You Make the Call

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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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