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topten January, 2011
     
 

This is a monthly reference source. By providing samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. You should discuss your particular situation with your Fiducial Business Advisor to answer your specific problem or concerns. (You may not rely on any answer given to avoid a penalty.)

 

 
 
Q.1 My mother passed in August of 2010. My sister and I are her only heirs; I am the executor of her estate. Her total estate was around $500,000 consisting largely of her house and some stock. I understand that there is no estate tax for 2010 and we get no step-up in basis?

 
A.1 Under the 2010 Tax Relief Act, the executor of an estate has a choice as to whether to elect to have the new law ($5,000,000 estate exclusion amount and step-up in basis for assets to fair market value as of the date of death) apply or continue to use the expired estate tax provisions. If the latter is chosen, there is still a limited basis step up for up to $1.3 million in value of assets. You can get the details and bring them to me, but it would seem that either way there will be no estate tax due, no federal filing requirement and the basis of the house and stock will be adjusted to fair market value as of the date of death.  
Q.2 I plan on making a gift to my niece before the end of December of $10,000 cash. Do I have to report
the gift?

 
A.2 You have an annual gift exclusion of up to $13,000 per donee. As long as the total value of all of the gifts given by you to your niece are valued at $13,000 or less, you need not report the gifts. I would suggest that you supply your niece a gift letter that she keep in her personal tax
file so as to be able to prove the gift should IRS ever audit her (IRS tends to use bank reconciliation and would likely assert the deposit was income absent proof
of a gift).

 
Q.3 I had a rental property for several years, but lost it to foreclosure. The value of the property had dropped below the principal balance of the note. The property was the only security for the note (I am not personally liable). Do I have income from debt relief?

 
A.3 Given that you are not personally liable for the balance of the mortgage, you do not have debt relieve income (which is ordinary). As the property was the security for the mortgage, the full amount of the note is considered the sales price of the property for tax purposes regardless of the fact it was worth less than the principal balance. You calculate gain or loss on the sale of the property based on the difference between your basis in the property (cost less depreciation allowed or allowable) and the principal amount due on the mortgage.

 
Q.4 I have an S corporation (I am the sole shareholder) with several employees and a sole proprietorship with no employees. I want to set up a retirement plan in the sole proprietorship. May I do so and not cover the S corporation employees?

 
A.4 Under regulations, businesses under common control are considered to be a “single employer” for purposes of the non-discrimination rules that apply to retirement plans. A corporation with a controlling interest in stock held by a sole proprietor would cause the sole proprietorship and the corporation to be considered a single employer. You may not disregard the employees of the S corporation- they must be covered by a substantially similar plan. You may adopt graded vesting rules (pro-rata vesting over as long as 7 years) or cliff-vesting (100% vesting after completing 3 years of service); any unvested amounts are generally redistributed to the remaining employees if an employee leaves without satisfying the vesting requirements.

 
Q.5 I instituted a 401k plan in my sole proprietorship. I have 5 employees, and all participated. I am running into a cash-flow bind- may I use the employee deferrals for a short period or must I deposit them in the retirement accounts right away?

 
A.5 You should make the payment as soon as possible to minimize the risk of penalty. An employer is required (under Department of Labor rules) to deposit the employee elective deferrals as soon as it is reasonably possible to do so, but no later than the 15th business day following the payday. However, the employee funds should NEVER be used for other purposes. Failure to deposit the deferrals timely may result in substantial penalties.

 
Q.6 I am now working at a local hotel that is part of a chain. I am planning a vacation and I understand the hotel offers employees substantially reduced rates at rooms that are not booked in the two weeks before my vacation. Will I have to recognize the difference between the regular room rate and the discounted rate
in income

 
A.6 Generally, the value of services provided to employees that an employer offers in the regular course of business is excluded from the employee’s income. While the value of the services cannot be excluded if the provision of the services causes the employer to incur “substantial additional costs”, the provision of a room to employees of hotel chains at a discount is common and the “cost” involved (mainly maid service) is not commonly considered to be “substantial”.

 
Q.7 I have a single-member LLC that I am electing S corporation status for effective January 1, 2011 and there will be additional shareholders added. I understand that there is a penalty for late filing the S corporation return. How much is it?

 
A.7 All of the shareholders of an S corporation that does not file on time are subject to a late filing penalty of $195.00 per shareholder per month (for up to 12 months) for returns for tax years 2010 and after. While there is a safe-harbor reasonable cause exception for partnerships made up of 10 or fewer individuals for late filing, the safe-harbor exception does not apply to S corporations. To abate a late-filing penalty, there must be a reasonable cause accepted by IRS. To avoid the late filing penalty file on time or file an extension before the original due date. Make sure you then file by the extended due date (if not, the late filing penalty is measured from the original due date).

 
Q.8 Two years ago I did my own return (2008 tax year). I have a rental property reported on Schedule E that I have rented for almost six years now. I miscalculated depreciation for that year only. Do I have to file a Form 3115 to correct the depreciation?

 
A.8 No, you do not have to file a Form 3115 to correct a math error. You may file an amended return.

 
Q.9 Several years ago I started to pursue my ambition to be a writer. I incurred relatively few expenses beyond a computer and printer. This year I “bit the bullet” and traveled extensively to be able to accurately write about the locations I am using in my current book, which I just completed and I am planning on selling the book to a publisher next year. Do I have to capitalize my current costs?

 
A.9 The simple answer is “No”. Authors, artists and musicians are generally not subject to the Uniform Capitalization Rules. Expenses that must normally be capitalized by other taxpayers are deductible as current expenses by self-employed authors, photographers, artists or musicians. If you so elect, you may capitalize the costs of writing the book and thereby offset income received in later years. However, you need not do so.

 
Q.10 I am planning on starting a day care business next year that will operate out of my home. I am taking a course and will be licensed by January of 2011. In budgeting for the business, my question is am I subject to the 50% limitation for the meals provided to the children?

 
A.10 Meals and entertainment provided to day care recipients (this excludes the day care provider and the day care provider’s family) are 100% deductible as an operating expense of the business and are not subject to the 50% limitation. Day care providers may use actual costs or use a Standard Meal and Snack Rate table that is provided by IRS and is available on irs.gov.

 
   
 
 
 
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