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Individual Issues Chapter 6 pp. 175-212

Individual Issues Chapter 6 pp. 175-212. 2016 National Income Tax Workbook™. Issue 1 p. 176 Employer Provided Auto/Airplane. Automobile: Any 4-wheeled vehicle Methods to value personal use Cents-per-mile rule Commuting rule Lease value rule.

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Individual Issues Chapter 6 pp. 175-212

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  1. Individual IssuesChapter 6 pp. 175-212 2016 National Income Tax Workbook™

  2. Issue 1 p. 176Employer Provided Auto/Airplane • Automobile: Any 4-wheeled vehicle • Methods to value personal use • Cents-per-mile rule • Commuting rule • Lease value rule

  3. Issue 1 p. 176Cents-per Mile Rule • Personal miles x standard mileage rate • Regular use in trade or business & • Vehicle meets mileage test • Include unreimbursed amount in wages • Value of auto cannot exceed • $15,900 for passenger vehicle • $17,700 for truck or van

  4. Issue 1 p. 176Cents-per Mile Rule • Regular use in trade or business • ≥ 50% of total mileage is for trade or business (Tor B) • Employer sponsored commuting pool uses each workday for ≥ 3 employees • Regularly used in T or B based on all facts and circumstances

  5. Issue 1 pp. 176-177Cents-per Mile Rule Example 6-1 • Company car provided to Casey • Mileage turned in monthly • 18,500 total miles, 4,200 personal • Meets mileage and regular use tests • If not reimbursed to employer • W-2: 4,200 x 54¢ or $2,268

  6. Issue 1 p. 177Cents-per Mile Rule • Mileage Test • Vehicle driven ≥ 10,000 miles/year & • Vehicle used primarily by employees • Must use cents/mile from vehicle start • Can only change to commuting rule • Includes maintenance, insurance, fuel • Without fuel, reduce rate 5.5 ¢ or less

  7. Issue 1 p. 177Commuting Rule • $1.50 one way to and from home • Requirements: • Car for noncompensatory reasons • Written policy prohibits personal use • Employee follows written policy • Employee not a control employee

  8. Issue 1 p. 177Commuting Rule • Control Employee (EE) • Officer with pay ≥ $105,000/year • Director • EE with pay ≥ $215,000 • EE owning ≥ 1% • EE owning 5% in current or prior year • EE with pay > $120,000 prior year (20%)

  9. Issue 1 p. 177Commuting Rule Example 6.2 • Casey – 500 trips between home/work • Bonafide noncompensatory reason • Primarily business, documented use • Casey followed written policy on use • $83,000 salary, no ownership • W-2 or reimburse: 500 x $1.5 or $750

  10. Issue 1 p. 178Lease Value Rule • Value = annual lease value • Employee documents all mileage • Employer includes in W-2 • Personal % of lease value or • 100% of lease value • Must use method from vehicle start • Can only change to commuting rule

  11. Issue 1 pp. 178-179Lease Value Rule • Determine FMV on date 1st available • Find lease value in Pub 15-B table • Multiply value by % personal miles • FMV = arm’s-length price + tax, title, etc. or • Invoice price plus 4% • MSRP minus 8% + tax, title etc. • Retail value of national pricing source

  12. Issue 1 p. 179Lease Value Rule Example 6.3 • Car given Casey cost $38,900 • Annual lease value: $10,250 (Fig. 6.1) • 4,200 personal miles of 18,500 total • Wages: $2,327 (4,200/18,500 x $10,250)

  13. Issue 1 p. 179Form W-2 & Personal Use • Personal use in boxes 1, 3, and 5 • Describe amount included in box 14 • 100%: EE deducts business as 2% exp • If no income tax withholding must tell EE by 1/31 or w/30 days of providing • Subject to FICA taxes (not if farm) • Last 2 months can be next year wages

  14. Issue 1 pp. 179-180Airplanes • Valuation methods for personal use • Charter Value (FMV method) • Value of similar flight chartered on similar plane • Standard Industry Fare Level (SIFL) • Formula to value • Employer deduction = actual costs

  15. Issue 2 p. 180Household Caregivers • Care provided in home at taxpayer’s direction and control is household EE • Provided by agency that controls is EE of agency • Example 6.4 - In home caregiver • TP provides supplies & instructions • Likely an employee

  16. Issue 2 pp. 180-181Household Employment Taxes • Schedule H, Form 1040 • Withhold income tax – @ EE request • If withheld, issue W-2 • Withhold & pay FICA • If ≥ $2,000 cash wages for 2016 • If pay EE’s share, include in box 1 • Non-cash wages not subject to FICA

  17. Issue 2 p. 181Household Employment Taxes • FUTA • Cash wages of $1,000 any quarter • 6% on first $7,000 cash wages • If timely pay state tax, 5.4% credit • State may require worker’s comp • No FICA/FUTA if paid to spouse, parent, or son/daughter under 18

  18. Issue 2 p. 181Household Employment Taxes • No FICA for employee under age 18 • Unless principal occupation • If student, not principal occupation • FUTA does apply • Ex. 6.5: No FICA, under 18 during year • W-2 for cash wages with income tax withholding or subject to FICA

  19. Issue 2 p. 181Household Employment Taxes • Grandparents Exception – wages subject to FICA (not FUTA) if: • Caring for grandchild living in employer’s home if child • Is under age 18 or • Has physical/mental condition in need of care 4 continuous weeks AND

  20. Issue 2 pp. 181-182Household Employment Taxes • Grandparents subject to FICA if payer • Divorced and not remarried • Widow or widower • Living with spouse – physical/ mental condition preventing care for child at least 4 continuous weeks in quarter • Example 6.6

  21. Issue 2 p. 182Fringe Benefits – Household EE • Generally not = wages • Provided at employer’s home • Meals - employer’s convenience • Lodging - employer’s convenience & condition of employment • $255/month transit passes (2016) • $255/month parking (2016)

  22. Issue 2 p. 182Fringe Benefits • Car Expenses • Running errands - 54¢/mile (2016) • Taxable if reimbursed for commuting • Provides auto – personal taxable • Health Insurance nontaxable if: • Only 1 EE & policy from Exchange • ≥ 2 EE’s – policy through SHOP

  23. Issue 2 pp. 182-183Household Employees • May qualify for dependent care credit • May use employer’s FSA funds • Example 6.7 – reduces income tax and FICA liability • Medical expense deduction if nursing-type services or qualified long-term maintenance/personal care services

  24. Issue 3 p. 183Relief from Joint Liability • § 6015 relief options • Innocent spouse • Separation of liability • Equitable relief • Not the same as injured spouse rules • State relief may not follow federal

  25. Issue 3 p. 184Res Judicata • Res Judicata: Cannot relitigate a matter already adjudicated on merits • Applies for innocent spouse relief if: • Relief was issue in prior proceeding • Spouse meaningfully participated

  26. Issue 3 p. 184Proposed Regs – Res Judicata • Res Judicata N/A if requesting spouse • Raised relief issue only in general • Did not specify section for relief • Did not qualify based on marital status during prior proceedings • Acts = to “meaningfully participated”

  27. Issue 3 p. 184Proposed Regs – Res Judicata • “Meaningfully participated” • In IRS appeals process while docketed • In discovery • In pretrial meetings, negotiations, trial • Signed court documents • Counsel represented in prior proceedings

  28. Issue 3 p. 184Proposed Regs – Res Judicata • No meaningful participation if: • Participated due to spousal abuse, control, fear of retaliation • Prior to relief effective date • Ability to contest stat, notice not relevant in participation determination • Example 6.8

  29. Issue 3 p. 185Unpaid Tax – Equitable Relief § 6015(f) • Filed a joint return with • Understatement/deficiency or • Unpaid tax, and • No full relief under innocent spouse or separation of liability • Unpaid tax determined as of due date • Example 6.9

  30. Issue 3 pp. 185-186Limits on Relief Credits or Refunds • Not for any payment on joint return if allocation made using separation of liability • Equitable relief cannot circumvent result of separation of liability method • Credit can include payments after and within lookback period of Form 8857 filing • Not joint payments w/nonrequesting spouse but includes applied prior year overpayment

  31. Issue 3 p. 186Limits on Relief Credits or Refunds Example 6.10 Separation of Liability • Married 2013, joint, divorced 2014 • Form 8857 – Frank understated 2013 income, entitled to separation of liab. • IRS allocated deficiency to Frank • No refund allowed – separation of liab. • If innocent spouse, refund possible

  32. Issue 3 p. 186Penalties and Interest • Not separate items for relief • Tie to understatement relief whether tax paid or not • Relief available for unpaid penalties even if refund of underlying tax barred • Example 6.11

  33. Issue 3 pp. 186-187Attribution Rules • Items adjusted due to AGI changes • Attributed to spouse whose erroneous item caused AGI change • If error of both, proportionate • Example 6.12 Tax on AGI change ID • AGI change hers – all items hers • $4,000 his, $6,000 hers – 40%/60%

  34. Issue 3 p. 187Allocation Rules • No credit or refund with allocation of deficiency under § 6015(c) • If 100% of deficiency to nonrequesting, full relief received → no relief under § 6015(f) • If < 100% to nonrequesting, partial relief, relief under § 6015(f) possible

  35. Issue 3 pp. 187-188Knowledge of Deficiency • No knowledge or reason to know of erroneous item → relief of related tax • Joint item indicates knowledge • Abuse or financial control by norequesting → no knowledge • Example 6.13 • $2,000,000 income, separate acct • $120,000 to joint account = knowledge

  36. Issue 3 p. 188Tax Benefit Rule - § 6015(d) • Tax benefit by one spouse of the item can override allocation • Example 6.14 • Wages: Karl 60,000 Keyana 25,000 • ($20,000) PS of Keyana disallowed • Figure 6.2 – Karl’s benefit $6,000 • 30% (6/20) limit to Karl’s liability

  37. Issue 3 p. 189Tax Benefit Rule - § 6015(d) • Example 6.15 $2,400 deficiency • Adjustments yielding deficiency: • Larry: $5,000 casualty/separate prop. • Leona: $7,000 tax shelter loss • Larry - $2,000 against his taxable income • $3,000 balance allocated to Leona • No knowledge of tax shelter facts • Larry’s % = 2/12 or 16.67%

  38. Issue 3 p. 189Tax Benefit Rule - § 6015(d) • Example 6.15 $2,400 deficiency • Q1: Larry knew facts that casualty wrong? • Larry: 100% casualty - 41.67% (5/12) • Q2: Leona requested relief and Larry did not know casualty wrong? • Leona: 83.33% (10/12), Larry 16.67% • Q3: Both ask, Leona knew shelter facts? • Leona liable for $2,400, Larry $400

  39. Issue 3 p. 189Collection and Statute of Limitations • Innocent spouse relief, separation of liability, most equitable relief types requests • No collection action against requesting spouse until 90 days after notice of determination of Tax Court decision • Collection statute runs again after 60 days after action suspension ends • If requester signs waiver, statute runs again 60 days after signing

  40. Issue 4 p. 190Charitable Contrib. of Food Inventory • Generally: Lesser of FMV or basis • § 170(e)(3)(C) – PATH Act - enhanced deduction if FMV > basis • Qualified contribution to qualified organization • Food must meet certain requirements • Organization must comply with rules

  41. Issue 4 pp. 190-191Deduction Calculation • Deduction: Basis + 50% profit • Limited to 2 x basis • Worksheet in Pub. 526 • Basis = cost for inventory purposes • Must remove from beg’g inventory • If no inventory, 25% x FMV for basis

  42. Issue 4 p. 191Determining FMV • Value food inventory using price at which same items sold at the time • Disregard: • Food was not sold due to standards • No market for the food • Produced exclusively for making contribution

  43. Issue 4 p. 191Limit on Food Inv. Contribution Deduction • Not a C - 15% total T or B net income • C corp - 15% of taxable income • Disregard NOL C/B or C/O, DPAD • C: Food contribution counts toward regular 10% limit • Excess deductions carryover 5 yrs. subject to 15% limit in future years

  44. Issue 4 p. 191Deduction Limit – C corp – Ex. 6.16 • Basis: $10,000 FMV: $10,000 • Taxable income: $500,000 • Deduction: $10,000 (10,000+50% x 0) Q1: If basis = $10,000, FMV = $35,000 • Deduction: $20,000 – lesser of • $22,500 ($10,000 + 50% profit) or • $20,000 (2 x basis)

  45. Issue 4 pp. 191-192Deduction Limit – C corp – Ex. 6.16 Q2: Effect on charitable contrib. limit? • General limit: $50,000 (10% x 500,000) • Food contrib. reduces it to $30,000 (50-20) • Excess other carryover subject to 10% limit Q3: Food deduction if TI = 100,000? • $15,000 (15% x 100,000) • $5,000 carryover for 5 years subject to 15%

  46. Issue 4 p. 192Partnerships and S Corps • Pass through deduction to owners • PNs and SHs subject to 15% limit of T or Bs that donate food inventory Example 6.17 – S corp, $500,000 net • Flow through to sole shareholder: • If $10,000 basis, $10,000 FMV: $10,000 • If $10,000 basis, $35,000 FMV: $20,000

  47. Issue 4 p. 192Partnerships and S Corps • If FMV ≤ basis, no 15% limit (all taxpayers) Example 6.18 - S corp net inc. $50,000 • SH MAGI = $60,000, no other food contrib. • If basis $10,000, FMV $10,000, no 15% • Deduct: $10,000 (< 50% x 60,000) • If basis $10,000, FMV $35,000, use 15% • Deduct: $7,500 (15% x $50,000) • Carryover $12,500 ($20,000-$7,500)

  48. Issue 5 p. 193IRA Charitable Distributions • Qualified Charitable Distribution (QCD) made permanent by PATH Act • Made directly from IRA • Max $100,000/year (each on joint) • No deduction but no income either • Exclusion to extent otherwise taxed • Made to US org listed p. 193

  49. Issue 5 pp. 193-194IRA Charitable Contributions • IRA trustee writes check to charity • Owner receives Form 1099R • Enter on line 15a, “QCD”, 0 on 15b • Need documentation from charity • Example 6.19 – Age 72 • RMD $25,000, $50,000 to charity • If reimbursed by IRA, no QCD

  50. Issue 5 p. 194Eligible IRAs for QCD • Eligible • Traditional deductible IRA • Traditional nondeductible IRA • ROTH IRA – up to amount of earnings • NOT Eligible • SEP or Simple IRA • Inherited IRA (unless beneficiary ≥ 70 ½)

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