Crouch, Farley & Heuring, P.C.-Financial Measurement, Analysis and Communication

Question: Care Corp, a C corporation, has eleven employees. Three of the employees are shareholders of Care Corp; the other eight are unrelated administrative staff. Care Corp provides for 60% of the medical insurance premiums (single plan) of all employees. For 2011, the total health insurance premiums paid by Care Corp was $65,000, of which $15,000 was for the three shareholders. The three shareholders had salaries of $100,000 each and the administrative staff was paid based on an hourly wage of $9.50 per hour. The average hours worked by the shareholders was 2,600 hours (7,800 totals) during the year, while the administrative staff worked an average of 1,800 hours (14,400 total). Can Care Corp qualify for the small employer health insurance credit on the 2011 Form 8941, and if so how much?

Answer: Care Corp would be eligible for the small employer health insurance credit for the tax year. The credit on Form 8941 is based on the non-shareholder staff, their hours worked, wages and the premiums paid for them. The hours worked, wages and health insurance premiums of the shareholders are not taken into account for purposes of the credit under §45R(e)(1)(A). Thus, based on hours of work performed by the other employees, Care Corp has six full-time equivalent employees (14,400 hours / 2080 rounded down to the whole number) and average annual wages of $22,000 [(14,400 hours x $9.50/hr) / 6 full-time equivalent employees, rounded down to the nearest $1,000]. This means the credit will not be phased out because there are less than 10 full-time equivalent employees and less than $25,000 in average annual wages. Thus the credit Care Corp will be eligible for will be $17,500 ($50,000 x 35%) on Form 8941.

This week's question is brought to you by Kris Siolka, EA from our Tax Knowledge Center.

September 29, 2011

Question: Tristan is in the business of making and selling wishing wells and other lawn fixtures. He files a Schedule C each year as a sole proprietor. In 2010, he had net business income of $25,368, which allowed him to take a self-employed health insurance deduction of $3,500. He has a health insurance plan established through his business. In October 2011, Tristan will be eligible for social security benefits and Medicare Part B. He wants to know if the amount he pays for Medicare Part B premiums will be eligible for the self-employed health insurance deduction. What do you tell Tristan?

Answer: Yes, the Medicare Part B premiums are considered medical insurance premiums for purposes of the self-employed health insurance deduction, per the 2010 IRS Form 1040 instructions for Line 29. This is a change in IRS policy effective for tax years beginning after December 31, 2009.

Answer: No, when a husband and wife establish an LLC for any reason, whether it is a trade or business or a rental activity, they are required to file Form 1065, U. S. Return of Partnership Income, to report the income and expenses of the activity. Had Jim and Darlene not placed the property into an LLC; they would have been able to elect out of partnership reporting and report the income and expenses of the rental on a separate Schedule E, Form 1040 for each taxpayer. This treatment applies to jointly owned rental property. Co-ownership of rental property does not create a partnership for federal income tax purposes; however, electing out of partnership reporting is advisable. In addition, LLCs cannot elect out of partnership reporting because the property is not owned by the co-owners. Instead it is owned by the LLC. Thus, a rental activity owned by an LLC with two members must be reported on a Form 1065 as a partnership.

This week's question is brought to you by Stephanie Davis from our Tax Knowledge Center.

September 15, 2011

Question: Cliff and Claire, long-time clients, just called with questions on claiming a theft loss. They hired a local contractor to build a deck that would surround the new above-ground pool. They paid the contractor a down payment of $2,000, half of the total estimated bill. The contractor assured them he could complete the project before the big holiday weekend, just four weeks away. After many repeated unanswered calls to the contractor, Cliff and Claire decided to hire a different contractor. The new contractor started and completed the project within the required time. The previous contractor finally returned a call to Cliff the week after the project was to be completed and apologized for missing the project due date – he was called out of town on family matters. The contractor will not return their down payment; is there a deductible theft loss?

Answer: Under Reg. § 1.165-8, a theft loss is the result of illegally taking property with criminal intent. The loss is deductible under §165(c)(3) in the year of discovery. Unfortunately, this situation does not warrant a theft loss deduction. Cliff and Claire cannot claim a theft loss because the contractor did not intentionally take the down payment with the intent of not completing the project. They may have a theft loss if the contractor was in the process of closing his business, but continued to bid jobs and receive down payments with the intention of not completing any of the projects and where intent of fraud could be proven. A theft loss includes larceny, robbery, embezzlement, burglary and false representation [Reg. § 1.165-8(d)].

This week's question is brought to you by Becky Van Kauwenberg from our Tax Knowledge Center.

September 8, 2011

Question: Alfred Singleton walks into Wellington Accounting Services, Inc (WASI) inquiring whether or not someone in this office can prepare his tax returns. Wilma, a tax preparer of WASI, invites him in to discuss his tax situation. After speaking with him, Wilma finds out his returns have not been prepared for 2006, 2007, 2008, 2009 or 2010. Wilma proceeds to gather all the information from Alfred that is required to file his tax returns for those five years. Wilma starts preparing his 2006 return, finishes and realizes Alfred incurred a net operating loss (NOL) in 2006 and wondered if Alfred could still carry the NOL back. Wilma went to Betty, a tax specialist at WASI, and explained Alfred’s tax situation to her. Wilma then proceeded to ask if Alfred still had the option to carryback the NOL incurred in 2006.

Answer: Betty responds to Wilma, explaining that Alfred can carry the NOL back, however according to §6511(d)(2) he will not receive a refund of tax. IRC section 6511(d)(2) states, a claim for credit or refund that corresponds with an overpayment attributable to an NOL being carried back must be filed within three years of the time prescribed by law for filing the return for the year the NOL occurred, including extensions. Alfred’s 2006 NOL carryback needed to be filed by April 15, 2010 in order for him to receive a refund of tax, assuming no extension was filed. Betty further explains to Wilma that even though Alfred is unable to receive a refund of tax the NOL must still be carried back to determine the amount of NOL that can be carried forward.

This week's question is brought to you by Erik Lammert, JD from our Tax Knowledge Center.

September 1, 2011

Question: Siegfried bought his principal residence for $1 million when the real estate market was at its peak. Since then the value of the home has fallen to $850,000. He considers himself fortunate that he only owes $800,000 on it, so he is not “under water” yet. Even better, he has found a lender who will make a $100,000 home equity loan to him, even though he only has $50,000 of equity in the home. If he takes out a $100,000 home equity loan, using his house as collateral, can he deduct the home equity loan interest on his personal income tax return?

Answer: He can deduct some, but not all, of the home equity loan interest on his personal income tax return. A home equity loan (or home equity indebtedness) is defined as debt (other than acquisition debt) which is secured by a qualified residence, but only to the extent the debt is not more than the fair market value of the qualified residence minus the amount of acquisition indebtedness with respect to such residence [§163(h)(3)(C)].

The FMV of Siegfried’s home is $850,000, but he still owes $800,000 on the acquisition debt, so only the interest on $50,000 of the home equity loan is deductible. If the FMV was less than the amount of the acquisition debt, none of the home equity loan interest would be deductible.

Total qualified educational expenses	$17,500
Minus: Tax-free educational assistance	-8,500
Minus: Expenses taken for American Opportunity credit	-4,000
Equals: Adjusted qualified educational expenses (AQEE)	$5,000

This week's question is brought to you by Cindy Hockenberry, EA, from our Tax Knowledge Center.

July 7, 2011

Question: Louie owns De Palma’s Taxi Service as a sole proprietorship. He has four employees, Tony, Alex, Bobby and Elaine. Each employee is assigned a taxicab owned by Louie and used for transporting people to their desired destination. Louie is a terrible bookkeeper but knows his employees keep detailed logs of each business mile they drive. Can Louie use the standard mileage rate for deducting the use of the taxicabs?

Answer: Yes. Revenue Procedure 2010-51, Sec. 4.05(1), was modified to allow taxpayers to use the business standard mileage rate to calculate the amount of deductions for automobiles used for hire, such as taxicabs for expenses paid or incurred on or after January 1, 2011. Since Louie is operating a fleet of less than five taxis, he is permitted to use the standard mileage rate.

For 2011, the business standard mileage rate is 51 cents per mile from January 1 through June 30 and increases to 55.5 cents per mile from July 1 through December 31.

This week's question is brought to you by Sherrie Weldon, EA, from our Tax Knowledge Center.

June 30, 2011

Question: Your client, Sean made a qualifying purchase of a new home in 2008 and was able to claim the entire $7,500 first-time homebuyer credit. Sean purchased the home for $100K and took out a mortgage of $90K. Per requirements for individuals that claimed the 2008 credit, Sean paid back $500 of the credit on his 2010 return. In 2011 Sean calls to let you know that he is considering a short sale of $85K that his lender is willing to approve. Sean would like to accept the deal but wants to know how the pay back of the remaining $7,000 will work. What do you tell him?

Answer: Given the facts presented, Sean won’t need to pay back a penny of the $7,000 balance. Under §36(f)(2), recapture is accelerated if a taxpayer disposes of the principal residence with respect to which a credit was allowed (or such residence ceases to be the principal residence of the taxpayer and, if married, the taxpayer's spouse) before the end of the recapture period. When recapture must be accelerated, the taxpayer must pay back the credit in full, reduced by any repayments that have already been made. That said, where the residence is sold to an unrelated third party, §36(f)(3) limits this accelerated payback to the extent of gain. Basis in the principal residence is the original purchase price of the home reduced by the balance due on the credit as of the sale date.

Therefore, given Sean’s fact set, basis in the home is $93,000 ($100,000 - $7,000). Selling his home short for $85,000 will result in a personal nondeductible loss of $8,000 ($85,000 - $93,000). Because repayment is limited the gain on the sale and Sean has no gain, he will not be required to pay back any portion of the remaining balance on the original $7,500 first-time homebuyer credit he received

This week's question is brought to you by Stephanie Davis from our Tax Knowledge Center.

June 9, 2011

Question: New clients, Jack and Dianne, moved to the area late last year and are concerned they will need to repay the First-time Homebuyer Credit with their 2010 tax return. They received the credit for the purchase of their first home in 2008 for $7,500. They lived in the house for two years, but were required to move closer to the military base when Dianne received military orders for deployment. Jack is a stay-at-home dad while his wife Dianne has been in the military since high school. Will these taxpayers need to repay the First-time Homebuyer Credit?

Answer: No, the repayment of the credit does not apply to taxpayers that dispose of the principal residence in connection with government orders for qualified official extended duty service. [IRC Sec. 36(f)(4)(E)]. They will need to complete Form 5405, Part III Line 11 and check the box for Line 12; this form is submitted with the 2010 tax return.

This week's question is brought to you by Erik Lammert, JD, from NATP’s Tax Knowledge Center.

May 12, 2011

Question: Larry owns an office building that he rents to various tenants. Due to rising fuel costs, he would like to install solar panels on the roof to generate electricity, and a geothermal heating and cooling system. Would he be eligible for a tax credit for these items on his 2011 return?

Answer: Yes. IRC §48 allows Larry to claim a tax credit equal to 30% of the basis of the solar panels placed in service during the year, and 10% for the geothermal heating and cooling system. Property eligible for the credit includes amortizable or depreciable property that meets certain government standards and is constructed, reconstructed, or erected by the taxpayer (or acquired by the taxpayer if original use begins with the taxpayer) that:

Uses the ground or ground water as a thermal energy source to heat or cool a structure (for periods ending before 2017).

The energy percentage does not apply to the portion of the basis of any property that is attributable to qualified rehabilitation expenditures. The basis of the property on which the credit is claimed must be reduced by 50% of the energy credit, even if the full amount is not used in the current year [IRC Sec. 50(c)].

The energy credit can be used to offset AMT liability without limitation and is subject to a five-year recapture rule if the property is disposed of. The amount recaptured is reduced 20% for each year the qualifying property is held [IRC Sec. 50(a)(1)].

This credit is claimed using Form 3468, Investment Credit, and becomes part of the taxpayer's Section 38 general business credit (GBC). If there is a GBC in addition to the energy credit, the energy credit is carried to Form 3800, General Business Credit.

This week's question is brought to you by Kevin Brown, EA, from NATP’s Tax Knowledge Center.

May 5, 2011

Question: In 2010, Ralph and Lynn installed new energy-efficient windows in their principal residence. They received a credit of $600 for the new windows on their 2010 tax return. In March 2011, the couple purchased a new energy-efficient furnace for the same home. Can they take a credit for this purchase in 2011?

Answer: No. Under §25C, taxpayers that make investments in residential energy property are allowed up to $500 in tax credit for making the improvements on their principal residence in 2011. The credit has both a lifetime limit and a limit based on the type of property expenditure. The lifetime limit under §25C(b)(1) states the taxpayer cannot exceed $500 over the amount of the credit taken in any prior year ending after December 31, 2005. In this case, Ralph and Lynn have taken $600 in credits in the prior years, and thus they are not allowed a credit in 2011. Even if they would not have taken the credit in the prior years, the maximum amount of credit that would have been available for the furnace would have been $150 under §25C(b)(3)(B).

This week's question is brought to you by Kirs Siolka, EA, from NATP’s Tax Knowledge Center.

Answer: Since Jenny received the home in the divorce, she has to repay the credit. In this example she must repay the entire $7,500 because her gain from the sale was $9,300. The $9,300 gain was calculated by reducing the basis of the home by the $7,500 credit. If the gain had been less than the $7,500 her repayment would be limited to the amount of the gain. If she sold it for a loss then none of the credit would have to be repaid.

According to the instructions to Form 5405, Line 13(e), the spouse who owns the residence after the divorce is responsible for the repayment, if any, of the entire first-time homebuyer credit. Jenny will file the Form 5405 in 2010 and fill out Parts III and IV to repay the credit.

This week's question is brought to you by Liza Corbisier from NATP’s Tax Knowledge Center.

April 21, 2011

Question: Long-time clients, Jack and Joy, adopted a beautiful special needs child last year. This is their third adoption in three years. Because their tax liability was minimal in the past, they were unable to use the full credit and have a carryover from the past two years. This year when Jack and Joy arrive for their appointment, both are excited to see you because they heard the adoption credit is now refundable. Is their excitement valid?

Answer: Yes, their excitement is valid – and they will be even more thrilled to learn that the carryover portion of the adoption credit they were unable to use in the past is also refundable this year. The Patient Protection and Affordable Care Act (2010 Health Care Act) made the credit refundable for tax years beginning after December 31, 2009. An adoption credit claimed in an earlier tax year and carried forward to a tax year beginning in 2010 is now a refundable tax credit. The credit carryover to 2010 is not subject to the income limitation [IRS Notice 2010-66].

This week's question is brought to you by Liza Corbisier from NATP’s Tax Knowledge Center.

April 14, 2011

Question: Mary paid $5,000 of medical expenses for her mother Dorothy in 2010. Dorothy earned $4,000 at her part-time job and received social security benefits of $12,000. Mary provides over 50% of Dorothy’s support. Mary comes to you and asks if she can claim the medical expenses she paid for her mother on her Form 1040 Schedule A. What do you tell her?

Answer: Yes. Dorothy’s W-2 earnings will not prevent Mary from claiming a deduction for the amount she paid for her mother’s medical expenses as an itemized deduction on Schedule A. Section 213(a) expands the definition to include the taxpayer’s parents. If the parent does not meet the gross income test for the taxpayer to receive the dependency exemption, the parent will still meet the definition of a dependent for purposes of medical expenses paid.

A taxpayer's medical expenses include expenses paid for a person who meets the §152 definition of a dependent. However, §213(a) expands the definition to also include a dependent child who filed a joint return with a spouse, a relative who would have qualified except for exceeding the income level, or anyone who would have qualified as the taxpayer's dependent but was claimed as a dependent on another person's return. Medical expenses paid for a dependent claimed under a multiple support agreement are also deductible [Reg. §1.213-1(a)(3)].

This week's question is brought to you by Sherrie Weldon, EA from NATP’s Tax Knowledge Center.

Answer: No. A “foster care provider” is able to exclude qualified foster care payments under §131. The Internal Revenue Code and Regulations do not actually define either “foster care” or “foster care provider.” By definition however, to “foster” is to give parental care and upbringing, usually on a short-term basis, to individuals unrelated by blood or adoption. When defining a child, §152(f)(1) supports the differentiation between biological and foster child by listing a son, daughter or foster child as distinctly different types of children. Therefore, because only payments received for “foster care” can be excluded from income under §131, and a biological parent caring for their own child is not considered “fostering”, payments received from state agencies to care for their biological children must be included in income.