Fiducial | We help your business grow and be profitable.

TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these 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. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I am one of three members of an LLC that was formed to hold rental property. Will an exchange of my interest in the LLC for an interest in another multi-member LLC taxed as a partnership qualify as a tax-free exchange?
   
   Under the Section 1031 like-kind exchange provisions, the definition of “like kind” for real property is broad. However, those provisions also specifically exclude a partnership interest from qualifying for tax-free exchange treatment. As a multi-member LLC is taxed as a partnership (unless it has elected to be taxed as a corporation) and a partnership interest is not qualified for Section 1031 tax-free exchange treatment, the transaction cannot be structured as an exchange of LLC interests.
   
   Depending on the circumstances, a tax-deferred transaction may be arranged. It would require a dissolution and distribution of the interest in property (to be held by you as a tenant in common). You could then contribute your interest in the property to the LLC as a capital contribution. The distribution of property is generally tax free from the partnership (LLC) and the contribution of the property to a partnership (LLC) will also generally tax-free. We would need details regarding your basis in the current LLC and the terms of the transactions to confirm the tax effect.
   
   
2. My father passed away early last year and left everything to me and my sister equally. We are co-executors. Dad’s estate was well under the $2,000,000 exclusion amount. We sold his house and car, and some stocks pretty soon after his passing. The estate was settled by the end of last year. Is there a return requirement?
   
   You are subject to filing a Form 1041 if the estate had more than $600 of gross income. As the assets described receive a step-up (or step-down) in basis to their fair market value as of the date of death, there is likely little gain or loss. Once we get the numbers, we can calculate the tax impact to you and your sister. As the estate was closed by year end, the Form 1041 is due by the 15 th day of the fourth month following the closing of the estate.
   
   
3. I had a large NOL the year before last. It was carried over to last year. Last year I had some income, and my prior accountant’s calculations show a very large alternative minimum tax. Does this make sense?
   
   Different from a regular NOL carryover, you likely have an alternative minimum tax NOL carryover. It must be separately calculated and many tax preparation systems will not automatically do so and the result can be a miscalculation of the alternative minimum tax. If you wish, I can send in the prior years’ returns to the Research Department at Fiducial, and we can help calculate the alternative minimum tax NOL.
   
   
4. I gave legal title to my residence to my children, but retained the right to occupy the house (rent-free) as long as I live. I was told by my friend that by re-titling the property in such a manner that my executor would be able to exclude it from my estate when it is valued for estate tax. Is that true?
   
   It appears that your friend has confused the probate process with estate tax exposure. As the title to the property passes immediately on death to your children, the value of the house is generally excluded from the state probate system. However, because you continue to occupy the house rent-free, its value will be included in your estate for estate tax purposes.
   
   
5. I intended to elect S corporation status effective on the formation of my LLC October 1, 2006. I just discovered that neither the Form 8832 nor the Form 2553 was submitted. I thought the attorney did it and he thought I had. Can I file a late Forms 8832 and 2553 and elect S status effective October 1, 2006?
   
   Under the provisions of Rev. Proc. 2004-48 , as less than 6 months from the due date of the tax return for the first year the election was to be effective has not passed has not passed, you may file a Form 2553 (by September 15, 2007) and obtain S corporation status effective October 1, 2006. The Form 2553 must be submitted with “FILED UNDER REV. PROC. 2004-48 ” written on top and a reasonable cause statement (outlining the confusion between you and the attorney as to who was supposed to file the Forms 8832 and 2553) signed by you as the shareholder under penalties of perjury must be attached. Under the provisions of the revenue procedure, you are not required to file the Form 8832, just the Form 2553.
   
   
6. I had some business property damaged during a storm and received insurance proceeds on 3-1-04 . The two-year replacement period (the taxpayer had until the end of 2006) has passed and no replacement property was purchased. Can I just declare the income on my 2006 income tax return?
   
   If the replacement period passed without making the necessary purchases, the 2004 income tax return must be amended. The gain must be shown on the tax return for the year in which the insurance proceeds were received. Replacement property may consist of new like-kind property or improvements to the damaged property. Perhaps you have made replacement purchases without even knowing it. Let’s examine your purchases and expenditures relating to the property over the last two years to see.
   
   
7. I am 52 years old and the 100% shareholder of an S corporation. I want long term care insurance to be part of the corporate health insurance program. Does my share of the long term coverage qualify for the self-employed health insurance deduction?
   
   Long term care insurance will qualify as health insurance for purposes of the self-employed health insurance deduction but is limited by a cap on the deduction. For 2007, someone age 51 through 60 at the end of 2007 may deduct up to $1,110 of long term care premiums. As long as it is offered as part of a non-discriminatory plan and you include the premium payments as compensation on your W-2, the premium payments are deductible as a medical expense by the S corporation, your share are included in your compensation but are not subject to payroll taxes and qualify for the self-employed health insurance deduction.
   
   
8. I need money for my S Corporation. I am planning to have the corporation sign a note with a relative. Is there a better way to do this?
   
   If you borrow the money directly and then loan the money to the S Corporation or contribute it as capital, you may use that loan as basis to claim losses passing through from the S corporation. If the corporation borrows the money directly, you may not use the loan as basis even if you personally guarantee the loan.
   
   
9. I went through bankruptcy last year and was discharged. It was a Chapter 7 bankruptcy, and substantially all my assets were disposed of. I was also relieved of debt. Some assets were not taken, however and are not fully depreciated. Can I continue to depreciate those assets?
   
   The basis of assets retained (along with other tax attributes, such as NOLs) are subject to being reduced by the amount of debt relief. A Form 982 will be filed with your income tax return for the year of the discharge of debt. Tax attributes (net operating loss carryovers, credit carryovers, basis of assets, etc.) will be reduced by the amount of the debt relief. In most cases, the basis reduction due to debt relief leaves no remaining basis to depreciate.
   
   
10. I established a cafeteria plan to provide health insurance for all of my employees on a salary reduction basis. Are the amounts deferred by the employees subject to payroll taxes or withholding?
    
    If a cafeteria plan contains a 401(k) plan, the amounts deferred under the 401(k) are subject to payroll taxes (but not income tax withholding). Amounts deferred under a cafeteria plan for other benefits, such as health insurance or dependent care, are not subject to payroll taxes or withholding.