​​You Make the Call

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

November 21, 2018

Question: Clyde would like to trade in his business-use auto before the end of 2018. He is looking to purchase a new SUV, by trading in his old truck, which will reduce the amount he must pay for the new vehicle. He claimed a §179 deduction when he purchased the truck two years ago. Clyde heard of the like-kind exchange rules and is wondering how to facilitate this transaction so he avoids paying tax. Does Clyde have a correct understanding of the like-kind exchange rules?

Answer: No. For 1031 exchanges completed after Dec. 31, 2017, the Tax Cuts and Jobs Act (TCJA) limits tax-free exchanges to real property that is not held primarily for sale (real property limitation). Thus, exchanges of personal property and intangible property do not qualify as tax-free like-kind exchanges.

November 15, 2018

Question: John owns a rental property with a mortgage. He took out a second mortgage on the rental property and used the proceeds to purchase his daughter's residence. Is this interest on the second mortgage that’s secured by the rental property deductible anywhere?

Answer: No. Deductibility of interest is traced to the use of the money. In this case, the money was used to purchase personal use property; his daughter’s residence. The mortgage is secured by the rental property, not the daughter’s residence, and is neither deductible on Schedule A because it does not qualify as qualified residence interest [§163(h)(2)] nor deductible on Schedule E as rental interest.

November 8, 2018

Question: The shareholders of Newco, a C corporation, have decided that they are unable to meet the demands of maintaining the corporation and have voted to liquidate as of Dec. 31, 2018. The shareholders come to your office and ask what the requirements are for reporting the liquidation to the IRS. They heard from another taxpayer they may need to file a Form 966. What do you tell them?

Answer: Yes, Form 966, Corporate Dissolution or Liquidation, is required to be filed by a corporation that is under a plan of liquidation. The corporation should file the form within 30 days after the adoption of the corporate plan of liquidation. If the plan resolution is amended or supplemented, the corporation can file an additional Form 966 within 30 days after adopting the amended or supplemented plan. The corporation must also attach a certified copy of the resolution to Form 966. Form 966 is required to be filed whether there is a gain or loss on the liquidation (Reg. §1.6043-1).

November 1, 2018

Question: Your client Mike has multiple sclerosis and deals with intense pain and spasms. His physician prescribed medical cannabis transdermal patches. Can Mike deduct the cost of the patches as a medical expense?

Answer: No, because it is in violation of federal law. Payments for illegal operations or treatments aren't deductible [Reg. §1.213-1(e)(1)(ii)]. No medical expense deduction is allowed for an operation or treatment that's in violation of federal law, even if state or local law permits the procedure or drug to be used (Rev Rul 97-9, 1997-1 CB 77).

October 25, 2018

Question: Gretchen owns an IRA and a §401(k) plan. She is 75 and must take a $10,000 required minimum distribution (RMD) from her IRA and a $25,000 RMD from her §401(k) for 2018. Gretchen would like to leave her IRA alone, so she asks you if she can take the total amount of her RMDs ($35,000) from her §401(k) plan. What do you tell Gretchen?

Answer: Unfortunately, Gretchen cannot do this. For RMD purposes, taxpayers can aggregate their IRAs. In other words, the RMD is calculated separately for each IRA and the sum of the separately calculated RMDs can be taken from one or more of the taxpayer's IRAs [Reg. §1.408-8, Q&A 9]. However, an IRA and a §401(k) plan cannot be aggregated for RMD purposes. Therefore, Gretchen must take her RMDs from each account, $10,000 from her IRA and $25,000 from her §401(k) plan. If she takes the entire $35,000 from her §401(k), she hasn’t taken the RMD from her IRA and will be subject to a 50% penalty on the excess accumulation in her IRA.

October 18, 2018

Question: The taxpayer had her business property condemned by the city under eminent domain for a new highway. She received a sum of money for the property, which resulted in a sizable gain. She excluded the gain from income under §1033. With an involuntary conversion, taxpayers are allowed three years to reinvest the proceeds from real business property and two years for all other property.

Unfortunately, due to unforeseen circumstances, the taxpayer was unable to locate suitable property within the three-year period. Will the taxpayer need to amend her return to report the gain?

Answer: Not necessarily. If the taxpayer has reasonable cause as to why she was unable to purchase new property within the required three-year period, she may request an extension of time from the IRS. The only caveat is that the extension for time must be requested within the replacement period, unless of course the taxpayer has reasonable cause for the late filing request [§1.1033(a)-2(c)(3)].

Taxpayers make this request by filing an extension request and cover letter with the IRS Service Center where the return is filed showing reasonable cause for failing to replace the converted property within the required time period.

October 11, 2018

Question: Benny and his wife Ginny are Mexican citizens who resided in Mexico all year with their children. He crosses the border each day to go to work for his employer, whose business is in the U.S. Ginny, works in Mexico. Does Benny need to file a U.S. tax return and if yes, how?

Answer: Yes, Benny needs to file a U.S. tax return. However, because he is a nonresident alien from Mexico, there are special rules for filing a U.S. tax return. Benny files Form 1040NR, U.S. Nonresident Alien Income Tax Return, using the married filing separately (MFS) filing status. As a nonresident alien, he cannot file as head of household or as married filing jointly since Ginny is also a nonresident alien. He reports only his U.S. sourced income (i.e., his U.S. wages). The standard deduction is not available to Benny as a nonresident alien, but he may deduct certain itemized deductions on Schedule A. Benny needs an ITIN to file Form 1040NR if he does not have an SSN and is not eligible to get an SSN. Resources: IRS Publication 4152 and IRS Publication 519.

October 4, 2018

Question: Aaron was renting residential property to Kirk. Upon eviction, it was discovered that Kirk was a hoarder and the property needed to be demolished. The property has not been completely depreciated. Can the cost of demolishing the building be expensed? Does the remaining basis in the rental roll into the basis of the new structure?

Answer: No and no. Any amount expended or loss sustained by Aaron on account of the demolition of any structure must be capitalized as part of the basis of the land on which the structure was located (Code Sec. 280B; Rev. Proc. 95-27).

There is generally no deduction allowable to an owner or a lessee of property for either the cost of demolition or any loss sustained on the demolition, rather the basis of the underlying land is increased by the adjusted basis of the demolished structure plus the net cost of demolition.

The requirement to add demolition costs and the remaining adjusted basis of the demolished structures to the land prevents these amounts from being added to the basis of any new structure and recovered through depreciation deductions. Thus, any tax benefits from the costs of demolishing a structure, and from its adjusted basis, are postponed until the taxpayer sells the land. The higher basis reduces his gain.

September 27, 2018

Question: Jonathan owns a trucking business taxed as an S Corporation. He pays himself and one other full-time employee a wage. While completing his 2017 return on extension, he is curious about how the pass-through deduction will impact him. He asks you if his wages are included in the limitation calculations for the deduction. What do you tell him?

Answer: Yes, his wages would be included when applying the limitation to the pass-through deduction. The term "W-2 wages" is defined, with respect to any person for any taxable year of such person, the amounts described in §6051(a)(3) and (8) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year §199A(b)(4)(A). In short, wages include total wages subject to income tax withholding plus elective deferrals to a qualified plan. As such, this would include Jonathan's wages.

September 20, 2018

Question: A C corporation is making an S election. The C corporation has charitable contribution carryforwards. When the S election is made, will those charitable contribution carryforwards transfer to the S corporation?

Answer: No. The charitable contribution carryforwards do not transfer to the S corporation and cannot be used on Form 1120-S. Tax attributes from when an entity was a C corporation do not carry over when a C corporation converts to an S corporation. Thus, during the period that the entity is an S corporation, the deductions are lost for both the S corporation and the shareholders.

September 13, 2018

Question: The end of 2017 was a big year for tax professionals, in terms of what we now need to know about the Tax Cuts and Jobs Act (TCJA). There have been some major changes and our clients want to know how the new law affects college savings plans. Many clients are asking about the possibility of using these plans for private school tuition for their pre-college children. Did the new act include the increased definition of qualified education expenses to include tuition for elementary or secondary schools?

Answer: Yes. As we know, a §529 plan distribution is tax-free if it is used to pay “qualified higher education expenses” of the beneficiary (student). Tuition for elementary or secondary schools was not considered a “qualified higher education expense,” in years prior. With TCJA, qualified higher education expenses now include expenses for tuition relating to enrollment or attendance at an elementary or secondary public, private, or religious school. Thus, tax-free distributions from §529 plans can now be received by beneficiaries who pay these expenses, effective for distributions from §529 plans after 2017.

There is a limit on the distribution that can be taken from a §529 plan for these expenses. The amount of cash distributions from all §529 plans per single beneficiary during any tax year can't, when combined, include more than $10,000 for elementary school and secondary school tuition incurred during the tax year.

September 6, 2018

Question: John received Form 1099-SA, Box 3, Code 1. He took an HSA distribution and rolled it over to another HSA account. Is this taxable?

Answer: No, if John can prove he rolled it over into another HSA account, it is not taxable. Use Form 8889, Part II, Line 14(b), to record the rollover.

August 30, 2018

Question: Calista is the executor of her mother’s estate. She has given her preparer several expenses associated with the maintenance of her mother’s estate assets held for investment. The expenses she gives the preparer consist of:

• $1,000 for home owner’s insurance
• $3,500 for yard maintenance and snow removal

She elects to file the estate return using a calendar year ending December 31, 2018. All expenses were billed and paid during the 2018 tax year. The estate’s AGI is $45,800. What, amount if any, of the estate’s miscellaneous expenses are allowable on the estate return?

Answer: Calista can deduct $3,584, [$4,500 - $916 ($45,800 x.02)] of the miscellaneous itemized deductions on the Form 1041 Line 15c. Miscellaneous expenses are subject to 2% of the AGI of the estate. Notice 2018-61, indicates that the repeal of the miscellaneous itemized deductions associated with Form 1040, Schedule A does not apply to Form 1041 estate or nongrantor trust deduction for miscellaneous itemized deductions subject to the estate or trust’s 2% of AGI for the tax year.

August 23, 2018

Question: Henry purchased a new piece of equipment on Sept. 10, 2017, that he will eventually be used in a business he plans to start. The equipment qualifies for bonus depreciation. He placed the equipment into service March 1, 2018. Henry heard that the Tax Cuts and Jobs Act of 2017 increased bonus depreciation to 100%. Can Henry claim 100% depreciation on this equipment?

Answer: No. Eligibility for 100% bonus depreciation requires that the property be both purchased and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. Property purchased before Sept. 28, 2017, is limited to 50% bonus depreciation and subject to the phase-out schedule from the PATH Act of 2015. Therefore, Henry can only claim 40% bonus depreciation on this equipment. For property purchased before Sept. 28, 2017, bonus depreciation is 50%if placed in service in 2017, 40% if placed in service in 2018, 30% if placed in service in 2019, and 0% if placed in service 2020 or later.

August 16, 2018

Question: Chip and Joanna are trying to decide if they should take out a home equity loan on their principal residence to pay for their son’s college tuition in 2018. They will claim their son as a dependent under the qualifying child rules, and would like to know if they can deduct the interest they pay on this loan in 2018. What do you tell them?

Answer: In general, under the Tax Cuts and Jobs Act of 2017, interest on home equity debt is not deductible as an itemized deduction for 2018–2025, unless the proceeds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. However, interest on a qualified education loan (including a home equity loan secured by real property) is deductible as an adjustment to income if the borrower certifies that the debt proceeds are being used, or will be used, solely to pay for qualified higher education expenses (Notice 98-54). Mixed-use loans do not qualify. Make the certification by giving the lender Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification. Thus, if Chip and Joanna only use the loan to pay for their son’s college tuition and make the certification, they can deduct up to $2,500 of student loan interest paid during the year, subject to phase-out based on their modified adjusted gross income.

August 9, 2018

Question: The taxpayer passed away in 2014. The fiduciary properly filed the decedent’s final Form 1040 in 2014. For 2015 and 2016, the fiduciary properly accounted for all estate income and expenses, distributed all estate assets to the beneficiaries, and filed Form 1041 for each year. Form 1041 for 2016 was marked as final.

In 2018, the estate received a check and Form 1099-B for $50,000 for an investment the decedent owned that the fiduciary and beneficiaries did not know about. Even with the step-up in basis at death, the capital gain on the investment when liquidated was $10,000. The funds were immediately distributed to the beneficiaries.

Who reports Form 1099-B, the estate or the beneficiaries?

Answer: The estate does not need to file another “final” Form 1041 nor does it need to open a new estate with a new EIN to issue K-1s to the beneficiaries. Instead, the beneficiaries will report the activity directly on their returns.

Determining when an estate’s administration ends is a question of facts and circumstances. The administration of the estate cannot be unduly prolonged. The IRS considers an estate to be terminated after a reasonable period for the fiduciary to complete its administration; generally, two years is acceptable. Consequently, any income, deductions and credits arising after the termination of the estate are considered the income, deductions and credits of the taxpayer succeeding to the property of the estate, or the beneficiary [Reg. 1.641(b)-3(d)].

Therefore, any income, deductions and credits for the estate that arise after the estate is closed are reported directly by the beneficiaries.

August 2​, 2018

Question: Sofia owns a successful business and has recently hired an au pair, Madelynn, to care for her two children. Can Sofia take the child and dependent care credit for the wages she pays Madelynn to care for her two children? Are the fees that Sofia paid the employment agency to hire Madelynn eligible for the credit as well?

Answer: Sofia is the host family for Madelynn and she reports the payments to Madelynn on Form W-2 at the end of the year. The wages paid are eligible for the child care credit assuming all other qualifications under Reg. §1.21-1 are met, expenses for household and dependent care services necessary for gainful employment. Employment agency fees may qualify as indirect expenses for the credit under Reg. §1.21-1(d)(11) if Sofia was required to pay the fees to obtain the child care. Reg §1.21-1(d)(12), Ex 7 reads: “Q pays a fee to an agency to obtain the services of an au pair to care for Q's children, qualifying individuals, to enable Q to be gainfully employed. An au pair from the agency subsequently provides care for Q's children. Under paragraph (d)(11) of this section, the fee may be an employment-related expense.”

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