You Make the Call

​​​​​​​​​​​​​​​​​​​​​​​​​​​You Make the Call

August 6, 2020

Question: Robert is an insurance agent who received a Form W-2 from his employer. He also received a Form 1099-MISC with an amount in Box 7 for commissions earned. This concerns him because it is his understanding that Box 7 is almost always subject to SE tax. Is Robert’s commission income subject to self-employment tax or can he just claim it as “Other Income?”

Answer: Yes, the commissions reported in Box 7 of the Form 1099-MISC are subject to self-employment tax. Form 1099-MISC (Miscellaneous Income) is used to report payments to independent contractors who provide trade or business services. Compensation reported on Form 1099-MISC includes: commission, prizes, awards or other forms of compensation for services rendered to the taxpayer’s trade or business by someone who is not an employee.

When taxpayers like Robert receive both Form W-2 and Form 1099-MISC, they will report the commission income on Line 1 of Schedule C. Robert will use Schedule C to report commission income even if he receives a W-2.

July 30, 2020

Question: During 2020, Nate took out a home equity loan on his primary residence for $248,000 to purchase a second home. The loan is secured by his primary residence. Can Nate deduct the interest as qualified mortgage interest?

Answer: No, Nate would have to take out the loan to purchase the second home and have the loan secured by the second home to deduct it as qualified mortgage interest.

In this case, the home equity loan interest is not deductible regardless of its use. Regardless of when the indebtedness was incurred, you can only deduct the interest from a loan secured by your home to the extent the loan proceeds were used to buy, build or substantially improve your home.

July 23, 2020

Question: Jasper is single and has lived in a house his father owns for the last five years. He paid the mortgage and property taxes and maintained the upkeep on the home while he lived there. On Feb. 2, 2020, Jasper’s father decided to sell the home. He wants Jasper to report the sale and exclude the gain under §121 because he used the home as his principal residence for all five years ending on the date of sale. Is Jasper able to claim the exclusion under §121 if his father owns the property at the time of sale?

Answer: Yes. If the state where Jasper resides recognizes equitable ownership, he can claim the gain exclusion up to $250,000 for a single taxpayer. In Paul L. Blanton, et ux. v. Commissioner, TC Memo 1998-211, a taxpayer who met the equitable ownership rules was allowed to exclude the gain on sale even though they were not listed on the title of the property that was sold.

July 16, 2020

Question: Your client turned 70½ in 2017 and would normally take their required minimum distribution (RMD) from their IRA in 2020. In the last two years, the client opted to have the amount of their RMD of about $20,000 transferred directly to their church. In turn, the taxable amount of the RMD is reduced to $0 by claiming the transfer as a qualified charitable distribution (QCD). In February 2020, your client initiated a transfer of their 2020 RMD to their church. Your client called concerned about being able to claim a QCD benefit on their 2020 tax return because there is no RMD requirement in 2020. Can your client still make a QCD in 2020 even though the RMD for 2020 is $0?

Answer: Yes. Taxpayers can make a QCD in 2020 regardless of the fact there is no RMD requirement. Often the taxpayer's RMD and QCD are the same, but the QCD is not limited to a taxpayer's RMD. Rather a QCD is limited to $100,000 annually. For individuals who were 70 ½ before Jan. 1, 2020, the age a taxpayer becomes eligible to make a QCD and the age a taxpayer becomes required to make an RMD are the same, but the amount of the RMD does not limit the QCD. This is further evidenced by the fact that individuals who turn 70 ½ after Dec. 31, 2019, are eligible to make a QCD once they are 70 ½ but are not required to make RMDs until turning 72.

For example, if the taxpayer's RMD is $45,000, the taxpayer may still choose to make a $100,000 QCD. For 2020, the client's RMD is $0, but this does not change the fact that a taxpayer at "RMD" age can make a $100,000 QCD annually. 

July 9, 2020

Question: Daniel, age 80, took his 2020 required minimum distribution (RMD) from his IRA in February 2020. Since RMDs were waived for 2020 under the CARES Act, he would like to know if he can put the money back into his IRA even though it has been more than 60 days since he received the RMD. What do you tell him?

Answer: Yes. He has until Aug. 31, 2020, to put the RMD back into his IRA. Under Notice 2020-51, an IRA owner who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by Aug. 31, 2020. The notice also provides that this repayment is not subject to the one rollover per 12-month period limitation.

July 2, 2020

Question: In 2019, Joe and Kathy purchased two electric vehicles, one for personal use and one for business use. To charge the vehicles, they installed an electric vehicle charging station at their home and one at their place of business. The costs were $3,500 and $5,000 respectively. What is their total qualified alternative fuel vehicle refueling (QAFVR) property credit they will report on Form 8911, Alternative Fuel Vehicle Refueling Property Credit, for 2019?

Answer: The credit is 30% of the cost of the charging stations. However, the personal QAFVR credit is limited to a maximum amount of $1,000 and the business credit for depreciable business property is limited to a maximum amount of $30,000.

In this case, the credit is $1,000 [$3,500 x 30% = $1,050 but limited to $1,000] for the personal use property and $1,500 [$5,000 x 30% = $1,500] for the business use property.

June 25, 2020

Question: If my client Eloise receives a Paycheck Protection Program (PPP) loan and the entire loan is forgiven, is she allowed a deduction for the business expenses she paid with the loan proceeds?

Answer: No. IRS Notice 2020-32 describes how business expense deductions are not allowed against loan income that was forgiven under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) §1106(b). Because loan proceeds are considered exempt income, taxpayers cannot take business deductions against this income.

June 18, 2020

Question: Betty Lou is a new tax client who was divorced in 2010 and receives alimony payments from her former spouse. A review of the 2018 tax return reflects that Betty Lou did not report the alimony as taxable income. Upon inquiring, Betty Lou says that both parties agreed to these terms during divorce proceedings. Can Betty Lou treat the alimony as nontaxable income?

Answer: Yes, Betty Lou can exclude the alimony from taxable income if an election out of alimony treatment was specified in the divorce decree. This election is an option for pre-2019 divorce decrees or separation agreements prior to the repeal of §71(b)(1)(B). Betty Lou needs to attach to the tax return a copy of the divorce decree containing the election designation or a separate statement made by the divorcing spouses designating the alimony as nondeductible by the payer and nontaxable to the payee [Temp. Reg. §1.71-1T(b) Q&A-8].

June 11, 2020

Question: Norman is 81-years-old and has a profitable Schedule C business with a solo 401(k). Norman has been taking RMDs from his solo 401(k) plan for several years. Can he make contributions to the solo 401(k) plan?

Answer: Yes. If a participant who is a 5% or more owner is still working at age 70½ and begins receiving RMDs, the employer must continue making plan contributions for that participant. In addition, the participant may continue making salary deferrals.

June 4​, 2020

Question: Henry, a long-time client, recently asked about the management fees that are deducted from his IRA account. Along with the management fees, he either pays broker commissions directly from the IRA account or contributes an extra amount to his IRA to cover these fees. His IRA plan administrator said these fees are deductible on Schedule A as itemized deductions. Do you agree? 

Answer: No. The fees (both broker and management) deducted directly from the IRA account each year are not deductible. Investment fees, if paid with after-tax funds, are considered miscellaneous itemized deductions (2% of AGI limit), which have been suspended for tax years 2018–2025.

Another issue to address may involve whether Henry has an excess contribution in the year he contributes the extra money to cover these fees. An IRA contribution cannot exceed the $6,000 ($7,000 if age 50 or older) maximum contribution limit, even if the excess amount is used to pay IRA management fees shortly after the contribution. 

May 28​, 2020

Question: Jerome and Gina filed Form W-7, Application for IRS Individual Taxpayer Identification Number, to renew their ITIN but have not filed their 2019 return yet. When filing their 2019 return, can they get the other dependent credit (ODC) for their child Garen, who has an SSN?

Answer: Yes, since the disallowance has to do with the issuance of a new ITIN. In this case Jerome and Gina have their ITINs and are just renewing them. Since they have been issued ITINs before the due date of the return, they are allowed to claim the ODC.

See Question 20 at https://www.irs.gov/individuals/itin-expiration-faqs.

May 21​, 2020

Question: Jorge and Martha travel the U.S., earning prize money as wheelchair racers. Based on the GSA per diem allowance for M&IE, will the amount for meals be limited to the 50% meal allowance on their Schedule C, or will the meals be 100% deductible?

Answer: Taxpayers filing a Schedule C may deduct 50% of costs for business meals, whether they are just going to lunch with a customer or traveling out of town for business. Meals incurred when traveling for business are considered 50% deductible and should be classified as “meals.”

The two ways to determine meal costs are: (1) actual costs for meals, or (2) the standard IRS meal allowance. You can find the standard meal allowance (called the “meal and incidental expense” rate (M&IE)) for most major U.S. cities in IRS Pub. 1542 (Per Diem Rates).

Taxpayers can no longer deduct entertainment expenses. You may still deduct 50% of your client’s business meal expenses that are not entertainment expenses.

May 14​, 2020

Question: Jean has two children: Jennifer, who graduated from college in 2018, and Joe, who was a freshman in 2019. Jennifer was a fifth-year senior in 2018 and Jean claimed an American opportunity tax credit (AOTC) on her 2018 return. In 2019, Jean received an IRS notice of denial for the 2018 American opportunity tax credit. The denial was because she claimed the credit for Jennifer on her last four tax returns and is not allowed the credit for her final semester in 2018. When Jean files her 2019 income tax return, can she claim an American opportunity tax credit for her son Joe since she received a prior year denial notice from the IRS due to claiming the credit in error for Jennifer in 2018?

Answer: If the prior year’s AOTC was disallowed due to a clerical or math error, the credit can be claimed for Joe in 2019 if a Form 8862, Information To Claim Earned Income Credit After Disallowance, is attached to the 2019 return and enough information is provided to the IRS to demonstrate eligibility for the credit [IRC Sec. 25A(b)(4)]. However, if the credit was disallowed because of fraud or recklessness, you cannot claim the AOTC for a period of 10 years. If the credit was disallowed due to intentional disregard of the rules and regulations, you cannot claim the AOTC for a period of two years respectively.

May 7​, 2020

Question: Evelynn reached age 70½ in 2017. She is employed and contributing to her employer’s SIMPLE IRA plan. Evelynn is also taking required minimum distributions (RMDs) from the account. Can she make a qualified charitable distribution (QCD) from her SIMPLE IRA?

Answer: No. A qualified charitable distribution is an otherwise taxable distribution from an IRA, other than an ongoing SEP or SIMPLE IRA owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. The rule cannot be used for distributions from SEP accounts, SIMPLE accounts, or qualified retirement plan accounts [§408(d)]. The distribution must be made from traditional and Roth IRAs only. To make a QCD distribution, Evelynn would need to make a tax-free rollover from the SIMPLE plan into a traditional or Roth IRA, followed by the direct transfer from the IRA to the charity.

April 30​, 2020

Question: In 2018, Robert and James started a partnership as equal partners. Robert, who is single, invested $450,000. The partnership reported an ordinary business loss of $425,000 on Robert’s Schedule K-1 for 2018. Robert passed the basis, at-risk basis and passive activity loss limitation tests. However, Robert could only deduct $250,000 of the loss, and had an excess business loss of $175,000 ($425,000 – $250,000) that was treated as an NOL carryover to 2019. Robert heard he can amend his 2018 return now and claim the entire $425,000 loss. Is he right?

Answer: Yes, Robert is correct. Section 2304 of the CARES Act retroactively eliminated the excess business loss (EBL) limit for noncorporate taxpayers for losses arising in tax years 2018, 2019, and 2020, so losses are fully deductible in those years. Robert can amend his 2018 return and deduct the entire loss.

April 23​, 2020

Question: The taxpayers withdrew money from a qualified tuition program (QTP) or 529 plan to pay for their child’s qualified higher education expenses, including room and board. Due to COVID-19, the dorms closed, so the university refunded part of the room and board expenses that were paid for with QTP funds. Can the taxpayers redeposit the refunded room and board money back into the same QTP?

Answer: Yes. When taxpayers receive a refund for qualified higher education expenses, including room and board, the refunded amount can be recontributed to the QTP within 60 days of receiving it. However, the recontributed amount cannot exceed the refunded amount. [IRC Sec. 529(c)(3)(D)].

April 16, 2020

Question: Louise’s husband died in 2010. His assets went into a QTIP (Qualified Terminable Interest Property) trust for the benefit of Louise. Louise received income for many years from this trust, which she includes as taxable income on her Form 1040. When she passes away, will these assets be included in her estate and will she receive the step-up in basis on these assets?

Answer: Yes. The QTIP trust assets will be included in Louise’s estate and the assets will be valued at the FMV on her date of death. The QTIP trust is an irrevocable trust that controls assets for the beneficiaries, while allowing the surviving spouse to have an income stream during their lifetime. These assets are included in the estate upon death.

April 9, 2020

Question: Charlie owns an S corporation that operates on a calendar year and provides a Simplified Employee Pension (SEP) plan. What is the S corporation’s deadline for funding its 2019 employer contribution to be deductible on its 2019 Form 1120S?

Answer: The S corporation can make its 2019 SEP contribution up until its 2019 Form 1120S due date, March 16, 2020. If the S corporation files a timely and valid extension for its 2019 tax return, then it has until Sept. 15, 2020, to make its 2019 deductible contribution.

April 2, 2020

Question: Parents have a son under the age of 24 who is a full-time student and a dependent of his parents. The son's only income in 2019 was $3,000 from a part-time summer job. The parents have heard about the stimulus checks and want to maximize their benefit. They have not yet filed their 2019 tax return and are hoping to file quickly so the IRS will use the 2019 return to determine the amount of their stimulus checks.

The parents want to forego claiming their son so that he can claim himself. They believe that if they file this way, instead of them receiving a $500 stimulus check for the dependent son, that he can claim himself and receive a $1,200 stimulus check. Can they do this to achieve a higher stimulus amount for the son?

Answer: No, this sounds like a solid strategy, but it is in direct conflict with the IRC. If the parents do not claim the son, this does not change the fact that the son is still a dependent under §151. Dependents under §151 may not claim themselves and, therefore, are not eligible for the $1,200 advanced stimulus tax credit. Thus, whether the parent's claim the son or not, the son cannot claim himself as an independent taxpayer.

March 26, 2020

Question: In 2003, Tara and DJ, spouses, bought a cabin about two hours from their hometown. Over the years, they shared many stories with you about spending summers fishing and winters skiing, and how this place has been such a hidden treasure to the family. This year, at their regular scheduled appointment, they told you they sold the cabin for more than they ever expected. DJ prepared an Excel s​preadsheet listing the various improvements and costs for the cabin, with one item listed as mileage. Can the taxpayers add their mileage for routine maintenance trips over the years to the cost basis of the cabin?

Answer: No. The mileage to maintain a personal asset cannot be added to its basis. When sold, personal assets are either reported as a taxable gain or as a nondeductible loss. Costs to improve a personal asset can be added to the basis while expenses to maintain it are considered personal and nondeductible.

March 19, 2020

Question: Carol wants to contribute to her grandchildren’s 529 plan. Carol’s friend told her in the past that this was deductible for federal tax purposes. She wants to know if, under any circumstances, contributions to 529 plans are deductible for 2019.​

Answer: Contributions to 529 plans are not deductible for federal tax purposes. Carol’s friend is most likely referring to a 529 plan contribution being deductible at the state level, not the federal level. Some states allow deductions for 529 plan contributions. Check with your state. The contributions to the 529 plan are not deductible at the federal level.

March 12, 2020

Question: Jackie provides a home for her father Jorge. He lived with her all year and received Social Security benefits of $10,000 and a pension of $5,500. Jackie pays all the household expenses and wants to claim head of household (HOH) because Jorge lives with her. Is she allowed to claim the HOH filing status on her 2019 tax return?

Answer: No. Even though Jackie provided more than half of Jorge’s support, she cannot claim him as a qualifying relative because his gross income is greater than $4,200. The gross income test disregards the nontaxable portion of Social Security benefits. For HOH purposes, your parent does not have to live with you; however, the qualifying relative tests must be met.

March 5, 2020

Question: Stella operates a Schedule C business and maintains a home office where she regularly meets clients and maintains her books and records. Due to the tax changes under the TCJA in 2017, she can no longer itemize her mortgage and interest deductions that are usually split between the home office and her Form 1040, Schedule A. Can she continue to claim her mortgage interest and property taxes as home office deductions on Form 8829?

Answer: The short answer is yes. However, there are stipulations to these deductions. With the new tax law, the mortgage interest and property taxes are treated as excess mortgage interest and excess property taxes if a taxpayer claims the standard deduction instead of itemizing their deductions. With this treatment the taxpayer is no longer able to create a loss associated with these expenses as they did in past years.

The deduction for business use of the home is limited to net income from the business [§280A(c)(5)]. The deductions cannot create or increase a loss from the business. The IRS has also taken this position for property taxes claimed for the home office deduction that would exceed $10,000 and are no longer automatically fully allowable on the Form 8829 [§Sec. 280A(b)]. The same is true if the taxpayer claims the standard deduction rather than itemizing. Instead, the property taxes become subject to the §280A(c) limitations based on gross income, like repair expenses and insurance (PMTA 2019-001).

This treatment may cause the taxpayer to be unable to claim the home office deduction for this tax year or in any other tax year. The taxpayer can choose to use the simplified method for the home office deduction, but they should be aware the simplified method is not eligible if the business has an overall loss.

February 27, 2020

Question: Monica turned 70½ in 2019. Under the old rules, she has until April 1, 2020, to take her first required minimum distribution (RMD). However, the new rules where the required beginning date (RBD) for RMDs increased to age 72 are effective for distributions after Dec. 31, 2019, and she won’t be taking the distribution until 2020. Does Monica need to take her RMD for 2019 or can she wait until the year she turns 72 to start?

Answer: Monica needs to take her RMD for 2019 by April 1, 2020, and continue taking RMDs in 2020 and thereafter. The effective date for raising the age for the RBD from 70½ to 72 does apply to distributions made after Dec. 31, 2019, but only for individuals who reach age 70½ after Dec. 31, 2019. Therefore, because Monica turned 70½ prior to Dec. 31, 2019, she must take her RMD for 2019 and thereafter.

February 20, 2020

Question: Brad turned 70½ in 2019 and would like to know when he must begin taking required minimum distributions (RMDs) from his traditional IRA. He heard he can wait until he reaches age 72. Is this true?

Answer: This is not true for individuals who attained age 70½ in 2019. The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) increased the required beginning date from age 70½ to age 72 for distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70½ after Dec. 31, 2019. Since Brad turned 70½ in 2019, he must begin taking RMDs by April 1, 2020.

February 13, 2020

Question: Taxpayers purchased land for $500,000 from an unrelated party for use in their business on a 20-year, recourse, installment agreement. They properly recorded the land on their books for $500,000 and an installment note payable for $500,000.

In year 10 the taxpayers defaulted on the installment note and the original owners repossessed the land. At the time of default, the principal balance on the installment note was $300,000 and the fair market value of the land was $550,000. How do the taxpayers remove the land from their business books?

Answer: The taxpayers will write the land off as a deemed sale as though they received Form 1099-A. The “selling price” of the land will be the lower of the outstanding principal balance of the installment note or the fair market value of the land at the time of the default.

In this case, the selling price of the land will be $300,000 and the cost of the land will be $500,000, resulting in a net loss of $200,000. Because the property was business use, the taxpayers will report the deemed land sale on Form 4797, Sales of Business Property.​

February 6, 2020

Question: To maximize the American opportunity tax credit (AOTC) of $2,500, Kristen wants to elect to include in income her scholarship for tuition, fees and course materials. Is this outcome possible with the Internal Revenue Code?​

Answer: Yes. Based on Reg. §1.25A-5 and IRS Publication 970, Kristen can elect to include in income $4,000 of tuition, fees and course materials that would have been tax-free as part of her scholarship to maximize the AOTC credit of $2,500.

January 30, 2020

Question: Charlie failed to file his 2018 Form 1040. The IRS prepared a substitute return on Charlie’s behalf under §6020(b). Part of Charlie’s income was from a Schedule K-1 that included qualified business income (QBI) items that would have generated a QBI deduction. Will the IRS allow the QBI deduction on the substitute return?

Answer: No. A QBI deduction will not be allowed on an IRS prepared substitute return under §6020(b). However, if in response to the IRS’s substitute return, Charlie files and signs a delinquent Form 1040 that includes a QBI deduction, the IRS will consider the QBI deduction following the same policies for other items included on the filed return in accordance with IRM 4.12.1.9, Examination of a Secured Delinquent Return (IRS SBSE-04-1219-0054). IRM 4.12.1.9 states: When a delinquent return is secured, the examiner will generally examine the taxpayer’s records to determine the accuracy of the return unless it is impracticable to do so (based on necessary time, research, etc.) or under required filing check procedures, it is not warranted. See IRM 4.10.5.2.7, No Examination Warranted.

January 23, 2020

Question: Fithut has a one-participant [solo 401(k)] plan that covers Sophia, the owner and sole employee. During 2020, Fithut hired Alex, age 18, as a part-time,150-hour-a-year employee. Can the business continue to have the solo 401(k) plan, or must a standard 401(k) plan be established?

Answer: Fithut can still qualify for a solo 401(k) plan since there is an exclusion for young and part-time employees. A solo 401(k) plan can exclude from coverage any employee who is under age 21 and any employee who has not worked for at least 1,000 hours during any 12-month period [§§410(a)(1)(A) and (a)(3)(A)].

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.

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