jklcpa

Adding to my post above, I'd probably deduct it. I don't think the character of the loan or its terms are changed simply because it was inherited. It is still a reverse mortgage, and if it is still in the estate the administrator or executor would handle it the same way the decedent would if still living, and in the heir's hands he is still bound by its terms and is required to pay it off within a certain time frame. From pub 936: Reverse mortgages. A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II.

It's true that the accrued interest does add to the outstanding balance of the mortgage since it is considered an additional advance since payments aren't being made. Generally speaking, interest on a reverse mortgage is only deductible when it is actually paid and also falls under the home equity interest rules. Now the question is whether the beneficiary inheriting that property can deduct it if he pays off the reverse mortgage. Without research, I'd say that he probably can because he is now the owner, the loan is secured by the property, he has the obligation to pay it off, he makes the payment, AND if he isn't otherwise limited by the home equity rules. That's probably why Abby mentioned it might be deductible if the heir didn't already have a second home, but even if he doesn't, he still has to worry about the $100K limitation.

Ask for the purchase docs and a copies of the cancelled checks of how these were paid for. This reminds me of an exact example that was given in a CPE class, and when the cancelled check was finally obtained, it was to a cash account that was off the books.

My first reaction is to wonder how the books were ever balanced and what else is wrong on the returns, and I'd be asking this client a lot more questions than how to now make assets magically appear on the tax returns. How were these assets acquired and paid for, were they financed and loan payments being made, were they acquired in some sort of barter arrangement? Were the cash accounts reconciled and in balance? Are there cash accounts in existence that also aren't on the books?

You didn't mention dollar amounts of these assets and that will make a difference in the answer. Are they below the de minimis threshold?

David, it sounds like your client has the scenario described in example 1 of 99-6. This video may be of some help, especially the accompanying transcript that describes the entire transaction step by step. It also includes how to determine the purchaser's basis in the assets. The purchaser's basis in the assets is in 2 pieces: that portion that was distributed to him and its effect, and the portion that he purchased from the selling member. http://www.pwm-nj.com/knowledge/tax/ruling-99-6

Lion then posted:

In another topic SaraEA said: (for reference, the original topic was "Partner K-1 box 16" )

Whoa there, that is NOT what I wrote or said. My first post had 3 distinctly separate paragraphs, the first of which was about putting the foreign taxes on Sch A and does NOT say anything about "requirements". If you look at the OP's question immediately preceding, my one line answer was in the context of her asking about taking a deduction on Sch A instead because (she implied) her expending the additional time to prepare the 1116 would result in her charging a higher fee that would negate the added benefits of taking a credit vs the Sch A deduction. I didn't think it necessary to explain that it would be a deduction and not a credit. I think BHoffman is a CPA and hopefully she and everyone else here does know the different between the two. I certainly did not say anything to indicate that a deduction is the same as a credit. The next paragraph I said that IF the OP WANTS to use the 1116, IF the OP's client met the criteria listed on page 5 of the 1116 instructions with ownership interest of less than 10% and not an active participant, then there aren't two classes of income to be reported on the 1116. I also reference the reg sec listed in the instructions so that the OP could read that and find out if it pertained to her client's situation. In the final paragraph of that first post I said I *think* that same criteria on page 5 of the instructions would allow the OP to bypass the 1116 and report the $61 CREDIT directly on page 2 of the 1040. Then, in my third post in this thread I reminded people that while it is possible to bypass the 1116 if the rules are met as stated in the instructions (under the $300/$600 limit and reported on a 1099div, 1099int, or the K-1s as listed, that we are still required to take into account any limitations that may exist as if we'd filled out the 1116. Here are my posts: Lion made a good point with her statement about additional K-1s and reminding us that the $300/$600 limits are in the aggregate. That IS one part of the requirements listed in the 1116 instructions as an exception to needing to include the form 1116. Some other points being brought up now though (investments, basis, sales, software and its strengths or robustness) have resulted in taking a topic off on a tangent, so hopefully the OP has her answers.

I easily set up the nomorobo on my home line with Comcast Xfinity and it is working well. We never gave that number out to anyone so any calls coming in are definitely not anyone we'd want to talk to. Unfortunately my business line is a traditional line with Verizon where nomorobo isn't available at this time but is available if I upgrade to FIOS. I'm considering the upgrade since we are already wired for it because it would really be nice to have calls on that line blocked as well.

back at ya. Works well for me. So there!

The thing is about bypassing the 1116 altogether and putting it all on the 1040 directly, we are still supposed to calculate the FTC with any limitations that might apply that would reduce it. Does anyone actually do that? Rhetorical, don't answer. For $61, I'd force the flow of it to page 2 of the 1040 and move on.

No need to call Drake. It happens when there are foreign amounts on a 1099-INT. It should be entered on the 1099-DIV screen and it won't be a problem since the worksheets aren't transmitted to the IRS. Just don't print the worksheet for the client if it will be questioned why it is on a DIV worksheet.

Yes, you can put the foreign taxes from the K-1 on the sch A instead. However, if you still want to use the 1116, you don't have to break out between passive and general income categories if this client is a limited partner with less than 10% in the ptnship and does not activity participate. That is stated in the form 1116 instructions starting at the very bottom left of page 5 of the instructions. In this instance, the form's instructions references the reg sec 1.904-5(h)(2) where this is stated. As a matter of fact, I think that this same rule should also allow you to bypass the 1116 altogether and enter directly on the 1040 since it is only $61. The rule for reporting directly on the 1040 is if it's under the dollar thresholds, is all in the passive category, and is reported on a 1099DIV, 1099INT, or a K-1. It seems like it meets all the criteria to me.

For most that have already passed the AFTR and are already in the AFSP, is will most likely be 15 hours including the 6 hr of tax refresher, BUT it might also depend on what state you are licensed and practicing in. See this chart from the IRS for CE requirements for the different designation holders: https://www.irs.gov/pub/irs-utl/Annual_Filing_Season_Program_exempt_non-exempt_CE_chart_for_provider.pdf Two other links: https://www.irs.gov/tax-professionals/annual-filing-season-program https://www.irs.gov/tax-professionals/reduced-requirements-for-exempt-individuals-for-the-annual-filing-season-program-record-of-completion

This article explains a lot, should get you pointed in the proper direction and answer many of your questions. Link is to an article from AICPA's Tax Advisor. http://www.thetaxadviser.com/issues/2012/oct/clinic-story-10.html

Did you run the personal 2015 tax calculations and 2016 projections related to those various scenarios? Which one works out better? What stands out is that if this is a typical year for the S corp, it has significant ordinary income, distributions of almost that same amount, and relatively low shareholder salary in comparison. Have you considered that the salary may be considered unreasonably low and should possibly be raised? Besides the reasonable comp issue and even though it will mean higher payroll taxes, it would be wise to increase the salary so that earnings reported to social security are higher and increase benefits at retirement. I had a client that refused to do this for many years, and then the year before he was ready to sign up for his benefits he asked me how he could impact those figures. Sorry Charlie, too late now.

It may be close to that, yes, but the partial 179 will still allow some amount of regular depreciation and there may also be other depreciation expense on prior years' asset additions that won't be affected by electing 179 in 2015. From his post above ordinary income without any sec 179 is $209, and in the scenario with $44K of 179 (before subtracting it out) has $222K ordinary income. I wasn't trying to be flip in suggesting to David that he run projections, because beyond discussing theory, the projections are needed to fine tune what level of 179 may be optimal for his client's particular situation, and no one here will be able to answer that for him. David never did say what shareholder's compensation was, but now we have information that the company has significant ordinary income, and David's original statement about a loss being created by the 179 and being disallowed that isn't the case at all. The company has this ordinary income that will flow through, and the potential disallowance was only the 179 deduction and contributions, all due to the amount of distributions and the ordering rules when figuring basis. With that level of ordinary income flowing through, other income possibly on the return, the possible excess distribution, filing status, etc, then items such as the Sch A and exemption phase-outs, and the add-on Medicare tax may be affected. We are also late enough into 2016 that David may be able to see the level of income this S corp will generate this year, the distributions to date, whether or not the owner is willing to adjust distributions for the remainder of this year, and whether or not it is beneficial to take that 179 in 2015 so that it comes over into the current and possibly future years, and just when the depreciation or 179 deduction will have the most bang for the buck.

Both statements are correct. Have you thought about a partial, smaller 179 deduction that reduces some of that ordinary income but doesn't limit the deduction while still eliminating the excess distribution? Perhaps these answers might be discovered by running a couple of scenarios in the tax planner for this individual?

Out of curiousity, I started to look this up and found the same letter that Gail did, dated in 2007. The interesting thing is that there's and explanation and a Q&A page dated 2013 from the IL CPA Society explaining the updated requirements that mentions the 2012 grandfathering in, and the Q&A says that those "registered" can prepare taxes and give tax advice. Obviously these are unofficial sources, but find it confusing that the state society would have the information *that* wrong. The main differences appear to be that those licensed can perform review and audits while registered CPAs can't, and the registered CPAs aren't required to attend continuing education. That being said, I don't see how the IRS would ever allow those that are "registered" to practice before the IRS without ongoing CPE. From IL CPA society: https://www.icpas.org/information/licensing-registration FAQs: https://www.icpas.org/docs/default-source/default-document-library/information/licensing-registration/illinois-public-accounting-act-faqs-2013.pdf?sfvrsn=0

Whether it's an operating loss or the sec 179 deduction, they will be disallowed and carried forward until the owner has basis. If not taking the sec 179 deduction, does the S corp have ordinary income in excess of $3K? With a starting basis of -0-, that is the only way those excess distributions of $3K could be nontaxable because of the ordering rules. I don't like the idea of switching the distributions to being due from shareholder, although it's a common practice. What do the books and records of the company reflect the transacton to be? If its a distribution, report it as such. If the owner had the intention to repay it, is that documented with a promissory note or in minutes of a meeting, or anywhere? Finally, to answer the easiest of the questions you asked, if the stock of the S corp has been held more than one year, and if we are only talking about stock basis (no debt basis), then the excess distributions would be long-term.

The fact that the new owner will be actively working in this business is irrelevant to the S corp status. My own practice was an S corp for many years. As long as this new owner is an individual that will not cause an inadvertent termination of the S election (eg- being a non-resident alien, corp, partnership), adding that individual as a stockholder would not exceed the 100 shareholder limit, and the S corp's gross income from passive activities doesn't exceed 25% of the gross income, then the corporation will remain an S corp. S corps aren't PSCs.

Sec 179 has limitations at both the corporation and shareholder level. Have you done the calculations within the S corp return to calculate the 179 allowed at the corp level? If you look at that calculation, stockholder compensation is an add-back, that's why Abby said he'd need at least $39K in compensation to allow it. If not, the 179 won't show on the K-1, won't flow onto the 1040 at all.

I'm not sure, I might have found the answer so read this and see what you think (and sorry the formatting is not so great): The IRC for the CTC is sec 24 where it says: (c) Qualifying childFor purposes of this section— (1) In general The term “qualifying child” means a qualifying child of the taxpayer (as defined in section 152(c) ) who has not attained age 17. And then if you look at sec 152(c), it says "who meets the age requirements in paragraph 3", and then look at #3, specifically (3)(A)(i), it says: (3) Age requirements (A) In generalFor purposes of paragraph (1)(C), an individual meets the requirements of this paragraph if such individual is younger than the taxpayer claiming such individual as a qualifying child and— (i) has not attained the age of 19 as of the close of the calendar year in which the taxable year of the taxpayer begins, or (ii) is a student who has not attained the age of 24 as of the close of such calendar year. Links to both pages: https://www.law.cornell.edu/uscode/text/26/24 https://www.law.cornell.edu/uscode/text/26/152