Ask or Answer a Tax Question Archive
From TaxAlmanac
This page serves as a question and answer page for various tax-related questions. Please feel free to ask questions here, but we encourage you to give back to the community by providing information on the questions that others have posted. Answers do not need to be polished and fully documented - sometimes just a hint will do, or will trigger a more in-depth response from others.
How to ask a question
- Please give questions a meaningful title so you'll be more likely to get a meaningful answer.
- sign your name at the end of your question by typing four tildes: ~~~~..
- Please check back for updates occasionally. A complete answer may be developed over a period of days.
- To continue a question, edit your question section (by clicking the [edit] link on right side of its header line). Please do not start multiple sections about the same topic.
- Please do not list your e-mail address, as questions aren't normally answered by e-mail. Also, be aware that the content on TaxAlmanac is extensively copied to many websites, and so making your e-mail address public here may make it very public throughout the Internet.
- Questions will be answered by humans, not by a computer. This page is not a search engine.
- The most recently added question will be at the bottom of the page.
How to answer a question
- To answer a question, edit the question section (by clicking the [edit] link on right side of its header line) and add your answer below the question. Multiple people should feel free to add their comments as this should provide a better, well-rounded answer.
- sign your name at the end of your answer by typing four tildes: ~~~~..
- If you'd like to indent your response so that it is easier to distinguish from the question, just add a colon ":" to the front of your answer.
- Please be thorough, providing as much of the answer as you are able. If you only know a little, please add what you can. Others can add to your answer after you.
- If possible, link to topic pages on TaxAlmanac which may have further information relevant to the question.
Current Topics Being Discussed:
The following table of contents lists the titles for all of the questions that have been asked below. Selecting the title from this list will take you directly to that question.
California taxation of earnings on out of state section 529 plans
Are earnings from out of state 529 that are used for qualifed educational expenses subject to CA income tax?
sale of business assets
1- how would you prepare a 8594 when the sales price is less than the allocated asset values
Capital gains vs ordinary income
I have a client who unwittingly purchased the stock of an S-corp instead of the land owned by the S-corp. She paid over $600k for the stock purchased from the stockholder...not the S-corp. Therefore, not Sec1244 stock. Is there a way to increase the basis of the land on the S-corp books by the investment in the stock thereby reducing the ordinary income from the S-corp operation of buying and selling real estate?
I recommend liquidating the S corp, assuming there has been no increase in the value of the land, triggering a gain on distribution. Reason: real estate should never be owned inside a corporation. Reason: a distribution to shareholders can trigger a gain equal to the increase in value over the original basis due to appreciation.
Form 1041 Trust
An article has now been created for this subject. You can view the article or the article's discussion page.
Sub "S" to Add Shareholder
An article has now been created for this subject. You can view the article or the article's discussion page.
Like-Kind Exchange Reporting
An article has now been created for this subject. You can view the article or the article's discussion page.
Classification of Income on Sales of Real Property purchased for Rehabilitation and Resale
An article has now been created for this subject. You can view the article or the article's discussion page.
Sep simple multiple employers
If an individual is self employed and has a SEP and also is an employee of a company that has a Simple plan, can he make the maximum employee deferals and receive the maximum employer 3% contributions in the simple plan and also take the maximum contribution in the SEP plan?
Auto Leasing
What is the rule on Auto leasing? The Owner is leasing to the company vs. Company leasing from auto dealer. I'm also concerned with the auto insurance implications.
Group Health Insurance
Can an employer require certain employees to pay a greater share of the cost of group health insurance (not a cafeteria plan) without treating the excess amounts to favored employees as employee compensation?
Decedent Estate/QRT 645 Election
When a decedent estate and QRT under a section 645 election are terminating simultaneously is it necessary to assign distributions to a "new" trust as indicated in instructions for form 1041? Note: All assets and income were distributed to the beneficiaries equally. Also is it wrong to change the type of entity from a decedent estate to a complex trust on the 1041 for the same EIN?
Real Estate Sale: Life Tenants
Does anyone know of any reference material on selling real estate that has a life tenant (estate) with other tenants (life tenant is landlord in a two family house, life tenant lives in other apartment)? Life estate not created by trust.
Dennis M. Doyle, CPA
- There is a lot of material on selling real estate, including life estates, but it will all be state specific because of local real estate law. To sell the land, the life estate can sell his interest in the real property, but generally no one will purchase a life estate in land. Instead, the life estate and the remainder interest(s) will need to sell the fee simple.
Real Property, Expense
Taxpayer buys real property with intention of instituting a major rehabilation development project. Soft costs are incurred and capitalized in connection with the project. Taxpayer subsequently abandons the major rehab project and intends to upgrade the property in its current form. Can the pre-development soft costs, which were intended solely for the rehab project, be charged directly to expense at the time the project was discontinued?
Taypayer Expenses
Taxpayer does computer printouts for his employer in his home, and takes the printouts to his employer's office once a week. Taxpayer doen't have any expenses for supplies and/or equipment, it is all furnished by his employer. The taxpayer only has auto expenses to deliver his work.The taxpayer receives a W-2 from his employer for his work. The taxpayer never works at his employer's place of business. Can taxpayer take auto expense? Can taxpyer take office in home expense's as a deduction on schedule A?
- According to IRS guidelines, the office in home deduction must meet the exclusive and regular use test (is a certain portion of the home used regularly and exclusively for business purposes?). In addition, the home office must be the principal place where business is conducted, which it appears to be in this case. As an employee, the IRS also requires that the taxpayer be working at home as a convenience to the employer in order to take the office in home deduction. Instructions for Form 2106 may be of some help with the commuting mileage expense question. The mileage is deductible if the taxpayer's home is his/her principal place of business under code section 280A(c)(1)(A).
- DaveJohnson 08:58, 13 Jul 2005 (CDT)
Interest Income on Installment Sale
Taxpayer has entered into a sale of several assets and will qualify for installment sale reporting. The purchase price will be paid over a 5 year period. Is it allowable to structure the payments so that payments made in the first four years are for principal only and the final payments in th.e fifth year are for interest. Both buyer and seller have agreed that interest is to be paid at the end of the payment period and will, if allowable, report the interest consistently, that is, the buyer will report no interest expense until the fifth year of the payout and the seller will not have to recognize any interest income until the fifth year.
- Publication 537, page 9 requires that adequate stated interest is included and that the present value of payments are determined based on the test rate of interest. For unstated interest, if the contract price is less than $3,000 no interest is required.
Insolvency/bankruptcy and partnerships
Bankruptcy/Insolvency questions: I have an LLC that has gone out of business, was insolvent but did not declare bankruptcy. One of the members declared chapter 7 and the other will likely declare chapter 13. I understand the COD (cancellation of debt) income is passed through from the LLC to the members who individually determine whether it has to be reported or whether they qualify for the insolvency/bankruptcy exception. In that case they reduce various tax attributes. My questions are as follows:
1. When testing for insolvency at the individual level do you include the value of future retirement income or IRA or other retirement savings accounts?
2. How is the COD income passed through on the K-1 from the partnership (LLC) return? Which line is it on? How do you avoid a K-1 matching error if you exclude that income from the individual return because of insolvency?
- Per the IRS instructions, page 7 (paraphrased): The partnership would issue for 1099-C to each partner for the cancellation of any debts. On page 25…If the partnership receives a 1099-C, report each partner’s share on Form 1065, Schedule K, line 11 and Schedule K-1, box 11, Code E. Regarding the K-1 matching, attaching an explanation to the return may eliminate an IRS notice.
3. The partnership before closing had four kinds of debt as follows:
a. Secured – In this case the underlying property was returned to the debtor and I treated the transaction as though the asset were sold in exchange for the balance due on the debt. Is this COD income or proceeds from sale of an asset? Is it subject to exclusion at the shareholder level because of insolvency?
b. Unsecured – This was all eliminated with a debit to accounts payable and a credit to COD income. Where does this show on the K-1?
c. Loans from members – Are these amounts COD income to the LLC or are they capital contributions by the members when forgiven?
d. Guarantees assumed by the shareholder – because of personal guarantees by the shareholder these become their personal debts.
Is this recorded any place on the partnership books? Do the shareholders get basis when assuming these debts? Is this a capital contribution by the members to the LLC or just more COD income at the LLC level?
Race Car in Corp.
Do you have any quidelines on how to successfully incorporate a solo shareholders race car in the Corp.
Corp is insurance brokerage firm, high cash flow. Car is raced by Solo shareholder in competition. Car bears advertising for target Corp. and for other third party advertisers. Advertising revenue is received by target Corp. Shareholder solicites business at the race events.
Expenses for race entry fees, transport of vehicles, etc. included in advertising expense.
I understand some problems, but, and looking for anyone who has a success in this area.
TIA
- Write it off as Promotion Expense. Keep good records. Audits of Corporatons are so rare you should have nothing to worry about. After 3 years you celebrate your "victory". David, CPA July 13, 2005
Principal Residence Use Test
Hello,
I've owned and lived in my principal residence for 10 years. I want to tear it down and build a new house on the land. I would like to immediately sell the new home.
Would the sale qualify for the exclusion of $250,000 (single)? I assume original costs plus all costs of new home, including demolishing costs, would qualify.
The main question is do I have to live in the new home for 2 more years or does my prior occupancy qualify?
Thank you very much
- It does not appear that the sale would qualify for the exclusion. The code section 121 and the publication 523 state that the property being sold must be owned and used as the prinicpal residence for 2 years.
- Why would the owner not qualify? It seems to me that this would be the same thing as totally remodeling the residence. Any absence by the owner from the residence while it is being rebuilt would be a "temporary absence". If the owner doesn't qualify for the exclusion then wouldn't you have to allocate the exclusion in situations where an addition was built or maybe a kitchen totally gutted and remodeled and not "used" for the entire two years? AnuenueAnuenue 21:37, 26 Oct 2005 (CDT)
Sole proprietor pay check or owner draw
Can a sole proprietor pay himself as an employee of his company in lieu of taking owner draws as compensation????
- As a sole proprietor, you do not pay yourself as an employee. Any money taken out of the company is done as an owners draw.
- You can put yourself on payroll if you want but do not have to. David, CPA July 13, 2005
- OK. Let's say the sole proprietor just got IRS approval to file his LLC's taxes as a corporation. NOW how should he pay himself? (There are no other employees)
- PrudentGary 15:04, 16 Jul 2005 (CDT)
Compensation of S Corporation employees From TaxAlmanac, A Free Online Resource Compensation of S Corporation Employees
The IRS sends this reminder: An S Corporation must pay reasonable compensation (subject to employment taxes) to shareholder-employee(s) in return for the services that the employee provides to the corporation, before a non-wage distributions may be made to that shareholder-employee. This issue has been identified as an area of non-compliance and will receive greater scrutiny in the foreseeable future.
Unlike a partnership, flow-through income from an S corporation is not subject to self-employment tax (Revenue Ruling 59-221, 1959-1C.B. 22). In direct contrast, a partnership’s flow-through ordinary income is generally subject to self-employment tax. On the surface, this appears to be a clear tax advantage of an S corporation vs. a partnership. However, in terms of "shareholder-employees" of an S corporation, the analysis does not end here.
If a shareholder-employee of an S corporation provides services to that S corporation, then reasonable compensation (subject to employment taxes) generally needs to be paid in return before any non-wage distributions may be made to that shareholder-employee. Several court cases support the authority of the IRS to reclassify other forms of payments made to the shareholder-employee as a wage expense. See Joly v Comm. 2000-1 USTC 50315 (6th Cir., 2000). In addition, several court cases have reinforced and clarified the IRS position as to the employee status of S corporation shareholders who perform services for the S corporation. See Veterinary Surgical Consultants, PC v. Commissioner, 117 T.C. 141 (2001) and Joseph M. Grey Public Accountant, P.C. vs. Commissioner, 119 T.C. No. 5, (Sept. 16, 2002).
Provided an S corporation shareholder is an employee and has received an actual distribution, the only remaining area of question is what amount is considered "reasonable" for that particular shareholder-employee. Whether the amount paid for the services provided constitute "reasonable compensation" is based upon all the relevant facts and circumstances
Retrieved from "http://www.TaxAlmanac.org/index.php/Compensation_of_S_Corporation_employees"
Simple Schedule C Question
An Art Gallery (for profit) gives away wine to shoppers. It is a very material expense for them. Under what account would you classify all the liquor store receipts??
- I would call it Promotion and deduct 100% David, CPA July 13, 2005
Would the 274(n) limitation kick in? Jeffkahn 13:47, 23 Aug 2005 (CDT)
Depreciation - Artwork
An article has now been created for this subject. You can view the article or the article's discussion page.
Like Kind Exchanges and Escrow
An article has now been created for this subject. You can view the article or the article's discussion page.
Land Development Projects
An article has now been created for this subject. You can view the article or the article's discussion page.
Schedule D reporting via broker summary
An article has now been created for this subject. You can view the article or the article's discussion page.
We always entered the realized gain/loss summary numbers on Sch D & attached the brokerage summaries to the 1040s. When we began 100% efiling we called the IRS e-file desk to ask what we could do since we couldn't attach things anymore. To our surprise they said that the IRS e-file only got pages 1 & 2 of Schedule D; no data from the attachments came thru! We now just type in the long & short term realized gains & losses. We never get CP-2000s as long as the Sch D sales totals equal or exceed the total of the 1099-Bs. Lesson - don't type in short sales as negative sale amounts since that decreases the total sales below what IRS computers are expecting.--Tjemison 16:46, 11 Oct 2005 (CDT)
Loan Fees
An article has now been created for this subject. You can view the article or the article's discussion page.
Automobile Expense
An article has now been created for this subject. You can view the article or the article's discussion page.
Tax Shelter for Gain on Secondary Home when Profit is Reinvested for Business Purposes
An article has now been created for this subject. You can view the article or the article's discussion page.
RENTAL PROPERTY
IF A PARENT'S CHILD LIVES IN HER HOUSE AFTER SHE HAS MOVED OUT AND LIVES IN A SENIOR VILLAGE AND HE PAYS THE MORTGAGE PAYMENT IS THIS NOT CONSIDERED RENTAL INCOME FOR HER AND SHE IS USING THE INTEREST ON THE MORTGAGE AS A DEDUCTION.
- Why create taxable income for Mom/Dad? These payments can be gifts. Better yet. Have taxpayer pay nursing home fees and deduct parent as a dependent. David, CPA July 13, 2005
Since the home is no longer the Parent's primary residence she cannot deduct the mortgage interest or real estate taxes on Sch A. If she chooses to treat the house as a rental, she needs to depreciate the property in addition to deducting the mortgage interest and property taxes. IRS likely will have a problem with allowing the rental losses year after year as the 'rent' received (the mortgage payment) likely is not as much as the fair market rent would be if rented to an unrelated party. There is also the question of the special treatment given to a relative.
The best treatment likely is for the child to simply pay the mortgage and be done with it. Neither parent nor child can itemize with the interest or RE taxes as the child is not legally reqired to pay either interest or taxes and the parent cannot deduct them as they are not actually making the payments (even as a second residence). Taxladyml 17:52, 27 Jul 2005 (CDT)
Capitalization of Roof Repair
An article has now been created for this subject. You can view the article or the article's discussion page.
Selling House
Can the buyer of a house allocate part of the purchase price to personal property thereby reducing his future property taxes and reducing the sellers capital gain. Is there any authority for this?
- How the buyer allocates or uses an asset has no relation to the seller's tax treatment. You'll have to check with your state about the personal property aspect of your question. Taxladyml 17:56, 27 Jul 2005 (CDT)
You can allocate the purchase price to the real estate portion and personal property portion as long as you have some economic basis for the allocation. Seller may have a capital gain on the personal property allocation if sold at a gain. David, CPA 20:14, 8 Aug 2005 (CDT)
Sole Proprietor & Check the Box
Can a Sole Proprietor elect to be taxed as a S-Corporation by filing the check the box form?
- No. --Gregg Gillaspy, CPA, CFP 22:30, 6 Jul 2005 (CDT)
That is what I thought, but I have a client that was already a part of the prior CPA's client base that was purchased. In reviewing the file of this client prior to preparing his tax return, I notice that the prior CPA filed the check the box form and a 2553. The IRS approved this election and she filed a 1120S for the company and then filed a 1040 for him personally as an emplyee of the company but did not subject his wages to federal or state unemployment.
Would you suggest amending the 2003 return and file the company portion on a schedule C?
Notify the IRS about the incorrect approval?
- Well, let's back up a minute...maybe I'm jumping the gun here. If the client is a "single member LLC", which would go on a Schedule C unless it is a Schedule E or F activity, it could have the "appearance of being a sole-proprietor" because it is reported on Schedule C. If it is indeed an LLC then it most definitely can file check the box form and then a 2553. Actually, during 2005 the IRS said you can skip the check the box form and file a 2553 which would accomplish the objective of both forms. I think you need to dig into it a little further.--Gregg Gillaspy, CPA, CFP 22:49, 6 Jul 2005 (CDT)
This client is not an LLC he has not filed any association papers with the state. He is only a sole proprietor. What do you think should be done?
Work on assignment for a company that does not take out taxes.
I am a temporary employee working for a company that does not take taxes out of the pay. The job tasks are very specific so I am not sure if I fit the "Contract Worker" category but know I need to pay taxes. What forms???When???
- For more information on contract worker status and federal estimated income tax payments, see IRS Publication 1779, Employee Independent Contractor Brochure (available at www.irs.gov), and the following IRS site: http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html
- You can pay Federal taxes with form 1040ES. David, CPA July 13, 2005
You need to find out what form they are going to use at the end of the year to report your wages to you and IRS. If they will be using a W-2 the company will be paying both your half and theirs of Social Security and Medicare (since they are not holding anything out of your pay IRS will give them no choice) but you will be responsible for the Federal withholding - use the 1040ES to submit your federal withholding. On the other hand if they will be using a 1099-MISC to report your pay, they are considering you a independent contractor and they are expecting you to pay all the taxes (again, use 1040ES) by showing the income on Sch C. If you really feel you qualify as an employee (and are willing to risk losing your job) you can fight the 1099-MISC by filing a substitute W-2 (Form 4852) and Form 4137 (Social Security and Medicare Tax on Unreported Tip Income) to pay your half of the Social Security and Medicare Tax plus adding a detailed explaination page to your tax return telling IRS what you've done and your reasons why. IRS will look over the situation and if they agree with you they will go after the employer (thus you may lose your job), however, if they do not agree with you, they will require you pay the remaining half of the Social Security and Medicare taxes and report your income on a Sch C. Taxladyml 18:17, 27 Jul 2005 (CDT)
L.L.C. Dissolved - which form to file
I filed form 1065 for an llc for the year 2001, the llc had two members for the year 2001 -however- for the year 2002,the llc became a one member llc, and eventually dissolved. is filing 1040 sufficient for the remaining member or 1) do i file form 1065 for the llc first which has just one member remaining , and then 2) file 1040 for the said remaining member.
Please help!
- File Form 1040 for the sole member, reporting the LLC's income. After losing the second partner, the entity no longer qualified as a partnership under state or federal law, including the federal tax rules for default entity classification. For federal tax purposes, the entity will be treated as a sole proprietorship (disregarded entity). Do not file the Form 1065 for the LLC's tax year during which it only had one member.
Prepayment Penalty deduction or add to the basis of Property?
Thank you.
Reza
Mortgage prepayment penalty "If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage"(Pub 936)Penalty should be deduct on the year paid. For more information See Pub 17 and 936.
aircraft depreciation/possible recapture
have a client considering purchasing a new $400,000. small plane & leasing it to a flying school for 3-5 yrs, then converting it to personal use. Wants to avoid recaptured depreciation at full rates, just pay tax at capital gain rates upon conversion. Q. 1. Does he have to forget about taking the 30% special depreciation? 2. Can he use MACRS, ie, 44% 1st yr, 22.4% 2nd yr etc, or must he use straight line 20% each yr for 5 yrs? 3. Any other cautions? TAXESETC 13:07, 12 Jul 2005 (CDT)
- If he buys the airplane out of state and doesn't pay sales tax on it watch out for your state if it subjects it to a USE TAX. Here in Missouri, the Department of Revenue is starting to retrieve airplane purchase information from the FAA and tracking down people who don't file and pay Use Tax. Happened to one of my clients last year and I told another client earlier this year to expect to be contacted within 3 years with a friendly Notice from the Department of Revenue. --Gregg Gillaspy, CPA, CFP 20:59, 12 Jul 2005 (CDT)
stock wash sales
client has over 20 transactions within the year for the same stock. my question is when does the wash sales actually "close or end" the qty of stock with each purchase varies from 50 to 3000. there are some large losses. do i need to compute deferred losses and revised basis for every trans for the whole year and continue to add to the basis (which will eventually dble in amount)? or at some point does a "batch" clear it self out?
Thanks,
- The batch 'clears' itself out when the client waits 32 days to re-purchase the stock which has been creating the wash sales, therefore not creating another wash sale. You are to re-compute the basis for the stock sold each time he sells it at a loss that qualifies as a wash sale. If the client is buying and selling different quantities of the same stock then someone has to keep track of each share of stock's basis in order to do it perfectly correct. I hope you are charging an arm and a leg to do this!! Remember that you have to check the client's January broker's statement to watch for a wash sale that crosses over the year-end. Taxladyml 18:28, 27 Jul 2005 (CDT)
Deducting IDC's for Limited Partner
I have read that you can deduct either 100% or amortizing over 60 months the Intangible Drilling Costs for a Limited Partner but I am unable to find out on what tax form.
Thanks, Aurelia
- If the partnership expenses the IDC, the partner can elect to amortize the IDC over 60 months. I believe this is usually done when the taxpayer is in an AMT situations. See Regulation 1.59-1
- According to this regulation, for the partner to amortize the IDC over 60 months, an election must be attached to the return with the following information:
- 1. Taxpayers name, address and EIN number
- 2. Type and amount of qualified expenditures identified in section 59(e)(2). In this case, this would be IDC and the amount.
- 3. Amount the taxpayer elects to amortize over 60 months. (The full amount does not have to be amortized)'
That sounds correct for a partner that is a general partner. The operating income would be reported on a schedule E had there been income. Would the schedule E be prepared with the amortization of the IDC on Form 4562 as amortization? If so what section of the code would I report, the on referenced above? The tax program I have doesn't let this item flow through to the appropriate form so I am trying to work around the program.
section 1031
taxpayers grandfather died in 1962, his estate was settled in 1963. Part of his estate was placed in Trust to be distributed to his Grand Children at the death of his last surviving child. Grandfather had 2 children (a) and (b). (a) died in 1983 with 4 children. Child (b) died in 2003 with 1 child. Child (b) was sole trustee during his lifetime and after his death his child and one child of (a) became trustees. The trust, among other assets had a tract of land (90 acres) that was undeveloped. This tract of land was part of the original estate having been purchased by grandfather in 1946. Trustees sold land and distributed proceeds 1/2 to the child of (b) and 1/8 each to the children of (a). Trustees distributed proceeds to each of beneficiaries of the trust and advised them that section 1031 applies and that taxes could be deferred under section 1031.
Question: can trust distribute cash or should it have transferred title to beneficiaries and then sold property in order to comply with section 1031 and can distribution be considered a distribution to beneficiaries under terms of will. Will states that trust is to be distributed to beneficiaries at death of final child. Will also states that trust is responsible for taxes on income generated by trust.
1. IRC Sec 1031 defers gain when property is exchanged for like-kind property. When property is exchanged partially for like-kind property and partially for cash, then part of the gain is deferred and part is recognized.
2. " . . .distribution be considered a distribution to beneficiaries under terms of will" -- as opposed to _______?
3. "Will also states that trust is responsible for taxes on income generated by trust". Absent such a provision, the beneficiaries would be responsible for income distributed to them, and the trust would be responsible for income retained by the trust. In the year of final distribution, the trust would have no income because all of it would have been distributed. Possibly the provision in the Will was intended to spell out the above. Janie 12:04, 22 Aug 2005 (CDT)
Condominium Conversions
Taxpayer, LLC owns a 77 unit apartment complex. LLC is considering converting the rental units to condominums and selling them. How is the gain treated for tax purposes? The holding period before the conversion will be over one year. Long term capital gain or ordinary income?
Thank you. Paul Baltrun
Depends on the numbers.
Taking just one unit.
LLC originally paid $100 for the unit. Assuming Accumulated Dep = $6. Adjusted basis = $94. TP spends $1 to convert to condo. Adjusted Basis = $95. Later sells unit for $110. Depreciation Recap (Ordinary Income Rates) $6. Cap Gain = $9
However, there may be some special rules with respect to rental residential real that I am forgetting. Leatherneck 23:25, 9 Aug 2005 (CDT)
2008 capital gain rate of 0%
I have been reading about the 5% rate for capital gains going to zero in the year of 2008. will that rate also apply to personal home sales?
thanks
--Shipkel 12:50, 26 Jul 2005 (CDT)
- I am not sure about 0% tax rate for capital gains for 2008, however, under Section 121 Exclusion allows a taxpayer to exclude from income up to 250,000 (500,000 MFJ)on sale of a principal residence under the conditions of ownership and used. To meet this conditions the taxpayer must have owened and used the home as a principal residence for at least two out of five years before the sale (the two years do not have to be consecutive.
- For more information see IRS Publications 523,527,530,537 and 544.
- --Arge
Tax and Accountability for Subsidized Cafeteria Plans
How do you apply employee payroll deductions toward pre-tax dining programs. If an employee has weekly or bi-monthly pre-tax dollars withdrawn via payroll tax deductions for dining, is the company required to apply the employees funds toward dining on a daily basis or a period of reasonable time for reimbursement (e.g., monthly or quarter.)
Seeking clarification, documentation, and/or legal cases regarding the subsidization for pretax cafeteria plans. What is the requirement and/or legal precedent?
Requesting conclusive support how this is applied in Fortune 500.
--DAUERMAN 16:06, 26 Jul 2005 (CDT)Elysa
Realizing a Capital Loss
If a client realizes a loss in 2005, must they report that loss on their 2005 return or may they postpone this loss until 2006. The client will not have any gains in 2005 to offset the losses. I have never had anyone ask this before and was caught off guard. Any feedback would be most appreciated. My initial feeling is that they can't postpone reporting the loss.
- The transaction must be reported in the year is occurs. You may have a situation in which only $3000 of the loss can be used in 2005 and the rest carried over into 2006. Taxladyml 18:32, 27 Jul 2005 (CDT)
Intangible Drilling Costs for a Limited Partner
Can you deduct the intangible drilling costs paid by partnership if partner is a limited partner and has no passive income?
The intangible drilling costs do not exceed the capital investment. There is actually a loss of capital investment because of the intangible drilling costs and operating expenses.
Thanks,
Holding period for residential rental acquired through inheritance.
I know any property acquired through inheritance automatically qualifies for long term capital gain treatment, but does it also qualify for the lower capital gain rates if the deceased acquired assets more than five years prior to death and/or sale of asset. Any insights would be greatly appreciated.
Nadamoto 20:37, 28 Jul 2005 (CDT)
Yes, it does qualify. The capital gain/loss is calculated by subtracting the fair market value of the property at the date of decedants death (your basis) from the selling price.
The lower rates for 5-year property no longer apply. Property eligible for capital gain treatment (except for unrecaptured sec 1250 gain, collectibles and small business stock) will be taxed at a maximum rate of 5% or 15%, depending upon the taxpayer's bracket. Janie 12:12, 22 Aug 2005 (CDT)
Lease & Option to Purchase Agreement
Taxpayer lived in home for two years then leased it out with a Lease & Option to Purchase Agreement. The agreement states all lease payments will apply to the purchase price if the option is exercised within two years. If it is exercised within the two years it will be treated as a sale of residence and the sale will not be taxable. The question is how are the lease payments handled when received? Are they held and then would not be taxable unless the option is not exercised, or are they treated as rent when received?KathyZ 15:10, 29 Jul 2005 (CDT)
ISO
Is there any way to avoid AMT on the excersie of ISO's without waiting a year from the date of excersise to sell the stock?
The alternative minimum tax is triggered on the exercise. If you make a disqualifying disposition, you can avoid the AMT; but if you hold the stock, and don't make a disqualifying disposition, you will owe the AMT. Goose 23:18, 13 November 2005 (CST)
Capital gains rate on property sale (sub-divided land)
My question to anyone out there that knows is what would be the basis and tax rate on the sale of land for someone who purchases a house with 10 arces and the sub-divides the acrage and sells a few lots. Would you use the basis on the total purchase price when you bought the house and land divided by the number of lots or would you use the market value of the lots the day the sub-division was approved? Thank you Pete K
Pete, I think you could come at this from two directions:
Method 1 - Recommended Hopefully when the owner purchased the home there was an appraisal completed. If so then it will break out the values attributable to the home and maybe even the land. If not then hopefully at least the home will have an appraised value separately listed. If home is listed by itself then take the portion of the as shown below.
Example: Price paid for Home and Land = $100. if an appraisal list the home separately great if not one should take an approximated guess at the value of what small acreages were selling for at the time the home was purchased.
But let's assume an appraisal was done and listed the home at $60 allocate some of the land to the land that would stay with the home, maybe one acre (can be more or less) to actual home. If they sold lots around the home then I believe it could be argued that the size of the lots sold are the best estimate of the average lot size in the neighborhood.
So then take the $40 and divide it by the # of acres remaining (not being allocated to the home). This will give you the best estimate of the allocable basis you could get in the absence of other more concrete documentation.
If there were 4, 2 acre lots sold and 2 acres remained as part of the land with the house then you would take the 40/2=10 (which would be the basis per 2 acre lot or $5 per acre.) If you sold the lots for $6 per acre then you have a $1 on each acre sold or an $8 Gain.
Method 2 The FMV of the lots could be used as a reference for allocating basis but only if you had an appraisal of the home to provide a frame of reference. Basis would then be mutilplied by the percentages found. Leatherneck 23:12, 9 Aug 2005 (CDT)
Losses on private annuity.
Close a Small Business
I have had a small consulting business with inventory for the past several years. Since I've been working full-time in another venture, I cannot keep running the biz, so I want to shutter it.
Questions: From an accounting standpoint, what's recommended for the inventory? I don't want to unload it, but rather use it down the road in another start-up. Also, what are some key points to know about closing a small business?
1031 Exchange
Can you maintain the tax savings of a 1031 exchange and incorporate an installment sale of the property or would you loose the tax deferral of the 1031 exchange?
Posted by Msingman
Moved here from 'Ask a Question' page by Tdoyle 20:07, 9 Aug 2005 (CDT)
Depending on the types of property being relinquished, you could possibly break the trasnaction into 2 parts. One part flows through the 6252 and the other through the exchange reporting form 8824??... E.G. 1/3 Interest and 2/3 interest.
I am not even sure this would work (in practice) closings and the like.
The much cleaner way is to:
Example: Relinquished property to sell for $1000. Owner gives Buyer $1000 with a mortgage. Buyer at closing returns the $1000 to the Owner and now Owner has $1000 to purchase replacement property, therein creating an exchange. The buyer pays on the loan just as he would have normally. Difference is no 6252.
All of this assumes a QI was used to facilitate the exchange of property to money then money to property. Leatherneck 22:51, 9 Aug 2005 (CDT)
Amending SC Articles of Incorporation
If a South Carolina LLC changes it's members is it required to file Amended Articles of Incorporation with South Carolina? Sodonnell
Non Businees Bad Debt Loss from Monies stolen by Nigerian Scammers (419 Advance Fee Fraud)
I have a client that is an Attorney in Illinois that was contacted by a so called Attorney in Nigeria. He told me that the Nigerian Attorney showed him proof that he is an attorney and not a scam artist. The Nigerian attorney has a client that wants to come to the United States of America and invest in Real Estate. This person can not use their own monies for certain costs to come to the United States. The Nigerian attorneys client is requesting from my client (Illinois Attorney) payment for Advance Fees, Performance Bonds Etc that will cover the cost to come to the United States. My client advanced a signicant amount of money ($700k) over the past year and half. The only payment he has seen is $500 which represents an overage due to exchange rates. It appears that my client will not fund the Nigerian attorney any more money. My understanding is that once you quit sending money, you are stiffed for the Service with No Effective Recourse. Will my client qualify for a non business Bad Debt? Does he qualify for a Theft Loss (Pub 547) for money taken through fraud? My client realizes that there is no longer any correspondence with Nigeria and that the monies are lost as of 2005. He is the Sole Shareholder of his S Corporation. He lent $98K to the S corporation and 98K was wired to Nigeria. The 602K was personally wired to Nigeria. I am not sure how or if these transactions are treated differently for any possible loss deduction.
Has the theft been reported to any law enforcement agency? If your client takes a $700K thefit loss, the IRS is sure to ask for documentation. He would need to prove not only the amount lost, but also the nature of the loss. Janie 12:26, 22 Aug 2005 (CDT)
1099Misc and W-2 from employer
Employee receives W-2 for wages/salary but gets a 1099Misc for car allowance as non employee compenation(flat rate w/no accountability)-Is 1099 amount reportable as employer reimbursement on 2106 form(to net against expenses incurred) or must Sch C be used for SE tax(which usually creates a net loss)lyn 10:06, 20 Aug 2005 (CDT)lynwal
A schedule C should be prepared and any business mileage that they have can be expensed against this income.
No schedule C should be prepared since this is not a business. Show as other income not subject to SE tax on Other Income line on page one of 1040. Also deduct expenses on schedule 2106.This auto allowance should have been included in W-2. David, CPA
Out of town commute of a contract worker
Background: A contract worker works and lives out of town and comes home on weekends.
Questions: 1. Can he deduct the miles from his drive home on weekends and back to work on Mondays, (about 600 miles reoundtrip)? 2. Are his appartment rent and meals deductible as business expense?
Thanks.
Rebates
How are rebates for purchasing products or services accounted for by an S-Corp? Is the rebate deducted from the cost of the product or service therefore lowering the expense or capital cost or is the rebate shown as income (taxable or non-taxable)? Are credit card rebates taxable or non-taxable income?
Accounting For Loans Made To Business By Owners/Partners/Shareholders
Client is two unrelated people with two businesses: an LLC that owns the building and an S-Corp that pays rent to the LLC. A CPA (not used anymore because I, a partner's husband, am doing the books/taxes) set them up this way. Of course, both businesses needed up-front money to operate and both people contributed. The CPA advised that each person put in $500 in the S-Corp booked as "Owner's Capital/Equity" and additional contributions be booked as credits to "Loans By Owner" for both businesses.
Now, the businesses are making money and the two people are gradually getting their money back. I've been simply booking these payments as debits to the "Loans By Owner" accounts. At tax time, let's say the S-Corp netted $20K after expenses/depreciation. Then $10K is passed to each owner's individual 1040 to be taxed. It seems unfair to be taxing this as income because all of it is just a repayment of the "Loans By Owners" money that was already taxed at some point previously, so I'm wondering if I'm accounting for this money correctly. Should there be an expense somewhere for these repayments that will reduce the net income for the businesses to zero? Also, should/can there be interest charges/payments involved here? Help is GREATLY appreciated!
TaxShack 10:02, 22 Aug 2005 (CDT)
I think you are handling the additional contributions correctly by applying it to the balance sheet in "Loans to/from shareholders" account and debiting the same account when the loan is paid. This means that both the contributions and re-payment have no effect on P&L, i.e. the 20K in your example is pure profit tatally unaffected by the loans proceeds and re-payment and should be taxed normally.
It will be interesting to see what other tax professionals have to say about it.
Abdul H. Khan
I agree that the current procedure is correct. In both an LLC and an S corp, the owners are taxed on the income earned by the entity when it is earned, without regard to whether the earnings have been distributed. Distributions are tax-free return of capital or loan repayments up to the amount of the capital contributed and earnings retained or loans originally made.Janie 16:55, 31 Aug 2005 (CDT)
Private Annuity Trust
Can an individual contribute a piece of improved real property with a basis of 2.0M and a FMV of 5M to a Private Annuity Trust w/o a tax issue? Then can the Private Annuity Trust sell the property so there is cash to provide for the annuity payments and not be taxed on the basis v. FMV? The annuity payments will be taxed as ordinary income to the beneficiaries? The consequence if an annuitant dies before the final payout? Can spouses be considered one annuitant and survive the death of a spouse? Thank you. CW Allen--Wadelin 09:26, 23 Aug 2005 (CDT)
Like Kind Exchange Intermediary
Can someone please define "qualified intermediary" when performing a like-kind-exchange transaction involving investment rental real estate? Thank you. Don Dfranklin 12:51, 25 Aug 2005 (CDT)
- A qualified intermediary (QI),per Reg.Sec. 1.1031(k)-1(g)4, is a person who is not the taxpayer or a "disqualified person" and who must do the following:
- Enter into a written agreement with the taxpayer (the exchange agreement) and acquire the relinquished property from the taxpayer and transfer it to the buyer of the taxpayer's property. The QI must also acquire the replacement property and transfer it to the taxpayer.
- Enter into agreement with the buyer of the taxpayer's property. This can be done by later assignment. Note: It appears that if all of the parties--taxpayer,buyer,and QI--sign the assignment, then all are notified in writing.
- In a deferred exchange, when the sales proceeds of relinquished property are held ina an escrow account, this escrow account must not be held by a related party, which the regs. refer to as a "disqualified person" (Reg. Sec. 1.1031(k)-1(k).
- Paul A. Lounibos 16:35, 7 Sep 2005 (CDT)
263 a calculation
dedaction for dependent
child study in colledge 27 yeas old, no income ,but colledge in other town. Can parent claime him as is dependent on tax return ,if they pay for all child expences. Eugene
Without glancing at any tax resources my understanding is yes since they provide over 1/2 his support. --Gregg Gillaspy, CPA, CFP 22:17, 25 Aug 2005 (CDT)
cash (check) received in error from a nonqualified annuity
A client did a 1035 exchange with his commercial annuity (nonqualified). The client decided immediately after doing the exchange that he didn't want to have his annuity with the new insurance co. he had selected. So he asked the new insurance co. to transfer the money back to the insurance company he originally had his annuity with (i.e. cancel the 1035 exchange). Instead, the new insurance co. issued him a check for the value of the annuity. Thus a distribution took place.
Because it's a nonqualified annuity and the new insurance co was not subject to rehabilitation, conservatorship, insolvency, or similar state proceeding, the amount received above his investment in the annuity is taxable as ordinary income (because he can't do a 60 day rollover like one can do for a qualified annuity).
How can this situation be reversed/corrected, etc? I'm certain the client will receive a 1099-R from the new insurance company unless something can be done. The client does not want to pay ordinary income tax on the accretion amount in the annuity. He wants all funds back in the annuity.
I've been unable to find literature on how to resolve this type of situation and advise the client accordingly.
Thanks for your assistance. Joel Shapiro, CPA
Vacant land
Taxpayer owns vacant land as an investment. Taxpayer incurs costs such as real estate taxes, insurance and maintenance costs during the year. Can the taxpayer capitalize any or all of these costs? Can the taxpayer deduct the real estate taxes and capitalize the other costs? Is this in any way considered a passive activity?
- Yes the taxpayer can capitalize these "carrying costs" by attaching an election under Reg. Section 1.263 to their return which state what they are how much the expenditures were. We use Lacerte's tax program which has this as one of its featured elections. If it is investment property I don't see how you truly can deduct the real estate taxes and capitalize the other "carrying costs"...or pick and choose how to handle these. No it is not passive in nature. --Gregg Gillaspy, CPA, CFP 22:32, 28 Aug 2005 (CDT)
spouse social security no.
i have a client. he got married this year. he went to another country for his marriage and hense, his spouse is living in another country. he's a permanent resident in the U.S.A. My question is can he file his taxes for current year as married filling jointly eventhough his wife is living in another country and she doesn't have a social security number?
Will need a Social Security number. David, CPA
I had the same situation, we applied for a TIN and it went much fasterDbtax 16:00, 30 Aug 2005 (CDT)
Self employment tax on retired ins agent benefits
The insurance company is reporting retirement benefits on form 1099 Misc Box 7 and the IRS is subjecting the amounts to self employment tax. Agent/client is frustrated w/ me and I cannot find NO authority to support his contention that other retired agents are getting IRS to drop the S/E tax assessment. He, of course, wants me to do the same for him.
Any help out there?
GM --GAM 14:39, 29 Aug 2005 (CDT) I had similar situation, applied for a TIN number and filed MFJ.
- A taxpayer appealed this issue to the Ninth Circuit Court and prevailed. Congress subsequently amended IRC Section 1402 to
hold that retired insurance agents' residuals are not subject to self-employment tax. See AOD/CC-1997-012, (December 29,1977)-- William R. Jackson V. Commissioner.
Paul A. Lounibos 16:09, 7 Sep 2005 (CDT)
Tax Forms for YR 1990 & 1991
I would like to know if there is a web site where I can download fed. and ca. state tax forms for free? Especailly prior tax years, for instant 1990 and 1991. Please advice.
Thank you,
--Thesheik2001 18:47, 29 Aug 2005 (CDT)
- The www.irs.gov website has forms and publications for current & prior years available for downloading & printing. As for California, I'd look into the www.ftb.ca.gov website for the same.
Personal residence in LLC
Two unmarried taxpayers form an LLC to hold their personal residence with intentions of retitling it to their personal names right before they sell it to take advantage of the gain exclusion. Won't they need to own it personally for 2 years to exclude the gain? Won't they realize gain when they distribute it from the LLC?Brengi 19:22, 29 Aug 2005 (CDT)
"Annual incremental income tax rate": clarify
This is my first time on this forum, so i appologize if this question has been asked or seems trivial, but....
I am doing a present value annalysis of a company's plan to produce a certain product (in this case the product is solar collectors). Im using a 1983 report's equations to do this (because its very thourough), and I am a little confused on what it calls the "annual incremental income tax rate".
The way it is used in the equation doesn't make it obvious, but is it just the average income tax of the company? or maybe the rate of increase of the income tax? The article is a little vague on this
I was hoping someone could give me some information on this, and if possible suggest ways to find values for it (in 1983 a similar company's annual incremental income tax rate was 18%).
Thanks
option to purchase
Are payments received by a landlord in an agreement where the tenant pays rent plus an additional amount that represents a option to buy the property construed as income. Or are the option payments an advance payment on future sale. If the payments are income, what is their nature. The option payments are not refundable and are forfeitable if the option isn't exercised in a specified time.
Basis of property
Trying to determine a basis of property - I am dealing with a farm that had been rented and reported on Schedule E in previous years. Farm was owned, and titled in my clients name and his brothers name 50/50 (my clients spouse had not been on the title.) My client passed away, and the farm was sold for 950k by his widow and her brother and law. The settlement statements and the real estate transfer form have the brother in law and my clients spouse named AS WIDOW of...and she was required to sign a termination of decedents property interest at closing. My client had a will leaving all residue of his estate to his wife. What is her basis? 15:37, 30 Aug 2005 (CDT)Dbtax
THE FARM MUST HAVE BEEN OWNED AS TENANTS IN COMMON. I SAY THE BASIS OF THE FARM IS THE VALUE AS OF THE DATE OF DEATH WHICH IS PROBABLY THE 950K ASSUMING THAT THE SALE TOOK PLACE CLOSE TO THE DEATH OF YOUR CLIENT. THERE SHOULD BE NO GAIN TO THE ESTATE OR THE BROTHER. THE ESTATE GETS 425K CASH AND IT GETS DISTRIBUTED TO THE SPOUSE WITH NO FED ESTATE OR INCOME TAX.--PATHAS 19:00, 31 Aug 2005 (CDT) I was on the same track. However, I neglected to mention this is a WI taxpayer - community property issues may arise? 09:37, 1 Sep 2005 (CDT)~
Why can't I upload a Word or Excel file?
Why can't I upload a Word or Excel file?
- Gregg - I've asked a question on your user discussion page for clarification.
- Tdoyle 22:33, 30 Aug 2005 (CDT)
Sale of personal residence with acreage to be subdivided
a person bought a home in 1990 on 50 acres of land and lived in this home until selling it with an acre of land in July 2005. The 49 remaining acres he has subdivided into 10 plots of 4.9 acres and will be selling them in the near future. Will there be a capital gain on the sale of these plots and if so how is it calculated?
THIS IS ADDRESSED IN SEC 1237. THERE ARE SOME SNAGS IN THAT SECTION, BUT ITS PROBABLY CAP GAIN. IF MORE THAN 5 LOTS ARE SOLD IN ONE YEAR, A PORTION COULD BE ORDINARY GAIN. THE CAPITAL GAINS RATE IS 15% --PATHAS 18:51, 31 Aug 2005 (CDT)
Off the top, you should be able to qualify more than 1 acre as personal residence, so I would sell the adjacent contiguous lots last or for the best price. Also be careful on the 15% rate calculation. You may also have state income income tax to consider. But other income that you have may also get pushed up in higher tax brackets and other deductions will be disallowed and also alternative minimum tax may kick in. In other words, the calculation is complicated and you may want to work with someone that has good tax planning software for different scenarios, so you know your after tax income as they sell or the worst case tax bill. Sheldon 12:30, 24 Sep 2005 (CDT)
SELLER PAYMENT TO BUYER AFTER CLOSING
A and B find a home to buy and fix up. A takes title to the home. B fixes it up. A reimburses B for rehab costs. After it is fixed up, the house is appraised and A sells the home at the appraised value to B. B borrows the down payment from a relative and takes out a bank loan to buy the house from A. Soon after closing, A writes a check back to B to reimburse him for his down payment and to pay him a "maintenance allowance." I am of the opinion that the basis of the house to B is the amount he pays at closing and that the payments received after closing are ordinary income to B and an ordinary deduction to A. My client disagreed and hired someone else who said he could reduce the basis of the purchased home by the payments made after closing as opposed to picking them up as ordinary income. Am I right or wrong?
offsetting self employment taxes where a business has a gain and farm a loss = negative loss
I have a farm and am self employed. The Turbo Tax professional tax program offset my gain from business with my farm loss resulting in no self employment taxes. The IRS has submitted a bill saying that I cannot offse the farm loss to the self employment business gain. Is that correct.
Was the farming activity reported on Schedule F or a Form 4835? Intuit team, we need more instant and conveinent emailing capabilities here. I think in some areas there is atleast a link to email the person listed somewhere on the left side.--Gregg Gillaspy, CPA, CFP 12:27, 2 Sep 2005 (CDT)
Lacerte workflow solutions semina
Is this seminar worth attending? I've been using the Lacerte program since 98' I would appreciate any input from someone who has attended these seminars in the past. Another solution maybe "webinars". Is this a worth the time and money?
Sale of Personal Residence
Can you have a sale of a personal residence when the taxpayer had the residence demolished before he sold the property? Actually, all that was sold was a piece of land since there was no home left on it. Taxpayer met all other requirements of Section 121 for excluding gain e.g. two of previous 5 years as main home etc.
I don't know of any other requirement that the home has to still exist. In fact, I would think it wouldn't make sense especially in storm situations like a hurricane. The owner should still get the Sec 121 treatment. Sheldon 12:10, 24 Sep 2005 (CDT)
Gift or Inheritance When Lifetime Rights are Waived
I have a client who was deeded property by his mother who maintained lifetime rights to the property. The property was her primary residence. When the mother had to go into a nursing home, the nursing home said she could waive her lifetime rights to the house which she did according to my client. The mother has since died and my client has sold the property in question.
My question is whether or not this transfer of assets has to be treated as a gift or an inheritance. My client says his siblings' accountants have told them it could be treated as an inheritance. My thought was that since the mother did not keep her lifetime rights to the property up until the time that she died, then this has to be treated as a gift. Does the fact that this was intended to be an inheritance have any bearing on the matter?
Tax Treatment for Building 4 Homes on Land Held 10 Years
My client has 5 acres they are subdividing with a culdesac and intend to build four homes that they will in turn sell. They have owned the property for over 10 years. Will they be allowed capital gains treatment if they develop the property by building the homes or would they have to subdivide and sell as "lots only" to avoid being taxed as ordinary gain?Purplette 17:12, 2 Sep 2005 (CDT)
The basis of the land will need to be split out, but they would get capital gain treatment. If they build, it is a question of what portion is long-term. Long-term treatment would apply to the land portion of any transaction. But if the sale happens within a year from the completion of the home, part of the gain would be short-term gain capital gain. Sheldon 13:13, 24 Sep 2005 (CDT)
TAX ON INHERITANCE
Who pays the taxes on the inheritance the Estate or the benificary?
Helen
- What is the net worth of the Estate? --Gregg Gillaspy, CPA, CFP 23:31, 2 Sep 2005 (CDT)
- Usually that is determined by the decedent's will or trust. If the decedent died intestate,then it depends on State law.
Paul A. Lounibos 15:26, 7 Sep 2005 (CDT)
Payroll tax on Nonqualified Stock options
My wife received nonqualified stock options from her employer.
Upon her death, these stock options became fully vested and transferred to me.
When exercised, the difference between grant price and market price is taxed as
ordinary income. This is my question. Do payroll taxes need to be paid as
well? If so, would 7.65% X 2 need to be paid?
Stewart R. JohnsonStudawn@sbcglobal.net 09:01, 5 Sep 2005 (CDT)
When I left my former place of employment, I was allowed to keep some non-qualified stock options for a period of time. I recently exercised some and noticed that FICA and Medicare taxes were withheld at 7.65%. My former employer matched the other 7.65%, even though I was no longer their employee. I would think the same would apply in your situation. The former employer will withhold 7.65% and match the other 7.65%.
--McCPA 16:24, 8 Sep 2005 (CDT)
When a nonqualified stock option is exercised, the excess of the fair market value of the stock received over the exercise price is ordinary income, subject to income and employment tax withholding. Goose 23:21, 13 November 2005 (CST)
Tax Refund Bank Products...Filing tax returns in January
I recently met with some sales reps from a tax software vendor who were tax practitioners themselves. They caught my attention with something I had always shunned. Utilizing BANK PRODUCTS to get taxpayers their refunds quicker. When one said he himself made $9,000 plus on his highest day doing this type of work and he had a number of $8,000 plus days, my attention was all his.
We recently moved into a newly built building which is next to the largest movie theater in town. Also, a bank is placing a facility within this new building. I'm considering setting up a company separate from the CPA firm so there is really no visible connection between the two and running a separate tax prep business which, in essence, would compete against H & R Block. Somehow I think the movie theater or bank could provide opportunities to make this happen.
Does anyone have any practical experience doing this? Suggestions, tips, do's and don'ts? Thanks very much. You also can email me directly at Gregg@GillaspyCPA.com --Gregg Gillaspy, CPA, CFP 06:39, 7 Sep 2005 (CDT)
Last year, our office began doing the bank products, after many years of debate. However, to stay competitive, we had to offer the products. We are a busy tax preparation and financial planning firm. I have 5 full time tax preparers in addition to myself. I contracted one existing employee in my office to process the bank products. She works off a straight commission and has incentives to work the products. Next tax season however all of my employees will be processing the bank products. The transition went smooth, and the work involved was simple.
We also are in a very busy area, near an H&R Block. And as you may know, their bank products are very $$$$. We cut the expense just under H&R's and brought in a good deal of new business (more in the late Jan - mid February period). My biggest concern at the time was issues with my broker dealer/u4 applications, etc. I did not want to become personally involved. However, after further research, I wouldn't have had a problem due to the fact it is still considered tax preparation service which is already disclosed on my U4. Basically, your company doesn't collect any "finance charges", you simply are charging a processing fee that is added to your tax preparation fee. Good luck!
Paula Wilson
I have a client who leases his employees. One of the benefits of the leased employee is health insurance. My client has "leased" himself out and gets a W-2 from the leasing company. The client is a sole proprietor, reporting income on a schedule C. All taxes are taken from his paycheck. How is this handled for tax reporting? Do you back out the employer share of employee taxes and insurance on the schedule C, or do you just leave the owner in with the leased employee expense?
How do I find the responses to this question?
S-corp shareholder distribution exceeds basis
How is the shareholder distribution reported when it exceeds the shareholder basis? Is it reported on the K-1?
The distribution in excess of basis is not reported on the K-1. It is the shareholders responsibility to compute the resulting gain from the distribution in excess of basis and reported on their individual return. The total amount of the distribution is reported on line 16, whether or not any part of it is in excess of basis. Basis Limitations for K-1 Losses
I do agree with the above answer, but would add that when you know that the S corp is in this situation, it is advisable to include a paragraph in a shareholder letter that part of their distributions received may be taxable and that they should consult their tax advisor. This is particularly advisable, if you are not the shareholder's personal tax advisor. Sheldon 13:12, 24 Sep 2005 (CDT)
Buying a Tax Prep Franchise
Has anyone purchased or considered buying a tax prep franchise, like Liberty Tax Prep?Atmco
I saw in an email on LTUG@yahoogroups.com or on TaxTalk with Kleinrock that Liberty Tax was the worst franchise outthere available. Don't know much other than what I read. --Gregg Gillaspy, CPA, CFP 21:47, 12 Sep 2005 (CDT)
Contributing to a Roth & Simple IRA (Self Employed) in the same year.....
Can a taypayer contribute $3000 to a roth IRA in 2004 and in the same year make a deductible(self employed) Simple IRA contribution in the amount of $3600 if the taxpayer has self employment earnings to support the deduction?
Yes, they are eligible regardless of the amount into SIMPLE IRA. I use Lacerte software, and it illustrates in the worksheets the calculation of eligile contribution into the ROTH.
percent of life insurance in a 412i
412i
Taxability of Death Benefit - Annuity
I'm struggling with an issue and could use some help.
I have a client whose father died in July 2005. He had an investment account from the 1970s until June 2005. He emptied out his investment account and purchased a single-premium Indexed Annuity, for which he earned a $40,000 bonus.
After owning this annuity for one month, he died. I know that tax is due on at least one of these transactions. My confusion is determining which one.
1) I know he must pay tax on the gain on the investment account closed in June on his final 1040.
2) Now, for the annuity, let's assume he purchased it for $380,000 and the death benefit is $420,000 (the $40,000 bonus).
It is my contention that the estate will show the $420,000 in the gross estate and pay estate taxes if the estate exceeds the limit. Then it will be distributed to the beneficiaries tax free.
However, the beneficiaries were told from an attorney that it will by-pass the estate and will be passed directly to them. Whether or not I agree is not the issue. If it does pass directly to them, is the entire amount of $420,000 taxable or just the $40,000 difference?
I have limited research tools available and the few I do have are not giving me a clear answer - if there is one. Any help will be greatly appreciated.
Rayanne 09:18, 12 Sep 2005 (CDT)Rayanne
I have a hard time believing the whole $420,000 would be taxed. In annuities I believe it is only the appreciation which is taxed and it is at ordinary income rates. --Gregg Gillaspy, CPA, CFP 21:44, 12 Sep 2005 (CDT)
The annuity is taxed as it would be to the owner. The taxable portion is the $40,000 difference. Mike Guy, CPA
sales tax deduction
Any word of the sales tax being deductible in 2006?````taxnut
Payroll Taxes
A client has paid payroll taxes for a C Corp partially and was directed by an attorney to designate the partial tax payments as "Trust Taxes" which they think is payment of the employee portion only. They are posturing for a possible bankruptcy which they think will forgive the "non Trust" portion of the taxes. Does anyone have any experience with this type of problem??
Section 121 Exclusion Allowed?
I'd appreciate any help anyone could give me with this. I asked the question a couple of weeks ago and got no response. Maybe I didn't give enough information. My client lived in a house for 35 years. The house had structural problems and was not considered worth much compared to the value of the land that it was built on. The owner donated the valuable parts of the dwelling (redwood beams, brass hardware) to a legitimate recycling agency and received a receipt for the donation. Then he had the house demolished and he sold the property. I would love to say that he's still eligible for the $250,000 exclusion of gain on his personal residence since he meets all other requirements. The question is, did he actually sell his personal residence? I'm worried that what he sold was only land! Thanks for your advise.
- Have you considered §121(d)(5) and §1.121-4(d)? It is an involuntary conversion provision that works in conjunction with §1033 and perhaps the exact facts and circumstances of your client fit within its scope. Peter C. Gatto, CPA 02:11, 14 Sep 2005 (CDT)
- Another thought - did the buyer ask the seller to demo and remove the house? If that was the case, I don't see why §121 would not still apply. (As opposed to the seller demolishing the old house, building a new house and immediately selling it.) Facts & circumstances, facts & circumstances . . . Peter C. Gatto, CPA 14:35, 14 Sep 2005 (CDT)
The property was his personal residence for 2 of 5 years, so I see no problem, even if the home was purposely demolished to get the most value out of the property. An auditor could try to argue the property was converted to another use first, but I think the exclusion would hold up. In my experience at closings of real estate now, title companies now ask the question of whether it was used as the owners personal residence for 2 of 5 years to determine whether a 1099 needs to be issued to the seller.Sheldon 13:10, 24 Sep 2005 (CDT)
- I see the key issue as what the sales contract says was sold. Since the seller demolished the property first, the sales contract may only be for a piece of land. No Sec. 121 exclusion for the sale of land. However, if the sales contract said the sale was for the house and land, but called for the seller to demo and remove the house to fully perform the contract, then it would be okay. Peter C. Gatto, CPA 00:15, 25 Sep 2005 (CDT)
Self Employment Income Possible from S Corp?
My client is the sole owner/member of an LLC in Ohio. However, he has elected to file form 1120S for the LLC. Should he pay self-employment taxes on his 1040 for the net earnings of the LLC (as he would have had he not made the 1120S election)? Or does he have to go through the trouble of setting up a payroll for himself to pay these taxes?
I believe you have to do the payroll and payroll tax game. However, this allows "Draws" that avoid P/R tax as long as you appreciate "Basis" issues - which is a serious hot button with the IRS. I have one client audited for that so far and the auditor promised more to come to those with Sub S clients.Gary 16:01, 15 Sep 2005 (CDT)
Do not pay FICA taxes on form 1040 since income from S Corp is not from "self employment. S Corp dividends are not subject to FICA. Determine the fair value of members services performed for the Corp (how much would you pay someone else to do perform the duties?)and pay that amount as payroll(w-2). How about $36,000? Ignore the profitability of the whole Corp activity. Do not worry about audits!!! The IRS has mentioned this as a "hot button" for years as with many areas and have not followed thru by increasing audits. Only saw 2 individual form 1040 audits this year out of 1,000 files returns. David, CPA 14:41, 22 Oct 2005 (CDT)
Taxation of services performed overseas for US customers
Foreign companies (partnership and corpoaration created under law of foreign countries) and foreign individuals develop web-sites for a US customer. All work performed in foreign country, by residents of that country, and the product (web-site code) then send through e-mail or regular mail to the US customer.
Is this income of the developers taxable in the US ? How the customer should report to the IRS about payments he mades to the foreign developers (e.g., 1099 or some other form) or he is not required to report at all ? What about tax withholding, if any ?
Contribution to SEP
I have heard conflicting answers to the question as to when a SEP must be fully funded. One answer is that it must be funded by the due date, including extensions, for filing the tax return for the year for which the contribution is being deducted, even if the return is filed prior to that extended due date.
The other answer said that funding must in fact occur on or before the date the return is filed, even if the extended due date is later. Which is correct?
The rules for SEP's are spelled out in IRC 404(h)(1)(B). This code sections states "if such contributions are made on account of such taxable year and are made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof)." When the return was actually filed has no impact on "time prescribed by law". As long as the return was in fact extended, you have until the extended due date. Stephen Wright 18:01, 17 Sep 2005 (CDT)
Depreciation - bulk fertilizer storage building
A farm supply store built a building for storing and blending bulk fertilizer. Do I need to depreciate the building over 31.5 years or can he write it off sooner?
- I am assuming you are the tax advisor because 1) you say, " . . . can HE write it off sooner"; and 2) you know about the 31.5-year life for non-reside