRS rejected the 2015 amended return claiming the child tax credit. The client is in the military and applied on time but wasn’t issued the number in a timely manner due to processing constraints. Did the IRS properly reject the 2015 amendment?
Answer: Yes. The 2015 PATH Act made several changes to the tax law, including preventing retroactive claims of the EITC, CTC and AOTC by amending a return or filing an original return for any earlier year in which the individual or anyone listed on the return did not have a SSN valid for employment. You can't claim EITC, CTC or AOTC unless the social security number for you, your spouse (if married filing a joint return) or a qualifying child is issued before the due date of the return including any valid extensions.
July 13, 2017
Question: Troy, a U.S. citizen, lived and worked in Michigan during 2016. His wife, a nonresident alien, lived in Canada all year with their daughter, Gabriella, who is 10 and has no income. Troy’s wife worked part-time in Canada, and didn’t have any U.S. gross income. Can Troy claim his daughter as a dependent on his U.S income tax return?
Answer: It depends. Troy can claim his daughter as a dependent if she is a qualifying child or a qualifying relative. Gabriella is not his qualifying child because she did not live with him for more than half the year and fails the residency test. However, Gabriella may be his qualifying relative if she is not a qualifying child of any other taxpayer, he provides more than half her total support, and her gross income does not exceed $4,050 for 2016. In general, Gabriella meets the tests to be a qualifying child of her mom. However, there is an exception to this general rule. If the person the child lives with is not a U.S. citizen and has no U.S. gross income, the child is not the qualifying child of any other taxpayer. Thus, Gabriella is Troy’s qualifying relative and can be claimed as his dependent if he provided more than half her total support.
July 6, 2017
Question: A taxpayer works at a furniture store as an employee. She received an incentive award or spiff from the furniture manufacturer that was reported to her on Form 1099-MISC. How does she report this on her tax return?
Answer: The spiff or incentive award is reported on Form 1040, Line 21, not subject to self-employment taxes. A spiff or spiv is an immediate bonus for a sale paid by a manufacturer or employer directly to the salesperson for selling a specific product. These are most prevalent in the automotive industry.
This link to the IRS website is a brief two page document on reporting incentive payments in the automotive industry:
Fun history on the spiff payment from Wikipedia: An early reference to a spiff can be found in a slang dictionary of 1859; "The percentage allowed by drapers to their young men when they effect sale of old-fashioned or undesirable stock." An article in the Pall Mall Gazette of 1890 on the practices in London shops used the term as follows:
a "spiff" system is usually adopted, spiffs being premiums placed on certain articles, not of the last fashion, indicated by a marvelous hieroglyphic put on the price ticket. These marks are well known by the assistant, and the almost invisible mystic sign explains why an article, wholly unsuitable, is foisted on the jaded customer as "just the thing."
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