You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
May 24, 2018
Question: Mom owned a rental property for many years. Some years she had a profit and other years she reported losses. She has decided to gift the rental property to her daughter, Ann. At the time of the gift, her basis was $100,000, the FMV was $150,000 and she had $65,000 in suspended passive losses. What happens to those suspended losses when Mom gifts the rental property to Ann?
Answer: Suspended passive losses are treated differently for a gift transfer than when disposed of in a fully taxable transaction to an unrelated party. When Mom gifts her interest in the passive rental activity to Ann, her suspended passive losses are added to the basis in the rental property. Under §469(j)(6), this increase to basis is deemed to occur immediately before the gift. Therefore, Ann’s basis is $165,000.
May 17, 2018
Question: Is an employer required to make a SEP contribution on behalf of an eligible employee who died during the year?
Answer: Yes. Employers must contribute on behalf of all employees who met SEP eligibility requirements under §408(k)(2) during the year for which a contribution is made, including those individuals who are no longer employed by the employer on the SEP contribution date. Although the IRS recognizes that this may present difficulties under certain circumstances, employers must contribute on behalf of those employees, including deceased employees and employees whose whereabouts are unknown. If the individual either had not previously established an IRA or had established one but had closed it before the employer's SEP contribution date for a particular year, the employer must establish an IRA on behalf of that employee [Prop. Reg. § 1.408-7(d)(2)].
May 10, 2018
Question: Chelsea, age 30, lives with her parents. Chelsea earned $5,000 during the year but her parents provided more than half of her support. This past year Chelsea needed a medical procedure and her parents paid the out-of-pocket medical costs. Can they claim the medical expenses paid on behalf of Chelsea on their return?
Answer: Yes. While Chelsea is not a dependent under §152, the gross income test under §213(a) is disregarded when determining a medical dependent. Because Chelsea is a qualified relative and her parents provided over half of her support, they can claim the medical expenses they paid for Chelsea on their return.
May 3, 2018
Question: George owns and operates a manufacturing business. As a condition for obtaining a business loan, the lender requires George to take out an insurance policy on his life to cover the debt in the event of his death. Because this is a business debt, are the premiums deductible as a business expense?
Answer: No. Life insurance premiums are not deductible by the insured if he or she is directly or indirectly the beneficiary of the policy. When the lender is the beneficiary of a life insurance policy required as a condition of approving the loan, the debtor/business owner indirectly benefits and cannot deduct the premiums (Reg. §1.264-1).
April 26, 2018
Question: A potential new client scheduled an appointment with you. The taxpayer has not filed tax returns for the last three years. During the initial interview, you notice that in 2015 the taxpayer changed his accounting method from cash to accrual for book accounting. The taxpayer’s average annual gross receipts are less than $5 million and is not required to report income on the accrual method. Can Form 3115 be filed with the 2015 tax return to reflect this change in accounting?
Answer: No. The taxpayer cannot file Form 3115 for the 2015 tax year because the return was not timely filed. The taxpayer is required to use the cash method for 2015, but could file Form 3115 for the current tax year if the return is timely filed. The original Form 3115 (or an electronic version) must be attached to the taxpayer’s timely-filed (including extensions) original federal income tax return implementing the accounting method change for the year of change [Rev Proc 2015-13, Sec. 6.03(1)(a)(i)(A)].
April 19, 2018
Question: Your client lives in a state where medical cannabis is legal. His wife has ALS and has been using medical cannabis to relieve some of the pain, discomfort, and side effects of the disease. Can the cost of the medical cannabis be deducted as a medical expense?
Answer: No. Cannabis used for medicinal purposes is not an allowable medical expense deduction on Schedule A, Itemized Deductions. Amounts paid to get a controlled substance, such as cannabis, for medicinal purposes is in violation of the federal Controlled Substances Act and is not legally procured even if state law permits its use when prescribed by a physician and the taxpayer has a prescription.
April 12, 2018
Question: Jackie purchased a timeshare unit in 2012 for $35,000. She and her family have used it personally as a vacation home since the date of purchase. The property was never rented. In 2017, the property lost value and Jackie decided to allow the lender to repossess the property. She received a Form 1099-A with $6,000 in Box 2 as the balance of principal outstanding and the FMV of $15,000 in Box 4. Box 5 was checked stating that Jackie was personally liable for repayment. Because this was Jackie’s vacation property and she never rented it, is Jackie required to report the repossession?
Answer: Yes. Jackie received a Form 1099-A. The sale of the property is required to be reported on the taxpayer’s return. This is a deemed sale of the property back to the lender. The Form 1099-A indicates that Jackie is personally liable for the debt, thereby making it a recourse debt to Jackie. She will report the deemed sale on her Form 1040 on Form 8949/Schedule D. When the associated debt is recourse debt, the selling price is the lower of the FMV or the balance of principal outstanding. For Jackie, the selling price is $6,000 because this amount is less than the FMV. The cost basis in the property will be the amount paid in 2012 of $35,000. Since the deemed selling price is less than her basis, Jackie will have a loss. However, the loss is from a personal use asset and is nondeductible under Reg. §1.165-9(a). Report the sale or exchange on Form 8949 and enter code L in column (f) and the amount of the nondeductible loss as a positive number in column (g).
April 5, 2018
Question: A new business began operations on Nov. 1. Prior to opening, the business incurred $47,000 in startup costs for training employees and advertising. How are the startup costs deducted?
Answer: In the year the active trade or business begins, the taxpayer may deduct the lesser of:
- Actual start-up expenditures.
- $5,000 reduced (but not below zero) by the amount that start-up expenditures exceed $50,000.
The expenses remaining after deducting the $5,000 amount are amortized over 180 months. Since the business incurred less than $50,000 of startup costs, it can deduct the full $5,000, plus an additional $467 in amortization on its first tax return [($47,000 - $5,000)/180 x 2 months]. The remaining expense is amortized over the remaining amortization period [§195(b)].
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