Tax News

2017 Tax Bill: Property tax prepay … and what is allowed?

Posted on by Craig Mathias

Reference: HR 1, “Tax Cuts and Jobs Act.”

There’s a LOT of contradictory media articles on the subject of prepayment of California property taxes due April 2018.  Here’s an excerpt from Parkers Tax Bulletin:

Caution: The Conference Bill includes a provision blocking taxpayers from prepaying state and local income tax relating to the 2018 tax year in 2017 in order to circumvent the new limitation on the deduction. Specifically, the bill provides that, in the case of an amount paid in a tax year beginning before January 1, 2018, with respect to a state or local income tax imposed for a tax year beginning after December 31, 2017, the payment will be treated as paid on the last day of the tax year for which such tax is imposed for purposes of applying the provision limiting the dollar amount of the deduction.

Our analysis: As CA starts its fiscal year 7/1/17, the taxes payable in April are for a tax year beginning before 12/31/17 and should be ok.

So… in PLAIN LANGUAGE:  You CAN pay your 2nd installment of your 2017 property taxes (due by April 2018) before 12/31/2017 (postmark) and deduct in 2017 UNLESS you are subject to Alternative Minimum Tax in 2017.  You CANNOT pay your December 2018 (first) installment of your 2018 property taxes early.  The CA counties won’t take the payment and the IRS won’t let you deduct it.

Problem solved!

Attorneys fees for alimony (non-deductible)

Posted on by Craig Mathias

Ref: Barry v. Comm’r, TC Memo 2017-237

Summary: Taxpayer hired an attorney to reclaim alimony that he felt was overpaid.  He argued the legal fees were deductible under Sec 212(1) because the result would be taxable income.

Tax court: Not deductible: Under the “origin of claim” doctrine, the transaction started under family law and not under a profit seeking venture.  The Tax Court also referenced earlier decisions where it disallowed legal payments incurred for alimony adjustment and for alimony recovery in prior cases. Lastly, the Court argued that had Barry brought this claim in the year of the divorce, the legal fees would have been clearly nondeductible as part of the divorce proceedings (a personal expense).

New per-diem rates for Continental US business travel (CONUS)

Posted on by Craig Mathias

Reference: IRS Notice 2017-54

The rate for meals and incidentals (M&IE) has been raised to $68 for high cost localities under the IRS high/low method.  Like all business meals, the net deduction is one half of that amount.

Example: Sole proprietor is on a six day business trip. M&IE under CONUS is $68 * 6 * 1/2 = $204 as the net deduction on the tax return.  M&IE is in lieu of actual expenses for meals, tips and other incidental travel charges.

Sale of Residence to Parents: Part Sale/Gift

Posted on by Craig Mathias

Fiscalini v. Commissioner, TC Memo 2017-163

In summary, a taxpayer sold his residence to his parents for a sales price of $975,000.  He received no cash directly.  The parents paid off his mortgages with a total of $664,000.

The Tax Court determined that the mortgage relief was the effective sales price of $664,000. Minus basis and the $250,000 Section 121 exclusion for sale of a residence resulted in gain of $122,000.

The remaining equity of $311,000 ($975k – 664k) was deemed to be a gift from the taxpayer to his parents.

PEO (Professional Employer Organization) and payroll tax liability.

Posted on by Craig Mathias

Reference: Chief Counsel Advice 201724025

An S corporation used a PEO to “lease” its employees with the contracted understanding that the PEO would remit all payroll taxes to the IRS.  The PEO failed to pay those taxes and the IRS concluded that they were still the liability of the S corporation employer in spite of its contract with the PEO.

The CCA did point out that IF the PEO goes through the process of being certified by the IRS, becoming a CPEO, then the S corporation would NOT have been held responsible for the CPEO’s failure to remit the taxes to the IRS.

Take away: If you’re using a PEO for “employee leasing,” be sure that they have gone through the process of being certified with the IRS and are a CPEO.

S Corporation Losses and Shareholder Basis

Posted on by Craig Mathias

Ref: Hargis, TC Memo 2016-232

The recent Hargis case serves as a reminder that losses from an S corporation can be used to reduce tax at the shareholder level only IF the shareholder has basis in that S corporation.  Furthermore,  guaranteeing corporate debt will NOT give rise to shareholder basis.

Simply stated, if the corporation is short of funds, the shareholder should either:

  1. Directly deposit personal funds to the corporation as either Paid in Capital or a formal loan with written documentation OR
  2. If borrowing is required: The shareholder should borrow funds personally and then deposit those funds into the S corporation.

The shareholder has no basis increase for loans to the corporation which he/she guarantees OR loans from other entities which he/she controls.

Qualified Personal Residence Trusts (QPRT)

Posted on by Craig Mathias

Ref; Sec 2702 and Reg 25.2702

QPRT are often used to remove a primary residence from a large estate as well as asset protection.  The rules for establishing are complex and care should be taken to engage an attorney well-versed in their formation.  QPRT are typically more “flexible” that often thought including:

  1. The residence can be sold within the QPRT as long as those proceeds are reinvested in a qualifying residence within time frames established under Regs Sec 25-2702.
  2. QPRT usually qualifies as a grantor trust under IRC Sec 677 and 673. Therefore, the grantor may exclude up to $250k ($500k for married filing jointly) if the requirements of Section 121 are otherwise met.

We can discuss this at length as well as provide referrals to Martindale A-rated attorneys to help in establishing such a trust if it meets your tax needs.

Tax Court Approves Alternative Medical Care

Posted on by Craig Mathias

Reference: Malev v. Comm’r, No. 1282-16S

The Tax Court allowed Victoria Malev to deduct alternative medical procedures not provided by a licensed medical practitioner. The Court cited Tso V. Comm’r stating that nothing in Code Sec 213 or related regulations requires that medical-related treatments be furnished by an individual licensed to practice medicine in any particular discipline or that the services or treatments be provided in person rather than remotely, or that the treatment be successful or universally accepted as effective.  The Court was also positively affected by Malev’s belief as to the effectiveness of the treatments. Furthermore, the Court did consider collaborative statements by Malev’s doctor in support of “integrated medical treatment” crossing various disciplines.

Foreign Financial Account (FBAR) extension to 10/15/2017

Posted on by Craig Mathias

Reference: FinCEN release dated 16 December 2016.

Public Law 114-41 had moved the annual deadline for reporting foreign financial accounts from June to April 15, with the ability to apply for a six month extension. With this release, FinCEN stated, “FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required.”

Note that the FBAR filing is IN ADDITION to the IRS Form 8938 that accompanies individual and business tax returns filed with the Internal Revenue Service.  The two forms have differing filing “triggers,” so be sure to ask if you have any foreign accounts.