Walther CPA Newsletter October 2019

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Certified Public Accountants


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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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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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Minds are like parachutes: They only function when open.”

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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Walther CPA Newsletter August 2019

Walther CPA Newsletter August 2019

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IRS Sends Letters To 10,000+ Cryptocurrency Users Urging Them To Pay Taxes


The Internal Revenue Service has started sending letters to over 10,000 taxpayers who own virtual currencies, such as Bitcoin and Ethereum, advising them to pay back taxes on any income they failed to report.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS commissioner Chuck Rettig in a statement. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.” Virtual currency is also an ongoing focus area for the IRS Criminal Investigation unit.

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Tax-Income balance

“Kiddie Tax” And Unearned Income From Scholarships

 Internal Revenue Code Sec. 117 excludes from gross income scholarship proceeds used to pay qualified tuition and related expenses at qualified educational institutions received by students who are candidates for degrees at those institutions.

  • Scholarship proceeds used for expenses other than qualified tuition and related expenses (i.e., tuition, fees, books, and equipment required for the enrollment or attendance of a student at an educational institution or for a specific course taken at the institution) are generally included in income and considered to be unearned income.
  • The law known as the Tax Cuts and Jobs Act amended the rules for the tax on children’s unearned income, commonly called the kiddie tax, so that it no longer is calculated at the parents’ top marginal rate and is instead calculated at modified trust and estate tax rates.
  • Students subject to the kiddie tax may need to file Form 8615, Tax for Certain Children Who Have Unearned Income. In some situations, students will need to use information not provided on Form 1098-T, Tuition Statement, to properly fill out Form 8615.

The change in the kiddie tax rates could cause some students to incur a larger tax liability due to the treatment of scholarship proceeds as unearned income than under the old kiddie tax rules. However, by following certain strategies, students may be able to reduce the amount of their unearned income from scholarships and avoid a kiddie tax liability.


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IRS Issues New Safe-Harbor Rule For Real Estate

 A rental activity (including multiple rental activities combined into a single enterprise) is treated as trade or business if the taxpayer spends 250 hours or more on rental services. 

To qualify for this 250-hour safe-harbor, the taxpayer must also meet the following requirements.

  • The taxpayer maintains separate books and records for each rental activity (or the combined enterprise); and
  • The taxpayer maintains contemporaneous records, including time reports and similar documents, concerning hours of services performed, a description of all services performed, the dates on which services are performed and the identities of the parties performing the services.

Furthermore, some of the hours spent on activities relating to a rental estate operation may not count toward the 250-hour threshold.  For instance, Notice 2019-17 specifies that rental services do NOT include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

Finally, certain rental activities are specifically excluded from the safe harbor rule, such as:

  • Real estate you use as a residence for any portion of the year; and
  • Any property rented on a triple net lease basis.

The IRS defines a triple net lease as a lease agreement where the tenant or lessee is required to pay taxes, fees and insurance and is responsible for maintenance activities for a property in addition to rent and utilities.

More to come: The IRS expects to issue additional guidance in this area.  Stay tuned for more developments.


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Walther CPA Newsletter July 2019

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Certified Public Accountants


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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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To steal ideas from one person is plagiarism. To steal from many is research.


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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.


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


 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) §; 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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May your choices reflect your hopes, not your fears.

Nelson Mandela


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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Walther CPA Newsletter March 2019

Walther CPA Newsletter March 2019

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Certified Public Accountants



Gross receipt aggregation rules 

For a business to be eligible for small business taxpayer treatment, the taxpayer must not be considered a tax shelter and can’t have average annual gross receipts of greater than $25 million. All persons treated as a single employer are treated as a single person for purposes of measuring gross receipts.

The gross receipts of all organizations that are part of a “parent-subsidiary group,” a “brother-sister group” or a “combined group” under common control are required to be aggregated for purposes of applying the $25 million gross receipts test. An organization can include a corporation, partnership, trust, estate or sole proprietorship that conducts a trade or business and can only be a member of one group. If an organization is a member of more than one group, the organization can attach a statement to its timely filed return indicating in which group it will be included. Otherwise, the IRS can choose the group in which the entity will be included.

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march highlights

Morale is when your hands and feet keep on working when your head says it can’t be done.”

Benjamin Morell
st patricks

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Reminder on return due dates for owners and beneficiaries of foreign trusts and gifts from foreign persons

 Two forms related to foreign trusts, Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, are required to be filed separately from the income tax return of the owner and beneficiary. Many foreign pension plans are deemed to be foreign trusts and require Forms 3520 and 3520-A to be filed. However, exemptions include Canadian Registered Retirement Savings Plans (RRSPs).

Form 3520

U.S. owners (or executors of estates of U.S. decedents) of foreign trusts and U.S. persons receiving a large gift from a foreign person are required to file Form 3520 by April 15. U.S. beneficiaries of foreign trusts are also required to file Form 3520 in any year in which the beneficiary receives a distribution from the foreign trust. Loans and certain other transactions between foreign trusts and U.S. persons must also be reported on Form 3520. Substantial penalties apply for noncompliance.

If a taxpayer files an extension for their individual return, they will receive an automatic extension to Oct. 15 on their Form 3520. Currently, Form 3520 can’t be extended independently of Form 1040 or Form 1041. Thus, if Form 3520 can’t be filed by April 15, the taxpayer must request an extension to file Form 1040 or Form 1041 to extend the due date for filing Form 3520.  

Form 3520-A

Form 3520-A is due March 15. A taxpayer can only extend it by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, separately from the Form 1040. An extension cannot be made by simply extending the due date for Form 1040. The extension is for six months until Sept. 15. Often, the taxpayer misses the March 15 deadline and the separate extension.

The penalty for failure to file Form 3520-A in a timely matter is the greater of $10,000 or 5% of the value of the portion of the trust treated as owned by the U.S. person. A foreign grantor trust with a U.S. owner must file a Form 3520-A, and it is generally filed by the trustee of the foreign trust. However, it’s ultimately the U.S. owner’s responsibility to ensure that the foreign trust files Form 3520-A and furnishes the required annual statements to all U.S. owners and U.S. beneficiaries. If the trustee of the foreign trust doesn’t file Form 3520-A, the U.S. owner must file the return.

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Walther CPA Newsletter Feburary 2019

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Certified Public Accountants


Five Steps To Follow In A Sales Tax Audit

  1. Treat the auditor with respect.  Provide them with adequate space to perform their work and have your sales tax records organized in advance.
  2. Presume you need to collect the tax.  On June 21, 2018, the Supreme Court of the United States ruled physical presence is not  a requisite for sales tax collection.  Since the decision in South Dakota v. Wayfair, Inc., more than 30 states have broadened their sales tax laws to include a business’s “economic and virtual contacts” with the state, as economic nexus.  That trend is likely to continue until all states with a general sales tax impose a sales tax collection obligation on remote sellers.
  3. Have complete and accurate exemption certificates.  If you don’t have a complete certificate that proves a customer is exempt, you’ll owe the state for the sales tax you didn’t charge – plus penalties and interest.
  4. Keep accurate records.  Be certain that all sales are taxed unless a valid exemption is on file.  Provide reconciliations of tax billed and collected from customers to amounts remitted to the taxing authority.
  5. Pay what is due.  Remit timely, many states provide discounts for early payments.


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feb highlights

Since light travels faster than sound, some people appear bright until you hear them speak.


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  • Qualified Small Business Stock Gets More Attractive

     Sec. 1202(a) provides that a non corporate shareholder can exclude 50% of the gain from the sale of qualified small business (QIS) stock that has been held for five years.  QIS stock must be stock in a C corporation; thus, Sec. 1202 is generally not available to exclude gain on the sale of S corporation stock or a partnership interest.

    The 50% exclusion percentage was increased to 75% for stock acquired from Feb. 18, 2009, to Sept 27, 2010, and then again to 100% for stock acquired on or after Sept. 28, 2010.  The 100% exclusion, unlike many other tax breaks, is permanent.

    This ability to exclude 100% of the gain on the sale of stock – stock sold for cash, moreover – is virtually unmatched throughout the Code.                                                            

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IRS To Waive Tax Penalties For Under Withholding And Underpayment

 Internal Revenue Service (IRS) has indicated that it would generally waive the tax penalty for any taxpayer who paid at least 85% of their total tax liability last year through federal income tax withholding, quarterly estimated tax payments or a combination for the two.

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Walther CPA Newsletter January 2019

Walther CPA

Certified Public Accountants


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IRS Announces 2019 Mileage Rates 

The Internal Revenue Service (IRS) has issued the 2019 standard mileage rates.  Beginning on January 1, 2019, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 58 cents per mile for business miles driven (up from 54.5 cents in 2018)
  • 20 cents per mile driven for medical or moving purposes (up from 18 cents in 2018)
  • 14 cents per mile driven in service of charitable

     organizations (currently fixed by Congress)

Keep in mind that, under tax reform, taxpayers can no longer claim a miscellaneous itemized deduction for unreimbursed employee travel expenses.  That deduction was eliminated from Schedule A alongside similar deductions like the home office deduction.


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Clarification Of Itemized Deductions For Trusts And Estates

 Treasury and the IRS intend to issue regulations providing clarification of the effect of newly enacted Sec. 67(g) on the ability of trusts and estates to deduct certain expenses. Sec. 67(g), suspends miscellaneous itemized deductions for tax years 2018-2025.

The pending regulations are anticipated to clarify that the costs of trust or estate administration that are deductible under Sec. 67(e)(1) are not miscellaneous itemized deductions and, therefore, their deductibility has not been suspended by Sec. 67(g).

Expenses that are paid or incurred in the administration of an estate or trust and that would not have been incurred if the property were not held in such an estate or trust are deductible under Sec. 67(e)(1). Expenses deductible under Sec. 67(e) include costs paid for tax preparation fees for most returns, appraisal fees, and certain fiduciary expenses, as outlined in Regs. Sec. 1.67-4. Costs that are not deductible under this section are those that customarily would be incurred by a hypothetical individual holding the same property, such as ownership costs (e.g., homeowners association fees, insurance, and maintenance).


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People often say motivation doesn't last. Well neither does bathing-that's why we recommend it daily.

Zig Zigler

Net Operating Losses 

Most taxpayers no longer have the option to carryback a net operating loss (NOL).  For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward.  The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017.  Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company.  Also, for losses arising in taxable years beginning after December 31, 2017, the net operating loss deduction is limited to 80% of taxable income (determined without regard to the deduction).


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