Walther CPA Newsletter August 2019
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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.
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).
Christmas Countdown
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
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.
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
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.
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.
Walther CPA Newsletter October 2018
Leasing Property To A Corporation
| Avoiding payroll taxes: Rental income from real estate is not subject to the self-employment (SE) tax; a lease of real estate to a closely held corporation represents the ability to withdraw funds from the corporation without incurring Federal Insurance Contributions Act (FICA) taxes (i.e., Social Security and Medicare) or SE tax.
· Avoiding corporate-level gain: Retaining ownership of real estate and other valuable tangible or intangible assets outside the corporation avoids the potential for triggering a gain within the corporation upon a distribution or liquidation of the assets. Conversely, if appreciated assets (i.e., those with a fair market value (FMV) in excess of adjusted tax basis) are distributed from a corporation, whether in liquidation or other form of distribution, gain must be recognized (Secs. 311(b)(1) and 336(a)). · Retirement cash flow: Retaining valuable assets outside a controlled corporation allows the shareholder-lessor to continue to receive a cash flow stream from the corporation in the form of rents or royalties, even though the shareholder is not employed by the corporation. This can allow a portion of the corporate income to flow to a retired shareholder or a shareholder who is uninvolved in the business operations. · Business transition: Retaining assets outside the corporation allows the ownership of the business operation and the ownership of business assets to be segregated. For example, a controlling shareholder-lessor may want to divest ownership and control of the business operations by disposing of some or all of the corporate stock but retain a significant portion of the business assets for lease to the entity. This can help transfer ownership and control to the successor generation by minimizing the value of the corporation (e.g., where the corporation contains only operating assets such as receivables and inventory, with fixed assets retained by the founder). |
Final 2017 Income Tax Returns
Due October 15, 2018
Individual: Form 1040
C Corporations: Form 1020
Employee Benefits Plans-5500
Gift Tax: Form 709
Since light travels faster than sound, some people appear bright until you hear them speak.
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Non Cash Contribution Lesson From The Tax Court:The Substantial Substantiation Rules
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Non Cash Contribution Lesson From The Tax Court: The Substantial Substantiation Rules
George Carlin on the problem of stuff. “My wife and I have too much stuff. My wife, however, hates yard sales. And we cannot afford a bigger house. So we give a lot of stuff away. “
The requirement of a proper contemporaneous receipt, as the recent case of Estelle C. Grainger v. Commissioner, demonstrates the need for substantiating and valuing non cash charitable contributions.
Fair market value (fmv) is what a willing buyer would pay a willing seller, neither under a compulsion to buy or sell and both having knowledge of the relevant facts.
If the fmv is greater than the taxpayer’s basis in the property, §170(e) requires, in certain circumstances, that the taxpayer must reduce the value of the contribution to the taxpayer’s basis amount. When the fmv is less than basis, however, there is no corresponding rule that allows taxpayers to increase the value of the contribution. Taxpayers must use fair market value. Accordingly buying items at a discount and then deducting them at the undiscounted value is not permitted under the law.
Two substantiation rules are (1) the aggregation rule and (2) the Form 8283 rules. In general, the substantiation rules get stricter and stricter as the value of a taxpayer’s donations increase. For all donations of either money or personal property, taxpayers have to maintain adequate records to show the date, location and valuation of all such donations. For each donation of either money or personal property that exceeds $250, the taxpayer must also obtain a contemporaneous written acknowledgement that meets several requirements. For donations that aggregate more than $5,000, the taxpayer must also provide a qualified appraisal that supports the value claimed for the donated property.
Remember, the statute applies these substantiation requirements not only to individual and discrete donations of personality but to aggregate donations of “similar items of property” to “1 or more” charity. Treasury Regulations tell us that “similar items of property” mean property of the same generic category or type and lists a bunch of categories. One of the categories is just this word: “clothes.”
