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

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.

January 5, 2017

Question: Janice (age 75) owns a traditional IRA. She should have taken a $10,000 required minimum distribution (RMD) from her IRA for 2016. However, she forgot and failed to take anything. Is Janice subject to a penalty for failing to take her RMD by December 31, 2016?

Answer: In general, she is subject to a 50% penalty on the amount she failed to withdraw. However, she can ask the IRS to waive the penalty if she takes steps to remedy the shortfall, as the shortfall was due to reasonable error. She must file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and attach a statement of explanation. File Form 5329 as follows:

  1. Complete Lines 52 and 53 as instructed.
  2. Enter “RC” and the amount she wants waived in parentheses on the dotted line next to Line 54. Subtract this amount from the total shortfall she figured without regard to the waiver, and enter the result on Line 54.
  3. Complete Line 55 as instructed.

December 29, 2016

Question: Taxpayer’s operate an S corporation and are interested in purchasing equipment for their construction business. The equipment qualifies as Section 179 property. They ask you, as their accountant, what is the best way to purchase it, via a loan through the bank, the vendor’s offer of finance or cash? They had a good year in business and feel they need to lower their taxable income.

Answer: As a tax professional, we often hear these types of questions at year end, but we know it does not matter if the purchase was financed or bought out right with cash. The business is able to claim §179 for the qualifying property and reduce taxable income, which is the ultimate goal. To claim a §179 deduction, the taxpayer must specify the items of §179 property to which the election applies and the portion of the cost of these assets that is to be taken into account [IRC Sec. 179(c)]. This election is made by completing Part I of Form 4562 (Depreciation and Amortization).

December 22, 2016

Question: Is a limited partner (or LLC member who is not a managing member) subject to self-employment taxes on the trade or business income from the partnership?

Answer: It depends. Section 1402(a)(13) excludes the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in §707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.

The 1997 Prop. Reg. §1.1402-2 defines a limited partner, which includes similarly situated LLC members. Prop. Reg. §1.1402-2(h)(2) states that an individual is treated as a limited partner, and therefore won’t be subject to SE tax, unless he or she does any one of the following:

  1. Has personal liability as defined in Reg. §301.7701-3(b)(2)(ii) for the debts of or claims against the partnership by reason of being a partner.
  2. Has authority under the law of the jurisdiction in which the partnership is formed to contract on behalf of the partnership.
  3. Participates in the partnership's trade or business for more than 500 hours during the partnership's taxable year.

Furthermore, a service partner in a service partnership may not be a limited partner. A partner is not considered to be a service partner if that partner only provides a de minimis amount of services to or on behalf of the partnership. A service partnership is a partnership that substantially all the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science or consulting [Prop. Reg. §1.1402-2(h)(5) and (6)].

There was opposition to these proposed regulations in the Taxpayer Relief Act of 1997, Congress provided that the IRS cannot issue any final or temporary regulations in this area until July 1, 1998. The IRS and Congress still have not issued any further guidance. However, taxpayers following these proposed regulations can use them as substantial authority in the case they are questioned by the IRS.

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