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topten May, 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 I am the 100% shareholder of an S corporation and its only employee. The corporation pays all of the expenses associated with a vehicle that I use for both business and personal trips. Do I have to reduce the expenses and depreciation claimed by the corporation due to the personal use?

 
A.1 As all of the expenses associated with the vehicle are paid the S corporation and therefore, the S corporation is deemed the equitable owner of the vehicle, the vehicle will be considered to be used 100% for business and is listed as a corporate asset. The expenses and depreciation are not reduced. Any personal use of the vehicle is accounted for by either adding the value of the personal use to your W-2 as additional compensation or by you repaying the corporation for the personal use.  
Q.2 I inherited some publicly traded stock from my Uncle Joe’s estate. He passed early this year. I sold the stock this month. It appreciated a little bit from the date of death. I was told that since I held the stock for less than one year I have a short-term capital gain. Is that true?

 
A.2 A2. In general, inherited property is considered to have been held for the long-term holding period and the gain you realized on the sale of the stock will be given long-term capital gain treatment.

 
Q.3 I purchased a franchise business several years ago and ran it successfully since then. However, this year I have run into some trouble and had to sell the business assets. I negotiated with the franchisor and was able to abandon the franchise – basically I was able to walk away with me paying nothing and receiving nothing for the franchise. I paid cash for the franchise, but friends are saying I now have debt relief income. Is that true?

 
A.3 No; not from the facts you present. In fact, you have a deduction in the form of being able to write off any remaining unamortized basis in the franchise. Perhaps your friends were confused in thinking that you had financed your purchase of the franchise.

 
Q.4 I have a housekeeper that I engaged using a service. I pay the service, and they pay the housekeeper. I am now being told that I must give the housekeeper a Form W-2 and report what I pay her on Schedule H. Am I being informed correctly?

 
A.4 No, you are not being informed correctly. Your housekeeper, from the facts you give, is not a “household employee”. She works for the agency through which you hired her. The agency through which she works is responsible for reporting what they pay her. If you had hired her directly, provided the cleaning materials and tools for her and she did not work for others as well as you, a reporting requirement for you may have applied.

 
Q.5 Q5. I am a newly ordained minister at our church. I received a W-2 that includes a parsonage allowance. In talking with another minister I thought that the parsonage allowance was completely tax-free, but now I am being told it is subject to SE tax. Is this true?

 
A.5 What you were told is true. A minister may generally exclude from income for income tax purposes an amount designated as a housing allowance by the employing body. However, the full amount of the housing allowance is included in income for purposes of determining self employment tax. Was the minister you talked with retired? If so, that may be where the confusion was sown as a housing allowance provided to a retired minister is not generally subject to income tax or SE tax.

 
Q.6 I am the sole shareholder of an S corporation. A large hail storm hit our area earlier this year and really damaged my work truck which is owned by the corporation- basically it is totaled. It is not yet fully depreciated. I received an insurance payment. Do I have to recognize income if I do not replace the truck by the end of this year? What happens if I spend more than I received from the insurance company buying a new truck?

 
A.6 No; you do not have to recognize income if a new truck is not purchased by the end of this year. In the case of an involuntary conversion you have until the end of the second year following the year you first receive the insurance proceeds to purchase replacement property. Generally, if you purchase replacement property with the insurance proceeds, the If you spend more to purchase a new truck than was received in insurance proceeds, the additional amount spent is treated as a new asset and is depreciated separately from the remaining basis of the truck (for which depreciation continues).

 
Q.7 I own a rental house that is being foreclosed on. I am told it is worth $200,000, but I owe $350,000. The original cost of the property is $400,000, my remaining basis is $300,000, and the mortgage is secured solely by the house (I am not personally liable for the mortgage). Do I have to recognize $150,000 of debt relief income?

 
A.7 As you are not personally liable for the mortgage in excess of the FMV of the property, you will not have $150,000 of debt relief income. On foreclosure, the property will be treated as sold for the amount of the mortgage, regardless of the FMV. As your basis is $300,000, but the remaining principal amount of the mortgage is $350,000, you will have a $50,000 gain (Section 1250 recapture) to recognize and it is treated as if the property was sold for $350,000.

 
Q.8 I am the trustee of my father’s living trust. He passed away last year and I have been working to keep the trust in compliance. I am taking a trustee fee as provided for in the trust agreement. I understand that the amount I receive is subject to income tax (and is deductible by the trust). Is the amount paid also subject to SE tax?

 
A.8 In general, unless you are a professional trustee (e.g., an attorney or CPA that manages trust accounts as a profession) the amount received as a trustee fee or as an executor of an estate will not be subject to SE tax.

 
Q.9 I plan on buying all of the assets of a corporation for over $400,000, rather than buying stock. In addition to doing this to have depreciable basis in the equipment and goodwill, I am doing this to avoid any potential liability for the debts of the corporation. Is there a problem I should be aware of?

 
A.9 Many states have a “bulk sale” provision that will potentially cause you some grief. Under this provision, if substantially all of the assets of a business are purchased the new owner will be liable for any unpaid sales taxes (and many state laws also cover unpaid payroll taxes) of the business. Several states, including Michigan, Pennsylvania and Texas have allowed the provision to apply to unpaid corporate income tax (the Franchise Tax in Texas). With any purchase of a business, even with an asset purchase, it is a good idea to get a tax clearance letter. Insisting on a right of restitution is a good idea, too, but it still could leave you with the problem of forcing repayment from the seller, which may be difficult to do.

 
Q.10 I am getting married by the end of this year. My fiancé had some federal income tax problems in the distant past and is still making payments. I do not want to be “caught” by his problems. What options do I have in terms of filing tax returns?

 
A.10 You have a couple of options. First, you may elect to file separately. This will insulate you from any tax claims pertaining to your husband. However, this may create a situation where you both are paying more tax in total than would be due if you file jointly. Calculations should be made to determine the most favorable method. In most cases, the lowest tax results by filing jointly. This leads to a second option; filing jointly and filing Form 8379, Injured Spouse Claim and Allocation. Under this form, each spouse’s tax is calculated as if filed separately. The injured spouse’s (your) tax is divided by the couple’s total tax, and then the percentage determined is used to calculate the percentage of the total tax owed by the injured spouse. The injured spouse’s payments are applied against this calculated amount and if the payments are in excess, that excess is refundable to the injured spouse. The injured spouse allocation only applies if there is a refund due.

 
 

 
 

 
   
 
 
 
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