Walther CPA Newsletter October 2019

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Involuntary Conversions (IRC 1033)

The owner of real property lost through condemnation can elect to defer tax on the gain to the extent that the owner reinvests the proceeds in similar property.

Two related Revenue Rulings, 81-80 and 81-181 contain pro taxpayer advantages on when condemnations pass muster under Section 1033.

81-180 determines that a sale of land under threat of condemnation satisfies the requisites for Section 1033, notwithstanding that the taxpayer knows at the time she acquires the property that a local government agency is going to authorize its condemnation.

81-181 determines that a land sale similarly qualifies, although the sale is made to a person other than the condemning authority. 

                                            

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Great leaders—and great gardeners –resist the temptation to micromanage. They know that flowers cannot grow if you keep jerking them out of the ground to check the roots.”

Rodger Dean Duncan
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Retirement Plan Distribution Can Be Taxed Even When

Check Isn’t Cashed

The Internal Revenue Service issued a revenue ruling explaining what happens when a distribution check from a qualified retirement plan isn’t cashed by the recipient and found that even when the check isn’t cashed, it still counts as taxable income.

In Revenue Ruling 2019-19, which the IRS released last week, the IRS gave the example of an individual who failed to cash the distribution check she received in 2019 and whether that allowed her to exclude the amount of the designated distribution from her gross income in that year. It also discussed whether her failure to cash the distribution check she received changed her employer’s (or plan administrator’s) obligations in terms of withholding and reporting.

The IRS said the individual’s failure to cash the distribution check she received in 2019 doesn’t permit her to exclude the amount of the designated distribution from her gross income for that year under Section 402(a) of the Tax Code. Also, her failure to cash the distribution check she received doesn’t alter her employer’s obligations with respect to withholding under Section 3405 or reporting under Section 6047(d).

The revenue ruling applies to a specific situation, and the IRS and the Treasury Department are continuing to analyze issues that could arise in other scenarios involving uncashed checks from eligible retirement plans, including situations involving missing individuals with benefits under those plans.

 

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R&D Tax Credit

Many manufacturing companies fail to take advantage of the generous research and development (R&D) tax credit simply because they don’t have staff working in a lab.

You can take advantage of this tax credit as long as your company performs activities such as the following:

  • Redesigns its production process to be more efficient
  • Introduces artificial intelligence or robotics into your manufacturing process
  • Develops software that enhances your company’s processes or procedures
  • Designs, constructs or tests product prototypes
  • Develops second-generation or improved products

This list is not all-inclusive. According to the IRS, many activities may qualify if they are performed in the United States and meet the following four-part test.

Part 1. Permitted purpose

The IRS test is to create a new or improved product, business component or process that increases performance, function, reliability, composition or quality or that reduces costs for your company. It does not have to be new to your industry.

Part 2. Technological in nature

The research must fundamentally rely on the hard or physical sciences, such as engineering, physics, chemistry, biology or computer science.

Part 3. Uncertainty eliminated

You must be able to demonstrate that you’ve attempted to eliminate any uncertainty about the usefulness of the development, improvement or design.

Part 4. Process of experimentation

You must be able to demonstrate during the research process that you’ve experimented and evaluated alternatives. This may have been done through research techniques like modeling, simulation, trial and error or some other method.

Documenting R&D Activities

Claiming the credit requires a lot of supporting documentation, however. It is worth taking the time to assess whether the amount of tax relief you’ll get is worth the effort. For example, you’ll need to determine how much of a credit your company is eligible for, how difficult it will be to document your company’s R&D activities, whether the credit can be used to offset alternative minimum tax liability and whether you can claim previously unused credits.

Many, if not all, manufacturers may find they can reduce their taxes by taking advantage of the federal R&D tax credit. In addition, many states have an R&D credit that is available to manufacturers. It’s worth investigating.

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Walther CPA Newsletter September 2019

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Certified Public Accountants

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IRS Announces Automatic Penalty Waivers For 2018, Will Issue Refunds To Affected Taxpayers

 The automatic waiver applies to any individual taxpayer who paid at least 80% of their total tax liability through federal income tax withholding or quarterly estimated tax payments, but did not claim the special waiver available to them when they filed their 2018 return earlier this year.

 The IRS will apply this waiver to tax accounts of all eligible taxpayers, so there is no need to contact the IRS to apply for or request the waiver.

 

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Thomas Dewar
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Foreign-Derived Intangible Income Guidance

Calculating the Sec. 250 deduction allowed to a domestic corporation for its foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) is addressed in proposed regulation 104464-18.

The proposed regulations clarify certain aspects of the FDII deduction computation, including consolidated group and partnership attribution rules, the definition and application of “foreign use” for qualifying sales of property, distinguishing between types of services, and providing ordering rules for the interaction of Sec. 250 with other tax provisions.

For tax years beginning after Dec. 31, 2017, but before Jan. 1, 2026, a domestic C corporation may claim a deduction equal to 37.5% of its FDII and 50% of its GILTI.

 

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Special Needs Trust

When a person with a disability receives an inheritance, he or she may become ineligible for needs-based federal funding. This could make it nearly impossible for that individual to live comfortably while also getting the care he or she needs. Luckily, there is a solution for these cases: Special Needs Trusts (SNT). Special Needs Trusts are a specialized type of trust that are used in order to maintain a beneficiary’s important public benefits such as SSI or Medicaid.

As health care expenses rise in the U.S., so do the challenges faced by individuals with disabilities and their families. Managing uncertainties that come with caring for a loved one with a disability can be financially burdensome.

It is important to remember that funds cannot be directly left to a beneficiary or he or she will likely lose public funding. In order to avoid this, it is prudent to instead allocate the funds to a trust to provide for anything that government aid is not providing, such as quality of life expenses like caregiving and schooling.

The upkeep of the trust for the beneficiary includes, but is not limited to, paying taxes, keeping clear records, maintaining nonconforming assets, educating beneficiaries and handling all distributions. The Trustee is responsible for the upkeep.

 

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