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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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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Nelson Mandela

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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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Walther CPA Newsletter March 2019

Walther CPA Newsletter March 2019

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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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Benjamin Morell
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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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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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  • 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

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Certified Public Accountants

www.walthercpa.com

happy new year

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.

jan1

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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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Walther CPA Newsletter December 2018

december

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Gift And Estate Tax Exemption Increase

 The tax-cut law significantly increased the amount of money that’s exempt from the estate and gift taxes, but only for 2018 through 2025. The exemption amount for an individual was $5.49 million in 2017, under the old tax code, and is $11.18 million in 2018. Stakeholders had questions about whether someone who made a large gift between 2018 and 2025 but then died after 2025 would have the gift subject to the estate tax at the lower-exemption level.

The IRS said that under the proposed rules, those who plan to make gifts between 2018 and 2025 could do so without worrying that they’ll lose the tax benefits of the higher exemption amount after 2025, when the estate tax changes in the Trump tax law are set to expire. The proposed rules would take effect once they are finalized.

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Uniform Application of Sec. 108 To Qualified Real Property Business Indebtedness (QRPBI)

 Real property developed and held by a taxpayer for lease in its leasing business is “real property used in a trade or business,” but real property held primarily for sale to customers in the ordinary course of business is not “real property used in a trade or business,” under Sec. 108(c)(3)(A).

Real property developed and held by a taxpayer for lease in its leasing business is “real property used in a trade or business” for purposes of Sec. 108(c)(3)(A). The COD income is excluded from gross income in the tax year of discharge, and the property’s basis is reduced by the same amount. On the contrary, real property developed and held by a taxpayer primarily for sale to customers in the ordinary course of business is not real property used in a trade or business for purposes of Sec. 108(c)(3)(A).

 

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Christmas Countdown

ornaments

A diverse community is a resilient community, capable of adapting to changing situations.

Fritjof Capra

Walther CPA Newsletter November 2018

Walther CPA

Certified Public Accountants

www.walthercpa.com

november

Estate Taxes

The Tax Cuts and  Jobs Act (TCJA) does very little to these regimes except to exempt a number of taxpayers from them due to the size of their estates. Under the TCJA, for decedents dying, or gifts made, after Dec. 31, 2017, and before Jan. 1, 2026, the basic exclusion amount was increased from $5 million to $10 million, indexed for inflation occurring after 2011. For 2018, the basic exclusion amount is $11,180,000.

The TCJA also addresses the possible “clawback” issue in case a taxpayer uses up his or her applicable exclusion amount during life, the TCJA sunsets, and the basic exclusion amount returns to $5 million, indexed for inflation. Readers may remember that this same issue arose when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) temporarily increased the applicable exclusion amount through 2012 to $5 million and, but for this provision being made permanent by the American Taxpayer Relief Act of 2012, would have sunset, returning the applicable exclusion amount to $1 million. While the TCJA does not resolve the clawback issue, newly added Sec. 2001(g)(2) directs Treasury to issue regulations to address any difference between the applicable basic exclusion amount in effect at the time of the decedent’s death and with respect to any gifts made by the decedent.

Surprisingly, the TCJA does not change the top estate tax rate of 40%, continues to allow “portability” of a deceased spousal unused exclusion (DSUE) amount, and does not change the basis step-up rules in Sec. 1014 — all provisions that seemed likely to change under early blueprints put forth by Congress and the president. As previously stated, the change in the basic exclusion amount will exempt more estates from paying estate tax. However, for taxpayers who will still have taxable estates, estate planning will continue much in the same way it always has, with the exception that more modest estates subject to the estate tax might focus more on maximizing the income tax benefits that may come from the increase in the applicable exclusion amount, such as having assets transferred to someone in an older generation to get a step-up in basis without causing an estate tax liability to the older generation.

Questions or comments? Email us at gary.walther@waltherpartners.com

or call 281-591-7749

Highlights

November 12 – Veterans Day Bank Holiday

November 15th

Texas Franchise Tax (except if located in a federally declared disaster area)

November 22 Happy Thanksgiving!

The first principle is that you must not fool yourself-and you are the easiest person to fool

Richard Feynman

thanksgiving

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Filing ‘Optional’ Partnership Return

 Married couples that jointly own a business may choose to treat the business as a partnership, which requires the business to file a partnership return. However, in many cases, treating the business as a partnership and filing partnership returns is optional.

Often, the default choice is to treat the business as a partnership and prepare a separate return for the business. This choice may be made for a variety of reasons, including a desire to not report gross income on an individual return because of the potential increased audit risk, or to provide liability protection for the owners.

However, there are alternatives. If the business is unincorporated and both spouses materially participate in its operation, the Small Business and Work Opportunity Tax Act of 2007, allows for the spouses to make a qualified joint venture election, under which the business will not be treated as a partnership. Rather, the spouses are treated as maintaining two sole proprietorships for all federal tax purposes, including income tax and self-employment tax.

The treatment of a business as a qualified joint venture can have several beneficial results. The business does not have to file a partnership income tax return or comply with the recordkeeping requirements imposed on partnerships and their partners. As a qualified joint venture, the business will not be subject to potential penalties for failure to file partnership tax returns. Additionally, each spouse is credited for his or her share of the earnings for self-employment tax purposes, and therefore each is eligible to make a separate qualified retirement plan contribution.

The qualified joint venture election is made by simply preparing and attaching separate Schedules C,Profit or Loss From Business (or Schedules F, Profit or Loss From Farming), and Schedules SE, Self-Employment Tax, for each spouse with a timely filed joint individual income tax return.

Alternatively, married couples living in community property states may also treat a co-owned business entity as a disregarded entity for federal tax purposes. By electing this treatment, the owners are again relieved of the partnership tax return filing requirements.

The advantage of non partnership tax treatment was spelled out recently in Argosy Technologies, LLC, T.C. Memo. 2018-35. In Argosy Technologies, a limited liability company (LLC) was owned 50% each by a husband and wife. The IRS proposed a levy to collect unpaid income tax liabilities of the owners and imposed a penalty against Argosy for failure to timely file after the business filed Forms 1065, U.S. Return of Partnership Income, for 2010 and 2011 after the due dates. The returns included Schedules B-1, Information on Partners Owning 50% or More of the Partnership, reporting the spouses as owning 100% of Argosy.

The taxpayers later petitioned the Tax Court and argued that they were actually a single-member LLC, not a partnership, and therefore were not required to have filed a partnership return.

The Tax Court held that since the LLC had represented itself as a partnership on its tax returns, it could not argue that it was another entity and disclaim its validity as a partnership. The court further noted that there was no evidence of an election under Sec. 761(f) for treatment as a qualified joint venture. Accordingly, the penalties against Argosy were upheld.

Had the partnership returns not been prepared and a qualified joint venture or disregarded-entity election properly made, the penalties would have been avoided.

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Offshore Account Holders Should Beware: The IRS Is Still Coming

 

For most of the past decade, the IRS has maintained a safe harbor for taxpayers who want to disclose offshore account holdings that may otherwise expose them to criminal penalties, and over the years, tens of thousands of taxpayers have availed themselves of the program. But on Sept. 28, the world changed for those who have not yet revealed their foreign accounts to law enforcement.

Citing waning taxpayer participation, the IRS ended the Offshore Voluntary Disclosure Program (OVDP) at the end of September. Yet taxpayers would be wrong if they think the program’s closure will dampen the agency’s resolve to go after those it believes are hiding taxable income overseas.

In fact, the IRS last year bragged about its enhanced digital tools for sniffing out those it believes are skirting tax laws (see Cohn, “IRS Criminal Investigation Chief Plans New Enforcement Programs,”Accounting Today (Aug. 2, 2017), and the Department of Justice’s Tax Division boasts a 91.5% conviction rate for tax crimes (IRS, Criminal Investigation 2017 Annual Report, p.7). Since 2009, more than 1,500 people have been indicted for crimes related to international activities, according to the IRS (IR-2018-52 (3/13/18)).

 

Though time has run out for taxpayers to make a complete disclosure and avail themselves of those program benefits, they can still voluntarily reveal their offshore assets.

                                                                                       

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