You Make the Call

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Jan. 21, 2021

Question: In 2018, Martin and Laura, a married couple, wanted to sell their home. They met all the requirements to be able to take the full exclusion under §121 for any gain on the sale of the home. However, Martin died on March 16, 2018, before they could sell the home. Laura never remarried, continued to live in the home and decided to finally sell it. She sold the home on Jan. 14, 2020, and moved in with her son. Until the date of sale, Laura continued to meet all the ownership and use requirements.

What is the maximum §121 gain exclusion to which Laura is entitled when she sold her home in January 2020?

Answer: Laura is eligible to use the full $500,000 exclusion. In order to be eligible for the full $500,000 §121 gain exclusion, a surviving spouse must meet the following requirements:

  • Both spouses must have met the ownership, use, and “one sale in two years” requirements up until the date of death of the decedent
  • The surviving spouse must continue to meet the ownership, use, and “one sale in two years” requirements up until the date of sale
  • The surviving spouse has not remarried as of the date of the sale
  • The sale of the home occurs within two years of the date of death of the spouse

Jan. 14, 2021

Question: During the year, Beth has found many opportunities to do online surveys, try out new products and download apps. In exchange, Beth is rewarded with small amounts of virtual currency. Since the rewards were not cash, checks or gift cards, are they included in income for federal tax purposes?

Answer: Yes. While the rewards may be small, the receipt of virtual currency is income when earned [§61(a)(1)]. Beth earned income for performing online services and received rewards in exchange. For federal income tax reporting purposes, the fair market value of the virtual currency Beth received for performing the online services is measured in U.S. dollars as of the date of receipt (IRS Notice 2014-21).

Jan. 7, 2021

Question: NOI Inc., an accrual basis S corporation, purchased a $50,000 machine on Dec. 11, 2020. Due to delays caused by the pandemic, the machine’s expected ship date is Jan. 19, 2021. Can NOI Inc. take a depreciation deduction for the machine in 2020?

Answer: No, the period for depreciating an asset begins when the asset is placed in service. Property is first placed in service when it is placed in a condition or state of readiness and available for a specifically assigned function, whether in a trade or business, a production of income activity, a tax-exempt activity or a personal activity [Reg. §1.167(a)-11]. Because the asset (machine) is not available for NOI’s use and is not capable of performing its intended function, no depreciation deduction is available in 2020.

Dec. 30, 2020

Question: John, is single, healthy and 57-years-old. He planned an early retirement for January 2020. After talking to his employer and the company’s 401(k) plan administrator about his retirement, distributions were set up to begin in February 2020. When the stay-at-home order was announced in March, the company he retired from closed its doors for good. Will John be able apply the COVID-19 emergency distribution relief to the distribution received in February?

Answer: Unfortunately, unless John is considered a qualified individual, the distribution in February would not fall under the relief provisions. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from Jan. 1, 2020, to Dec. 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.

A qualified individual meets one or more of the following:

  • Diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
  • A spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • Experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • Experienced adverse financial consequences as a result of being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19; or
  • Experienced adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Dec. 23, 2020

Question: Ethan inherited both Series I and Series EE bonds from his uncle Bob. Ethan cashed them out a couple of months after Bob’s passing. The bank issued Ethan a Form 1099-INT. Will the bonds receive a step up in basis?

Answer: No. Savings bonds do not receive a stepped-up basis. Savings bonds are IRD (income in respect of a decedent). The interest earned is included as income by Ethan (beneficiary) in the year they are cashed. Ethan will report the receipt of this inheritance in the same manner as Bob would have, Form 1040 Schedule B, Interest and Ordinary Dividends, and attach it to Form 1040.

Dec. 17, 2020

Question: When his father died, Robert inherited a house, rentals and land with standing timber. Does Robert have any basis in the timber?

Answer: It depends. When the FMV of the property was determined on the father’s date of death, did Robert receive an appraisal for the timber at that time? If the answer is yes, then basis of the standing timber equals the FMV on date of death valuation. If no appraisal was obtained for the standing timber, Robert can go through a qualified forester to get the FMV on date of death valuation, which gives him basis when he sells the timber.

December 10, 2020

Question: Lidia acquired stock that meets the requirements of small business stock; however, she did not purchase the stock. The stock was gifted to her by her father in September 2019. He obtained the stock in October 2011. She plans to sell the stock in December 2020. Since the stock would meet the requirements in the hands of her father, will Lidia be able to claim the small business stock gain exclusion under Section 1202?

Answer: Yes. If the gifted stock met the requirements in the hands of the transferor, the stock is treated as being received in the same manner as Lidia’s father, which allows her to exclude 100% of capital gain on sale.

To be classified as qualified small business stock (QSBS), the stock must have been acquired by the taxpayer at the stock's original issuance either in exchange for money or other property (not including stock), or as compensation for services provided to such corporation (other than services performed as an underwriter of such stock).

There are exceptions to this original issuance requirement. If stock is acquired by the taxpayer in the following ways, the stock will qualify as QSBS if the other QSBS requirements also are met: If any stock in the corporation is received as a transfer by gift or at death, the transferee is treated as having acquired the stock in the same manner as the transferor and having held the stock during any continuous period immediately preceding the transfer during which it was held (or treated as held under these rules) by the transferor.

Dec. 3, 2020

Question: Your client’s son, Henry, is eight years old. He was the named beneficiary of his Uncle Ray’s traditional IRA. Uncle Ray died in 2020 at the age of 55. The client is asking you about how this inheritance will impact Henry. Your client has heard that in some cases an IRA must be distributed in five years or perhaps 10 years but, seems to recall that perhaps Henry’s age determines how many years he will have to distribute the IRA income. What do you tell the client?

Answer: Henry is an eligible designated beneficiary. As such, he is required to distribute required minimum distributions (RMDs) over Henry’s life expectancy beginning in 2021, the year after his uncle’s death. Once Henry reaches the age of majority (generally age 18), the remaining balance in the IRA must be distributed within 10 years from that date.

Eligible designated beneficiaries are surviving spouses, minor children, chronically ill individuals [(§401(a)(9)(E)(ii)(IV)], or any other individuals who are not more than 10 years younger than the decedent.

If Henry had not been an eligible beneficiary, he would need to distribute the entire balance of the IRA on or before Dec. 31 of the year that includes the 10th anniversary of his uncle’s death or Dec. 31, 2030.

November 24, 2020

Question: Tia has a traditional IRA with no basis that she would like to convert to a Roth IRA. Tia’s income is much lower than usual in 2020, so she wants to make sure the conversion income is reported on her 2020 tax return. What is the deadline for converting Tia’s traditional IRA to a Roth IRA so the income is reported in 2020? Is it the same deadline for making a regular Roth IRA contribution? In other words, does Tia have until April 15, 2021, the 2020 tax return due date, excluding extensions?

Answer: In general, Tia must convert the traditional IRA to a Roth IRA by Dec. 31, 2020. However, if Tia takes a distribution from her traditional IRA at the end of 2020 and rolls it over to a Roth IRA within 60 days ending in 2021, the conversion income is reported in the year the amount was distributed, which would be 2020. Tia cannot wait until April 15, 2021, the 2020 unextended tax return due date. [Reg. §1.408A-4, Q&A 7(a)]

November 19, 2020

Question: The company bookkeeper embezzled $150,000 over a three-year period from 2017-2019. The business is accrual basis and filed an insurance claim in 2019, the year the embezzlement was discovered. The insurance proceeds were received the following year in 2020. When should the insurance proceeds be reported in income: in 2020 when received, in 2019 when the discovery was made and amount determined, or does the company amend each of the prior three years and adjust them for their pro-rata share?

Answer: Because the business is accrual basis, they accrue the insurance income receivable in 2019. If they had been cash basis, they would have reported the insurance as income when it was received in 2020.

The idea with accrual basis taxpayers is that they report income when all events have occurred to earn it and when the income can be determined with reasonable accuracy. Using this idea, income is reported at the earliest of:

  1. When the payment is received
  2. When the income amount is due to the taxpayer
  3. When the taxpayer earns the income
  4. When title passes

Though these points are for normal business income, the taxpayer can still apply them to this scenario. In this case, items one and two would be the most appropriate. The income became due to the taxpayer when they submitted the insurance claim in 2019. Therefore, record the insurance receivable and the insurance income in 2019. Do not go back and amend 2017 and 2018 as the amount was not received or due to them in those years.

November 12, 2020

Question: My client Akash walked into my tax office and asked if the FBAR deadline for 2019 tax returns has changed due to the CA wildfires. What do I tell Akash?

Answer: Yes, the FinCEN Form 114 (Report of Foreign Bank and Financial Accounts), also known as the FBAR, can be filed by Dec. 31, 2020 due to the CA wildfires if Akash is a victim of the fires.

FBAR filing deadline is normally Oct. 15 (automatic extension if the April 15 deadline is missed). For tax year 2019:

  • The normal extension deadline for FBAR was extended to Oct. 31, 2020.
  • The IRS has agreed with FINCEN to extend the FBAR date to Dec. 31 for FBAR filers impacted by California wildfires, Iowa derecho, Hurricane Laura, Oregon wildfires and Hurricane Sally.
  • This extension only applies to 2019 filers.

November 5, 2020

Question: On June 10, 2020, Sebastian received a $60,000 qualified COVID-19 distribution from his qualified retirement plan. He understands this will be taxable, but not subject to the 10% early withdrawal penalty even though he is only age 39. You explain he can either pay tax on the $60,000 on his 2020 tax return, or he can pay the tax on $20,000 on his 2020, 2021 and 2022 tax return. Sebastian knows he will be able to repay the entire $60,000 in 2022. Does he need to pay tax on the $20,000 in 2020 and 2021 if he will be recontributing the $60,000 in 2022, the third year?

Answer: Yes. Taxpayers who choose the repayment option do not get to skip the taxes until the amount is repaid. Instead, the taxpayer will file Form 8915-E, Qualified Retirement Plan Distributions and Repayments, (available in draft form only) for each of the years until the amount is repaid.

The taxpayer will pay taxes each year on one-third the amount of the distribution. In the year of repayment, the taxpayer will not pay tax. In that year, the taxpayer will amend the prior year(s) to claim a refund.

Thus, Sebastian will be required to pay tax on $20,000 both on his 2020 and 2021 tax return. However, in 2022, he will not pay tax on the remaining $20,000, and he is able to amend his 2020 and 2021 return to exclude the $20,000 on each return.

October 29, 2020

Question: Beachside Inc. is taxed as a C corporation and is considering making a political contribution. Would the political contribution be tax deductible as a business expense on the corporate tax return?

Answer: No. Under §162(e), a trade or business expense is not allowed for expenditures in connection with influencing legislation, participation in any political campaign and any attempt to influence the general public with respect to elections, legislative matters or referendums, or any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of the official.

October 22, 2020

Question: Wionna, a single taxpayer, has three children under the age of 17 living with her and twins (Russell and Dennis, age 21) who are attending college locally. Wionna pays the rent, utilities and all other support costs for the twins; they are not working and have no other sources of income. For 2020, Russell received a $5,000 scholarship that was used for tuition. Can Wionna still claim Russell as qualifying dependent on the 2020 tax return?

Answer: Yes. A student under 24 who is a child of the taxpayer does not take into consideration scholarship payments received for purposes of the support test [§152(f)(5)]. There is no distinction between taxable or nontaxable scholarships for this purpose.

October 15, 2020

Question: Edgar runs a small technology company that uses the services of two foreign contractors. One lives in Guatemala and the other one lives in Costa Rica. They will be paid $5,500 and $8,500 respectively. Edgar needs to know if he has any obligation and compliance to issue them a Form 1099-NEC, Nonemployee Compensation?

Answer: No, Form 1099-NEC is not required to be issued to foreign contractors. First, the employer verifies the contractors are not U.S. citizens working outside the country. The foreign contractors will sign Form W-8BEN, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). By completing Part I and signing Form W-8BEN, the foreign contractors are certifying they are not U.S. persons. The foreign contractors do not need ITINs. Form 1099-NEC does not need to be filed [Reg.§1.6041-4(a)]. The Form W-8BEN is not filed with the IRS; however, the employer must keep it in the files in the event of an audit.

October 8, 2020

Question: Lylah, Bentley, Westin and Braxton inherited a home upon the death of their grandfather in 2016. The FMV of the property on the date of death was $100,000. Lylah bought out Bentley, Westin and Braxton for $20,000 each in 2016 by obtaining a bank loan. Lylah lived in the home as her principal residence until 2020 when the bank foreclosed on the property. She received a Form 1099-A with a debt outstanding of $45,000 and FMV of $80,000. She is personally liable for the outstanding debt. Can Lylah use the §121 exclusion to report the sale of the home, and what is her sales price?

Answer: Yes, Lylah can use the §121 exclusion since she owned and used the home as her principal residence for a period from 2016-2020. She meets the ownership and use test for two out of the five years before the sale.

Since Lylah is personally liable for the repayment of the debt, her deemed sales price when reporting the sale on the Form 8949, Schedule D is $45,000. Since this loan was recourse debt, the selling price of the home was the lessor of the FMV or the balance of the principal outstanding reported on the Form 1099-A. Her basis in the home is $85,000 ($25,000 + $60,000). Since her basis exceeds the sales price, she has a nondeductible loss on the foreclosure sale of her home.

October 1, 2020

Question: Justine has a 401(k) plan loan with her employer and recently was diagnosed with COVID-19. She has never missed a required payment before and is concerned that she will not be able to afford to make her weekly payments due to being off work. Can she request a forbearance on her required payment due to being impacted by COVID-19?

Answer: Justine will not only have 14 days to suspend the loan repayment, the plan loan will receive an automatic repayment delay of one year. This treatment is only applicable if the employee, spouse or dependent has been impacted or affected by COVID-19. Had she had the plan loan and not contracted COVID-19, she would still be liable for the repayment.

Delayed repayment of plan loans: Affected participants who have a payment on a plan loan due between the date of enactment and Dec. 31, 2020 (the "grace period"), will be able to receive a one-year extension. The five-year mandatory repayment period that applies to most plan loans is suspended for the duration of the grace period. The CARES Act provides that the subsequent loan payments will be "appropriately adjusted" to reflect a one-year extension and any interest which accrues during the one-year extension.

September 24, 2020

Question: Due to a medical condition during 2020, Scarlet’s doctor advised her to use a specific type of menstrual product but did not issue Scarlet a prescription. May Scarlet pay for the non-prescribed menstrual product with her qualified HSA funds?

Answer: Yes. Effective after Dec. 31, 2019, the CARES Act changed the HSA rules for expenses incurred and amounts paid for tax-free distributions from an HSA. The Act both repealed the prescription requirement for over-the-counter medicine or drugs and updated the definition of qualified medical expenses. For HSA purposes, amounts paid for menstrual care products shall now be treated as paid for medical care and thus a qualified medical expense [§223(d)(2)(A)]. Menstrual care products are defined as a tampon, pad, liner, cup, sponge or similar product used by individuals with respect to menstruation or other genital-tract secretions [§223(d)(2)(D) as amended by Act Sec. 3702(a)(2)].

September 17, 2020

Question: We Count, LLC filed its 2018 Form 1065, U.S. Return of Partnership Income, by April 15, 2019, and did not elect out of the centralized partnership audit regime. In September 2020, it discovered an error on the 2018 Form 1065 and needs to file an amended return, which it would like to e-file. Which form does We Count file?

Answer: Partnerships subject to the centralized partnership audit regime are referred to as BBA partnerships. In general, if a partnership wants to electronically file an amended partnership return, it must file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, to request an administrative adjustment in the amount of one or more partnership-related items.

However, for tax years beginning in 2018 or 2019, BBA partnerships that filed Form 1065 and furnished all required Schedules K-1 prior to the issuance of Rev. Proc. 2020-23 (April 8, 2020) may amend those returns by filing Form 1065, checking the “Amended return” box and writing “Filed Pursuant to Rev. Proc. 2020-23” at the top prior, to Sept. 30, 2020. Partnerships must also furnish amended Schedules K-1 with the same notation on a statement attached to each Schedule K-1.

This relief allows partnerships and their partners to benefit from the provisions of the CARES Act without having to wait to file administrative adjustment requests (AARs) for the current year, which would otherwise be required under §6227. When a partnership files an AAR, partners only benefit from the changes when they file their current year’s tax return, generally 2021 for changes made in 2020. This process would significantly delay the relief provided in the CARES Act, which is intended to apply to the affected taxable years and provide an immediate benefit to taxpayers. (https://www.irs.gov/pub/irs-drop/rp-20-23.pdf)

September 10, 2020

Question: Laura has a sole proprietor Schedule C business. The taxpayer advertises that a percentage of the business sales will go to various public charities in their city. Can the taxpayer deduct the charitable contribution to the charities as an ordinary and necessary business expense under §162 or must the taxpayer deduct the charitable contributions on their Schedule A, Itemized Deductions?

Answer: In general, expenditures for institutional or goodwill advertising keeping the taxpayer's name before the public are generally deductible as ordinary and necessary business expenses if the expenditures are made with the reasonable expectation of a financial return commensurate with the amount of the payments [Reg. §1.162-20(a)(2)].

For example, payments of a percentage of sales as a donation to public interests in cities where the business sales occur would be considered an ordinary and necessary business expense. In one such situation, the IRS held that the payments were a form of goodwill advertising that were deductible as ordinary and necessary business expenses, rather than charitable contributions (PLR 9309006).

In another ruling, the IRS concluded that charitable contributions were ordinary and necessary business expenses when they were made to a special city fund dedicated to oil pollution control, beautification and advertising to recover tourist business lost because of oil spillage on local beaches (Rev. Rul. 73-113). In this ruling, the taxpayer derived a significant portion of its income from the tourist industry in that city. Therefore, the taxpayer expected a financial return commensurate with the amount of the charitable contribution it made, causing the expenditure to be an ordinary and necessary business expense.

September 3, 2020

Question: If the employee has sick pay under the Families First Coronavirus Response Act for COVID-19 or is quarantined for potential exposure to COVID-19, how much is the covered employer required to pay?

Answer: The employer must pay up to two weeks — or 10 days — of paid sick leave for any combination of qualifying reasons. This equals out to 80 hours for a full-time employee, or for a part-time employee, the number of hours equal to the average number of hours the employee works over a typical two-week period.

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