You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
July 11, 2019
Question: Harry and Sally are divorcing after many years of marriage. As part of the divorce settlement, Harry is required to transfer some of his stock to Sally. She wants to sell the stock, but Harry is being difficult. Since he won’t provide information about the stock, how does Sally determine her basis for gain or loss on the sale?
Answer: Because the stock was transferred incident to divorce, Sally’s basis in the stock under §1041(b) is Harry’s basis on the date of the transfer. Even though Harry is being difficult, he is required under Reg. §1.1041-1T(e) to provide Sally the records necessary to determine the adjusted basis and holding period of the stock. If Harry cannot establish basis in the stock, then Sally has no carryover basis and must use $0 basis for the stock sold.
July 3, 2019
Question: Ethan died in 2018. Although he did not have a taxable federal estate (Form 706), he had a taxable state estate. The executor is also filing Form 1041 reporting the estate’s income. Can the state estate taxes paid be deducted on the federal Form 1041?
Answer: No, state estate taxes are not deducted on the federal Form 1041. The following taxes cannot be deducted on the Form 1041 by an estate or trust:
- Federal income, duties, and excise taxes.
- Federal estate and gift taxes.
- Generation-skipping transfer taxes (unless imposed on income distributions).
- State estate, inheritance, legacy, succession, or gift taxes.
June 27, 2019
Question: Maria and Juan’s daughter, Sophia, attends a university as a full-time student. They received Form 1098-T from the university. Based on the billing statements from the university, the amount reported in Box 1 of Form 1098-T is incorrect. It appears the amounts were doubled. Can Maria and Juan claim the AOTC based on the amounts reported in Box 1?
Answer: No. The amount of qualifying expenses actually paid, not the amount reported on a Form 1098-T (either as billed or paid/received), controls the size of the credit [Terrell, Angela A., (2016) TC Memo 2016-85 ; Prop. Reg. §1.25A-1(f)(1)].
Under §6050S, eligible educational institutions must file certain information returns [Form 1098-T (Tuition Statement)] to assist taxpayers in determining the education credit amounts they may claim. Institutions must include the aggregate amount of payments received for qualified tuition and related expenses on the Form 1098-T for each taxpayer [§6050S(b)(2)(B)(i)]. However, the Form 1098-T statements should be used only as an aid and should be compared to the taxpayer's actual records of qualified tuition and related expenses properly paid.
June 20, 2019
Question: Dave has a son, John, who attends college and asked if there were any tax credits for tuition paid. John is attending a prestigious university on the east coast, and the cost is not cheap. After discussing this life event more, Dave states John had a rough first semester and was almost asked to leave due to an arrest and conviction on a possession and intent to deliver charge of a controlled substance, a prescribed medication for his ADHD (attention deficit hyperactivity disorder). Unfortunately, the intent to deliver in a school zone was considered to be an aggravating factor. As a result, John now has a felony conviction on his record. John attended rehab as part of the sentence and now is excelling in his studies. Great news, but how does this affect the client’s ability to claim a tax credit for education?
Answer: The American opportunity tax credit (AOTC) does have the requirement that, to qualify as an eligible student, the student cannot have a felony drug conviction. The AOTC isn't allowed for qualified expenses for the enrollment or attendance of a student for any academic period if that student has been convicted of a federal or state felony offense consisting of the possession or distribution of a controlled substance before the end of the tax year with or within which that period ends [§25A(b)(d)(D); Reg. §1.25A-3(d)(1)(iv)]. Availability of the lifetime learning credit doesn't depend upon whether the student has been convicted of a felony drug offense; this is the only tax benefit available to Dave for John’s education expenses.
June 13, 2019
Question: Johnny is filling out Form 8960,
Net Investment Income Tax Individuals, Estates, and Trusts. Form 8960, Line 9c is for miscellaneous investment expenses. Can he deduct the miscellaneous investment expenses here even though the 2% miscellaneous itemized deductions are not allowed on Schedule A starting in 2018?
Answer: No, the deduction is suspended for 2018–2025. The amounts reported on Form 8960, Line 9c are the amounts allowable after the application of the deduction limitations imposed by §67 and §68.
Deductions subject to AGI limitations under §67 or §68.
Any deduction allowed against net investment income that, for purposes of computing your regular income tax, is subject to either the 2% floor on miscellaneous itemized deductions (§67) or the overall limitation on itemized deductions (§68) is allowed in determining net investment income, but only to the extent the items are deductible after application of both limitations.
Miscellaneous itemized deductions suspended for tax years 2018 through 2025.
Miscellaneous itemized deductions under §67 are not allowed for tax years beginning after 2017 and before 2026 [§67(g)].
June 6, 2019
Question: Jim owns a commercial rental property that is reported on Schedule E. He rents the property to his S corporation in which he materially participates. In 2010, the S corporation made leasehold improvements to the property. In 2018, Jim decided to retire and sold the assets of the S corporation. The buyer did not rent the building from Jim, and did not need the leasehold improvements. The S corporation is liquidating in 2019. How should the S corporation treat the remaining basis in the leasehold improvements?
Answer: The S corporation can treat this as an abandonment of the leasehold improvements on Form 4797. The selling price will be $0 with the remaining adjusted basis as its cost. This will result in a loss; however, the loss will be nondeductible under the related party. Under §267, the shareholder and the S corporation are related parties.
Lessors are subject to the same abandonment loss rules as lessees for leasehold improvements. Thus, if leasehold improvements made by the landlord are abandoned or disposed of at the end of a lease, the landlord can deduct the unamortized or undepreciated basis of the improvements in the year of abandonment or disposition [IRC Sec. 168(i)(8)]. If the lessor purchased the building after the leasehold improvements were already in place, an allocation of the purchase price must have been made to the leasehold improvements before the lessor could deduct an abandonment loss on the improvements. However, if the new tenant continues to use the improvements, no loss is available to the landlord. In Standard Commodities Import and Export Corp., the Tax Court determined a transfer of leasehold improvements to a majority shareholder did not constitute a factual abandonment because both parties received consideration in exchange of the leasehold property for the release of liability; thus, any abandonment loss was disallowed under IRC Sec. 267.
May 30, 2019
Question: Ralph is a partner in XYZ. In Box 13 on Ralph’s 2018 Schedule K-1, the partnership allocated $110, Code K, excess business interest expense. Where on Ralph’s 2018 tax return do you deduct the $110?
Answer: The $110 is not deductible on Ralph’s 2018 tax return. Ralph’s allocation of excess business interest expense is treated as paid or incurred by him in 2019. But, the $110 is only deductible in 2019 to the extent that XYZ specifically allocates to Ralph excess taxable income or excess business interest income on his 2019 Schedule K-1, Box 20, Codes AE and AF, respectively [IRC Sec. 163(j)(4)(B)(ii)(I); Prop. Reg. 1.163(j)-6(g)(2)]. Ralph will use a 2019 Form 8990, Limitation on Business Interest Expense Under Section 163(j), to determine how much of the $110 he can deduct on his 2019 tax return.
Note: The intention of this Q & A is only to highlight the timing of claiming a deduction for excess business interest passed through to a partner. It is not intended to instruct on the limitation itself or Form 8990.
May 23, 2019
Question: On March 5, 2019, Bluebird, Inc. (an S corporation) requested an extension to file its 2018 Form 1120S,
U.S. Income Tax Return for an S Corporation. Bluebird proceeded to file its 2018 Form 1120S on May 1, 2019, without making a SEP contribution for its sole shareholder/employee. Can Bluebird still make a SEP contribution for 2018, and claim the deduction on an amended Form 1120S?
Answer: Yes. The due date for making a deductible SEP contribution is the extended due date of Bluebird’s Form 1120S (Sept. 15, 2019), even though the tax return was filed earlier. As long as the tax return is filed after obtaining a valid extension, taxpayers have until the extended due date to make the contribution regardless of when the return is actually filed (Rev. Rul. 66-144).
May 16, 2019
Question: Can my client Louie, who owns a trust, still take trust investment advisor fees that are above and beyond what an “ordinary” investor needs?
Answer: Yes. Based on Reg. §1.67-4(b)(4), the taxpayer can claim trust investment advisor fees that include advice necessary for the trust above and beyond what an ordinary investor would need for advice. These fees are not subject to the 2% miscellaneous deduction. Louie can no longer claim trust investment advisor fees for advice rendered to an ordinary investor because these fees are subject to the 2% miscellaneous deduction for 2018–2025.
May 9, 2019
Question: The taxpayer purchased a cemetery plot in 1999 for $2,000. In 2019, he discovered the cemetery had used the plot for someone else. As restitution, the cemetery paid the taxpayer $10,000 and the taxpayer acquired a new plot for $8,000. Is any of the involuntary conversion payment taxable?
Answer: Yes. Because the taxpayer did not reinvest the full $10,000 into a new plot, a portion of the restitution payment will be taxable.
The recognized gain is the excess not reinvested. In this case, the recognized gain is $2,000, the amount not reinvested ($10,000 restitution - $8,000 realized gain). The total deferred gain is $6,000 ($8,000 realized or deferred gain - $2,000 recognized gain). The basis of the new plot is $2,000 ($8,000 cost of the new - $6,000 deferred gain).
May 2, 2019
Question: Joe procrastinated filing his 2014 Form 1040 tax return because he knew he was getting a refund. He finally got around to completing it on Sunday April 15, 2018. Joe did not bother to mail it until Monday, April 16, 2018, when the post office was open because he said that the IRS extended the due date for tax returns until Monday because April 15 fell on a Sunday. Will Joe get the refund?
Answer: No. Joe will not receive the tax refund. He is correct that the IRS extends the due dates of tax returns that otherwise land on a Saturday, Sunday or legal holiday. However, that rule does not apply to receiving a tax refund.
The IRS does not extend the deadline used to determine how much of the taxes withheld on his wages may be refunded to him. Under §6513(b)(1), the taxes withheld on his 2014 wages are deemed paid on April 15, 2015. To receive a refund of taxes paid, the claim needs to be filed within three years after filing the return or two years from the date the tax was paid, whichever is later. This was upheld in KHAFRA, ET AL. v. IRS, ET AL., Cite as 122 AFTR 2d 2018-XXXX, (DC MD), 11/06/2018.
April 25, 2019
Question: Prior to her marriage to Elliot, Olivia owned securities. During the marriage, the securities were sold at a loss and a capital loss carryover resulted. The couple filed joint returns during their marriage. In 2017, Olivia died. When filing his 2018 Form 1040, does Elliott continue to use the capital loss carryforward?
Answer: No. Net operating losses (NOLs) and capital losses allocable to the decedent cannot be carried over and used by her estate. Also, those losses cannot be carried over and used in future tax years by a surviving spouse (Ltr. Rul. 8510053). However, they can be used in the decedent's final return, including one filed with a surviving spouse. Carryover losses not used in the decedent's final return expire in the year of death (Rev. Rul. 74-175).
April 18, 2019
Question: Qualified Inc., an S corporation located in Vermont, has several shareholders who are located out of state. Vermont requires estimated income tax payments on behalf of nonresident shareholders. This year, Qualified Inc. made $15,000 in required estimated payments for their nonresident shareholders. The shareholders are not required to reimburse Qualified Inc. for the estimated payments. Can Qualified Inc. deduct the estimated tax payments made for the nonresident shareholders?
Answer: No, Qualified Inc. cannot deduct the Vermont estimated income tax payments made on behalf of the shareholder [TC Memo 2015-73]. Instead, the payments are treated as distributions to the shareholders.
April 11, 2019
Question: Taxpayer has a Schedule K-1 (Form 1120S),
Shareholder’s Share of Income, Deductions, Credits, etc., from her S corporation that does not list any information about qualified business income (QBI). Box 1 of the K-1 reports ordinary income and the taxpayer received a Form W-2,
Wage and Tax Statement, from the S corporation. Is this enough information to calculate the 20% deduction under §199A?
Answer: No, the S corporation must supply QBI information to the shareholder on Schedule K-1 in Box 17 with codes V-Z. If the K-1 fails to report this information, it is presumed that the shareholder’s share of QBI items is zero.
A relevant pass-through entity or RPE must separately identify and report the following items on the Schedule K-1 issued to its owners for any trade or business engaged in directly by the RPE:
- Each owner’s allocable share of QBI, W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property attributable to each trade or business.
- Whether any of the trades or businesses are an SSTB.
If an RPE fails to separately identify or report the required items, the owner’s share of those items will be presumed to be zero [ Reg. §1.199A-6(b)(3)(iii)].
April 4, 2019
Question: In 2017, John filed a joint return reporting wages of $355,000 and was subject to the additional Medicare tax on Form 8959. On John’s 2018 joint return, his wages dropped to $215,000 and your software program did not generate Form 8959. Why is John not subject to the additional Medicare tax on Form 8959 in 2018?
Answer: The threshold for filing Form 8959 for a MFJ return is when wages exceed $250,000. Since John’s wages did not exceed $250,000 in 2018, he is not subject to the additional Medicare tax on Form 8959 and, therefore, your program did not prepare the form.
March 28, 2019
Question: John owned a rental property for 10 years. In 2018, he moved into the property to use as his primary residence in hopes of excluding gain under §121 when he sells it in the future. Will John recognize gain on the conversion of the rental property to his residence in 2018?
Answer: No, there is no recognition for income tax purposes for the retirement of a depreciated asset by converting it to personal use, assuming assets were not expensed under §179. No gain or loss is recognized at the time of conversion. However, when a business asset is converted to personal use and later sold, §§165(c)(1) and 165(c)(2) do not permit deduction of a loss on a sale or other disposition. This is true even if the decline in the property's value occurred while it was used in the taxpayer's business and would have been deductible had the property been sold when it was converted.
March 21, 2019
Question: You have many clients who own rental activities.
- Robert works full time as a car salesman and owns one rental property that generates income.
- George is sole proprietor who owns a handyman business and owns seven rentals.
- Bill is a farmer who rents out 120 acres of farmland that he doesn’t use in his farming business.
- Chuck is the CEO of a major corporation and personally owns a commercial rental building.
Is the income from these activities qualified business income (QBI) for the purposes of claiming the qualified business income deduction (QBID)?
Answer: It depends. It may be frustrating to hear, but there is no one-size-fits-all answer to any of these scenarios and the dozens of others that tax professionals are wrestling with this year.
Fact: Only §162 trade or business income can generate QBI [Reg. §1.199A-1(b)(14)]. Generally, a rental does not rise to the level of a trade or business, which is why rental activities are passive, reported on Schedule E, and not subject to SE tax. However, it has always been possible for a taxpayer’s rental activities to rise to the level of a trade or business, but the IRC has never offered a clear definition for this, which has historically made this determination highly subjective. It is nearly impossible to glean a precedent from Tax Court rulings, and they have swung either way with similar fact sets. With this is mind, when Congress enacted this new §199A/QBID at the end of 2017, tax professionals had nothing to hang their hat on, and the community has been flooded with opinions as to whether rental activities are a trade or business for §199A purposes. No matter how eloquent or convincing the arguments are one way or the other, there simply isn’t a statute to rely on for anyone.
That said, the IRS issued Notice 2019-07 in January 2019, which includes a proposed revenue procedure that provides a safe harbor for treating a rental activity as a trade or business solely for purposes of §199A. The proposed regulations indicate that a rental activity that meets certain criteria is a rental real estate enterprise (RREE), and deemed to be a trade or business for §199A purposes only.
In sum, taxpayers and tax professionals are free to argue any rental activity is a “trade or business” under §162, if they have an argument. But only those owners of rental real estate that meet the safe harbor in Notice 2019-07 are considered a trade or business in the eyes of IRS without argument.
The safe harbor is not part of this answer, but members can access a summary of the safe harbor that is included in the
summary of §199A regulations published late January at the following link.
March 14, 2019
Question: Mike is a sole proprietor filing a joint return with taxable income of $150,000 (no capital gains). He reported net income of $54,000 on Schedule C (Form 1040),
Profit or Loss From Business (Sole Proprietorship), for 2018. Is Mike’s qualified business income (QBI) deduction based on 20% of $54,000 before the taxable income limitation is taken into consideration?
Answer: Not necessarily. The deduction is 20% of QBI. Mike’s QBI is the net amount of his income, gain, deduction, and loss with respect to his Schedule C business. However, QBI also takes into account other deductions attributable to his trade or business including, but not limited to, above-the-line deductions for self-employed health insurance, one-half the self-employment tax and any contribution to a self-employed retirement plan based on his Schedule C net income [Reg. §1.199A-3(b)(vi)]. Thus, he must reduce his Schedule C net income by other allowable deductions attributable to his business to arrive at QBI, and then multiply the net amount by 20%.
March 7, 2019
Question: My client Albert wants to provide a death benefit to his employee’s spouse or to the employee’s estate. Is there a tax-free employee death benefit available to the employee’s spouse or the employee’s estate from the company?
Answer: Yes, based on Reg §1.101-2(a)(1), the general rule is that amounts up to $5,000 paid to beneficiaries or the estate of an employee, or former employee, from the employer, shall be excluded from income. This does not pertain to income paid to the employee, which must be included as part of compensation and is taxable. The employer will get a deduction for employee death benefits. Any amounts over $5,000 will be included in the beneficiary or estate income.
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