Walther CPA Newsletter July 2019

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Retirement Account Withdrawals

Identify Sources of Cash Flow and Related Costs:

How are you going to make the check, the cash, show up in your bank account every two to four weeks, and what costs will it cover.

Determine How to Withdraw Money:

You can take distributions from your IRA when you’re in a low tax bracket and do partial Roth conversions.

Right Assets in the Right Accounts:

Consider placing the least tax-efficient, highest expected return investments (emerging markets funds, sector rotation funds, commodities) in your Roth IRA and traditional IRA and the most tax-efficient, highest expected return investments (S&P 500, MSCI EAFE International, and MLPs) in your taxable account.

Make Annual Strategy Adjustments:

As investment expectations change, where you put those assets may shift. It’s not a static process, it’s not a set-and-forget. Investments need managed on an ongoing basis because there’s essentially tax alpha opportunities every year.

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Medicare Considerations

  Medicare Part A (Hospital Insurance) covers inpatient hospital stays, care in a skilled nursing facility, hospice care and some home health care.

Medicare Part B (Medical Insurance) covers certain doctors’ services, outpatient care, medical supplies and preventive services.  You pay nothing for most preventive services if you get the services from a health care provider who accepts the assignment.  In 2019, the standard Part B premium is $135.50 per month (or higher depending on your income). Original Medicare includes Parts A and B and you’re able to choose the doctors, hospitals and other providers that accept Medicare.  In general, you’ll pay a deductible or coinsurance for Part A and Part B services.

  • Medicare Part C (Medicare Advantage or MA) is an all-in-one alternative to original Medicare and includes Part A, Part B and typically Part D.  The coverage is provided by private insurance companies approved by Medicare and you typically choose health care providers who participate in the plan’s network.  You typically pay a monthly premium for the MA Plan, in addition to the monthly premium for Part B.  You’ll also be responsible for a copayment and coinsurance for covered services and these plans have a yearly limit for your out-of-pocket costs.  Many MA plans offer vision, hearing and dental coverage, as well.
  • Medicare Part D (Prescription Drug Coverage) adds prescription drug coverage to original Medicare and some other Medicare plans. You usually pay a monthly premium and these plans are run by private companies approved by Medicare.
  • Medicare Supplement Insurance (Medigap)  If you choose to buy a Medicare Supplement Insurance policy, the plan may pay some of the deductibles and coinsurance for Parts A and B.

Enrollment

If you’re already receiving Social Security benefits, you’ll automatically be enrolled in Medicare Part A (Hospital Insurance) and Part B (Medical Insurance) when you turn 65 years old, but you can decline Part B coverage and sign up later.  Since everyone has to pay a premium for Part B, you may delay this coverage if you’re already covered by another plan. If you’re not receiving Social Security benefits, you need to sign up for Medicare.  Most people should enroll in Part A when they turn 65 years old, even if they are covered through their employer’s insurance plan.  If you paid Medicare taxes while you worked, you won’t have to pay a premium for Part A. 

Other insurance coverage

If you have Medicare and other insurance coverage, like employer or union, military, or veterans’ benefits, each type of coverage is considered a payer.  When you have more than one payer, you need to coordinate your benefits to determine which payer will pay first and which one will pay next. The primary insurance company will pay up to the limits of the coverage, then the secondary insurance company will pay (up to coverage limits) if there are costs not covered by the primary insurer.  Remember to tell your doctor and health care providers that you’re covered by multiple insurers to help them determine where to send the bills and to avoid delays.

Practical tips

  • When you work into retirement years or have a spouse with employer coverage, it’s important to stay on top of the rules because of the dollars at stake.  If you or your spouse are still working, the employee coverage is going to be primary and Medicare is secondary.  However, once the employer coverage ends, Medicare coverage becomes primary.
  • If you have a retiree health plan, it is secondary to Medicare.  There are some exceptions if you’re under 65 and have Medicare through a disability or work for a small employer.
  • Pay close attention to the window for enrolling in Medicare coverage (if required), because you can only sign up between January and March each year.
  • Your premiums for Parts B and D will go up if you’re above the income thresholds ($85,000 for single filers / $170,000 for joint filers).  If you’re above the income cutoff, you may be able to make some financial moves to keep your income below the threshold.
  • Keep in mind that providers sometimes make mistakes by billing the wrong plan or by failing to bill your secondary plan.  Make sure each claim has made it through both plans before you pay.                                                                                              

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Tax Time Travel: Relief From Errors, Missed Elections, Certain Mistakes

 Rescission

 The rescission doctrine was applied in the tax world by Penn v. Robertson, 115 F.2d 167 (4th Cir. 1940), and now resides in Rev. Rul. 80-58, which, relying on that case, holds that a successful tax “undo” has two prerequisites:

  • The parties to the transaction must be returned to the status quo ante(i.e., the relative positions they would have

   occupied had no contract been made); and

  • The rescission must be accomplished within the same tax year as the original transaction.

Superseding returns

Since the Supreme Court’s decision in Haggar Co. v. Helvering, 308 U.S. 389 (1940), taxpayers have been able to change the positions taken on their already-submitted returns by filing a second return, superseding the first. The precondition to doing this is straightforward: The superseding return must be filed before the due date — including timely filed extensions — for filing the initial return (see Internal Revenue Manual (IRM) §3.5.61.1.8(1); Rev. Rul. 78-256).

Check-the-box elections

Simply stated, the tax law’s entity classification rules give taxpayers the option — by means of checking a box on Form 8832, Entity Classification Election — to classify certain types of entities as corporations, partnerships, or disregarded entities. 

Another tool: Requests for Sec. 9100 relief

Confusion over, and the complexity of, the Code’s election provisions are a primary reason that Regs. Secs. 301.9100-1 through 301.9100-3 provides rules permitting extensions of time for certain other late elections. The range of elections covered by the Sec. 9100 (and other) do-over provisions is extensive, including the use of the last-in, first-out inventory method, Sec. 338(g) and (h)(10) elections; dual-consolidated-loss agreements (see Regs. Sec. 1.1503(d)-1(c)); gain-recognition agreements under Sec. 367(a) (see Regs. Sec. 1.367(a)-8(p)); Foreign Investment in Real Property Tax Act statements (see Rev. Proc. 2008-27); and the timely documentation of success-based fees. 

Generally speaking, Sec. 9100 relief falls into two categories — automatic relief (under Regs. Sec. 301.9100-2) and discretionary relief (under Regs. Sec. 301.9100-3).

Automatic relief is conditioned on the taxpayer’s taking corrective action within a specified period (within either six or 12 months of the due date of the associated return). Securing discretionary Sec. 9100 relief is more cumbersome. First, it is available only for elections whose due dates are set by regulation (not by statute). Second, it will be granted only when the taxpayer can demonstrate, via the filing of one or more required affidavits and otherwise, that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government (e.g., granting relief would result in a taxpayer’s having a lower tax liability in the aggregate for all tax years affected by the election).

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Walther CPA Newsletter June 2019

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New Limitation On Excess Business Losses

 The new limitation on excess business losses provision is effective for noncorporate taxpayers for tax years beginning after Dec. 31, 2017, and it is scheduled to sunset after Dec. 31, 2025. Much attention has been given to the Sec. 199A deduction for qualified business income, the new qualified opportunity zone provisions, and the Sec. 163(j) limitation on business interest expense. But there is another major change that affects individuals and trusts for which little regulatory guidance has been issued: the excess business loss limitation of noncorporate taxpayers under Sec. 461(l).

The TCJA amended Sec. 461 to include a subsection (l), which disallows excess business losses of noncorporate taxpayers if the amount of the loss is in excess of $250,000 ($500,000 in the case of a joint return). These threshold amounts for disallowance will be adjusted for inflation in future years (Sec. 461(l)(3)(B)). The disallowed amount is carried forward as a net operating loss (NOL) to the following tax year under Sec. 461(l)­(2), thus eliminating the need for a separate carryback provision.

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Don't dwell on what happened, no matter how bad it was. Find something else to do. Find something to do to help others.

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Structuring Divisive Reorganizations

A Type D reorganization involves a transfer of assets between corporations. Immediately after the transfer, the transferor corporation or its shareholders must be in control of the corporation to which the assets are transferred (Sec. 368(a)(1)(D)). For divisive D reorganizations, control means ownership of at least 80% of the total voting stock and at least 80% of the total number of shares of all other classes of stock (Sec. 368(c)). Under Sec. 368(a)(1)(D), stock or securities of the corporation to which the assets are transferred must be distributed to the transferor’s shareholders in a transaction that qualifies under Sec. 354, 355, or 356.

Type D reorganizations can be either acquisitive or divisive. However, the most common uses of D reorganizations involve the splitting of one corporation into two or more corporations in transactions commonly described as split-ups, split-offs, and spinoffs. Such transactions occur because the two businesses are perceived to be worth more individually than together, or because the shareholders want to split, with some owning one business (via owning the stock of one of the corporations) and others owning another (via owning the stock of the other corporation).

Type D divisive reorganizations can take the form of a split-up, a split-off, or a spinoff, whereby a corporation transfers part of its assets to one or more controlled corporations, which then distribute their stock in one of the following ways:

  • In a split-up, assets are transferred from one corporation to two or more controlled corporations. The stock of the controlled corporations is then distributed to the transferor corporation’s shareholders, and the transferor corporation is liquidated. The distribution of the controlled corporations’ stock can be made on a pro rata or non—pro rata basis.
  • In a split-off, certain assets of a corporation are transferred to a newly created corporation in exchange for all of the new corporation’s stock. The transferor corporation then distributes the new corporation’s stock to one (or one group of) shareholder(s), who are required to give up their stock in the transferor corporation in exchange.
  • In a spinoff, certain assets of a corporation are transferred to a newly created corporation in exchange for all of the new corporation’s stock. The transferor corporation then distributes the new corporation’s stock to its shareholders, who are not required to give up any part of their stock in the transferor corporation.

When deciding the form of corporate division to undertake, its purpose should be considered. For example, a spinoff should not be used when there is corporate discord, because it will result in pro rata ownership of the distributing and new corporations by the existing shareholders. In contrast, a split-off does not require a pro rata distribution of stock and, thus, can result in one shareholder owning most or all of the original corporation, and the other shareholder(s) owning most or all of the newly formed company.

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Distribution By Former S Corporation Is Part Dividend

 In Rev. Rul. 2019-13, the IRS ruled that a distribution to the sole shareholder of a C corporation was partly a recovery of the former S corporation’s accumulated adjustments account (AAA) and a taxable dividend for the remaining distribution.

The company involved was originally a C corporation that had accumulated earnings and profits (E&P) of $600x when it converted to an S corporation. (The sole shareholder held all 100 shares of stock in the corporation.) When the corporation terminated its S election, it had an AAA of $800x and continued to have the $600x of C corporation E&P.

During the corporation’s S corporation post-termination transition period, the corporation redeemed 50 of the 100 outstanding shares for $1,000x. The corporation made no other distributions during the post-termination transition period. Pursuant to Sec. 302(d), the redemption is characterized as a distribution subject to Sec. 301. For the tax period that includes the redemption, the corporation had current E&P of $400x.

The IRS ruled that if, during a former S corporation’s post-termination transition period, the corporation distributes cash in redemption of a shareholder’s stock, which is characterized as a distribution subject to Sec. 301, the corporation should reduce its AAA to the extent of the proceeds of the redemption pursuant to Sec. 1368. Consequently, the IRS ruled that $800x of the distribution should first reduce the S corporation’s AAA under Sec. 1368 (which was not taxable) and that the remaining $200x was a taxable dividend under Sec. 301.

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Walther CPA Newsletter May 2019

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LLC Owned Solely By Spouses: A Partnership Or A Joint Venture?

Ordinarily, a domestic entity with two or more owners is classified as a partnership for federal tax purposes. If a qualified entity, and a married couple as community property owners of the entity, treat it as a disregarded entity for federal tax purposes, the IRS will accept the position that it is a disregarded entity. If a qualified entity, and a married couple as the owners of the entity, treat it as a partnership for federal tax purposes, the IRS will accept the position that it is a partnership for federal tax purposes.

A business entity is a qualified entity if:

  • The business entity is owned solely by a married couple as community property under the laws of a state, a foreign country, or a possession of the United States;
  • No person other than one or both spouses would be considered an owner for federal tax purposes; and
  • The business entity is not treated as a corporation under Regs. Sec. 301.7701-2.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.

A business owned by a married couple as tenants by the entirety should also qualify to be treated as a disregarded entity since the tenancy is a single ownership. The law in the state where the spouses are domiciled should be consulted.

Sec. 761(f) allows a qualified joint venture conducted by spouses filing a joint return to not be treated as a partnership for federal income tax purposes. A qualified joint venture is the conduct of a trade or business if:

  • The only members of the joint venture are the spouses;
  • Both spouses materially participate (within the meaning of Sec.      

    469(h), ignoring paragraph (5) thereof) in the business; and

  • Both spouses elect this treatment.

If joint venture status is elected, each spouse files a Schedule C, Profit or Loss From Business, Schedule E, Supplemental Income and Loss, or Schedule F, Profit or Loss From Farming, as appropriate, to report his or her share of the items of income, gain, loss, and deduction. This election is not available if the business is conducted through a state law entity such as a partnership or a limited liability company (LLC), according to the instructions for Form 1065, U.S. Return of Partnership Income.

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Qualifying As A Real Estate Professional

In Antonyshyn, the court upheld the IRS’s findings that the taxpayers had losses in the years 2009-2010 that were passive losses and not deductible against other income. The taxpayers owned six residential rental properties located in five different states — none in their home state of California. They hired management companies for four of the properties, which were located in Georgia, Missouri, and North Carolina, to handle daily operations, including collecting rents, interacting with tenants, and arranging for maintenance as needed. The other two properties were not leased out during the years under audit. The court found that most of the taxpayers’ time spent on the activities was not for daily operations but was for activities related to being investors, which is generally not counted as participation. Therefore, the wife did not qualify as a real estate professional under Sec. 469(c)(7). In addition, the court noted the taxpayers kept poor records, which were not credible in many instances. Having consistent activities that qualify as real estate management or keeping daily time sheets will support the taxpayers assertion that they are real estate professionals.

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IRS Reevaluating Active Trade Or Business Requirement For Spinoffs

The IRS announced on Thursday that it is reviewing its approach to the active trade or business requirement that must be met for a five-year period for a business to qualify for a tax-free spinoff under Sec. 355 and, as a result, is suspending two revenue rulings, Rev. Ruls. 57-464 and 57-492, in which it previously ruled on the topic (Rev. Rul. 2019-09). The suspended rulings addressed the active trade or business requirement under Secs. 355(a)(1)(C) and (b).

Rev. Rul. 57-492 involved a corporation engaged in refining, transporting, and marketing petroleum products, which began a separate operation to find and produce oil. The separate operation to produce oil did not include any income-producing activity or source of income until less than five years before its separation from the primary refining, transportation, and marketing operation, so the IRS ruled that the exploration and production operation did not satisfy the active trade or business requirement.

The IRS is conducting a study to determine, for purposes of Sec. 355, “whether a business can qualify as an [active trade or business] if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected.” The IRS stated that the active trade or business analysis underlying the holdings in the two revenue rulings relies in a significant part on the lack of income generated by the activities under consideration, and, consequently, these rulings could be interpreted as requiring income generation for a business to qualify as an active trade or business. Thus, it is suspending the revenue rulings until the completion of the study.                         Contact us for more information

Walther CPA Newsletter April 2019

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Property Ownership – Production of Income vs. Personal Consumption

 When a personal residence is sold for a loss, Treas. Reg. 1.165-9 makes explicit what is implied by §165: the loss is not deductible if the home was a personal residence at the time of sale.  However, the regulation also provides that if a taxpayer moves out and the home is then “rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale,” then any loss becomes deductible.   The rental process needs to be done correctly, rent to a real tenant for a real time period and a real amount of money. Renting to a friend for 5 days a month for income less than what  a monthly rental would be is not sufficient. Upon review the taxing authorities must see evidence that the rental is to make money and not an extension of a personal activity.

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IRS expands relief from underpayment penalty

 The IRS announced on Friday that it is amending Notice 2019-11 to lower the amount of tax that an individual must have paid in 2018 to avoid the underpayment of estimated income tax penalty to 80% (Notice 2019-25). The change was made after concerns were raised that the earlier relief, which lowered the underpayment penalty threshold from 90% to 85%, did not go far enough given all the uncertainties taxpayers and tax practitioners faced after the many changes wrought by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.

The rules remain in place for 2019 and future years that 90% of prior year tax must be paid through withholding or estimated tax payments.

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March Madness Good Luck!

The Illinois CPA Society has compiled a list of five key tax issues that people involved in sports betting, even NCAA March Madness pools, need to keep in mind.

1. Special tax reporting is required for gambling wins of at least $600 or 300 times the original wager.

2. Gambling wins of $5000 or more may require withholding taxes to be taken out before payout.

3.  All cash and non-cash gambling winnings are taxable.

4. Casual gamblers must report win and loss totals separately – not simply state the overall difference.

5. Keep all printed gaming receipts or records of wagers for official tax documentation.

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