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Individual IssuesChapter 6 pp. 175 - 212

2016 National IncomeTax Workbook™

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01. Employer-provided Autos & Airplanes

02. Household Caregivers

03. Relief from Joint Liability

04. Charitable Contributions of Food Inventory

05. IRA Charitable Distributions

06. Ministers

07. Amish & Mennonite Taxpayers

08. Lease with an option to purchase

09. Crowdfunding

10. Fantasy Sports2

Individual Issues

p. 175

2

Cents-per-mile rule

54¢ per mile

Value:

Car < $15,901,

Van or Truck < $17,701

Must meet 2 test to qualify

Regular Use in Trade or Business

Mileage Test3

Employer provided Autos

pp. 176 - 177

Regular Use

50% mileage use for business

Sponsored commuting pool

Facts & circumstances

Mileage Test

Driven at least 10,000 miles

Used primarily by employees

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Cents-per-mile Rule

pp. 176 - 177

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Computes taxable portion

Each trip considered 1-way, $1.50 per trip

Requirements:

Provided for employee use, required to use for

commuting

Policy in place prohibiting personal use

Employee follows policy

Employee is not a controlled employee 5

Commuting Rule

p. 177

Determine FMV on first day available for use

Use Annual Lease Value Table

Calculation:

Annual Lease Value x Personal Miles

Total Miles

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Lease Value Rule

pp. 178 - 179

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Personal use reported in box 1, 3 & 5

If business use included, deduct on Sch A

Generally withhold income taxes

Required to withhold SS & Medicare

(exception for Farmers)

Noncash fringe benefit pd in last 2 months,

can be reported in subsequent yr7

W-2 Reporting

p. 179

Personal use is taxable

2 Methods to determine personal use:

1. Charter Value

FMV method

Uses value of similar flight on a similar plane

2. Standard Industry Fare Level (SIFL)

More commonly used method

Uses formula (Dept of Transportation) 8

Personal Use of Airplane

pp. 179 - 180

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Generally household employees

Employers file Sch H to report:

1. Federal income tax withheld

Not required to withhold, if so must issue W-2

2. Employment taxes withheld

Must withhold SS & Medicare if wages $2,000+

3. Federal unemployment taxes owed

Must withhold if wages $1,000+

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Household Caregivers

pp. 180 - 181

Wages paid to spouse, child under 21, or

parent, not subject to FICA or FUTA

Wages paid to employee under 18 exempt

from FICA (unless principal occupation)

Grandparent wages subject to FICA if: Caring for grandchild under 18 or has physical/mental

condition

Employer is divorced, widow/widower, spouse unable to

care for child 10

Exceptions

pp. 181 - 182

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Fringe benefits not included in wages:

Meals

Lodging

Transit passes

Parking

Mileage

Health Insurance 11

Fringe Benefits

p. 182

Child & Dependent Care Credit

Credit = 35% of $3,000 (1) OR $6,000 (2 or more)

Flexible Spending

Max contribution = $5,000, ($2,500 if MFS)

Medical Expense Deduction

Itemized deduction for nursing type services or long

term maintenance or personal care services under

a prescribed plan of care12

Benefits for Taxpayers

pp. 182 – 183

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IRC § 6015 allows 3 ways to request relief:

Innocent Spouse Relief

Separation of Liability

Equitable Relief

Proposed regulations make significant changes

to the existing regulation

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Relief from Joint Liability

p. 183

Additional guidance on Res Judicata

Unpaid tax defined

Rules for Credits/Refunds

Penalties & Interest not separate items

Attribution Rules

Allocation Rules

Revised rules on Collections & SOL

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Proposed Regulations

p. 184

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Will not apply if raised generally & did

not specify subsection

Meaningful participation:

Participated in appeals process

Participated in discovery;

Participated in pretrial meetings,

settlement negotiations, or the trial;

Signed court documents; and

Was represented by counsel 15

Res Judicata

p. 184

Regulations propose that unpaid tax &

underpayment mean the same thing

TP can get relief only if:1. Filed a joint return with underpayment or

deficiency and tax was unpaid.

AND

2. Does not qualify for full relief under Innocent

Spouse Rules or Separation of Liability Rules

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Unpaid Tax

p. 185

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Regulations limits credit or refund:

1. If using separation of liability method, no credit or

refund allowed

2. Equitable relief cannot be used to circumvent the

fact that no credit or refund exists

3. Filing Form 8857 is the same as filing a claim for

credit or refund

4. Requesting spouse generally not eligible for a

credit or refund of joint payments 17

Credits or Refunds

pp. 185 - 186

Regulations clarify that penalties and interest

on an underpayment are not separate items

from which a requesting spouse may obtain

relief

Relief is based on attributable underpayment

May request relief if tax is full paid18

Penalties and Interest

p. 186

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Item disallowed due to the increase to AGI is

attributed to the spouse whose erroneous item

caused the increase to AGI

If the increase to AGI is the result of erroneous

items of both spouses, the resulting income

changes are apportioned proportionately.

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Attribution Rules

pp. 186 - 187

Relief not dependent on the availability of a

credit or refund.

If entire deficiency can be allocated to the non-

requesting spouse, the requesting spouse has

received full relief

A requesting spouse with no knowledge or

reason to know of an erroneous item can

receive relief for the liability attributable to that

item or portion thereof 20

Allocation Rules

pp. 186 - 187

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The amount of an erroneous item allocated to a

requesting spouse may increase or decrease

depending on the tax benefit to the requesting

and non-requesting spouses

Generally allocation to the individuals treated as

if they had filed separate returns.

Exception if joint return allowed tax benefit to

both and non-requesting spouse does not

receive full tax benefit21

Tax Benefit Rule

pp. 188 - 189

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Example 6.14

pp. 188 - 189

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IRS cannot initiate a levy or initiate or prosecute

a court proceeding to collect the taxes subject

to a request for relief until 90 days after the IRS

mails a notice of determination or until the

decision of the Tax Court becomes final

SOL on collection is suspended during the time

that the IRS is prohibited from collecting by levy

or a proceeding in court and for 60 days

thereafter. 23

Restriction on collections & suspension

of the limitations period p. 189

Deduction limited to the lesser of:

FMV, or

TP’s basis

FMV = Price at which the TP sells the same

food items

Basis = Cost incurred for the food inventory24

Charitable contributions of food

inventory p. 190

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Apparently wholesome food

Intended for human consumption

Must meet all quality & labeling standards

Receiver must use for care of ill, needy or infants

Use must be related to receivers purpose or function

Cannot be transferred for money, property or services

Receiver must provided stmt agreeing to comply

Receiver cannot be a private non-operating foundation

Food must satisfy FDA requirements 25

Qualified Contribution

p. 190

For qualified food inventory, deduction

equals:

Basis

PLUS

½ the profit that would have been recognized

if the inventory was sold at FMV

Deduction limited to 2x TP’s basis26

Calculating the deduction

pp. 190 - 191

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C corps – 15% of all taxable income

All others – 15% of total net income from

all trades or businesses that donated food

P/S & S Corp pass deduction to S/H’s

Excess can be carried forward for 5 years

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Limit on deduction

pp. 191 - 192

2 rules apply to IRA owners who are 70 ½ :

Must begin taking RMD

Can make QCD

QCD allows TP to contribute up to

$100,000 from their IRA to a Qualified

Charitable Organization with no tax effect

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IRA Charitable Distributions

p. 193

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1. Owner requests IRA trustee to make QCD

2. Trustee writes check to charity

3. Owner receives F1099-R showing distribution

4. Owner reports on 1040 or 1040A, writes QCD

next to entry, reports “zero” as taxable.29

Procedure to make a QCD

pp. 193 - 194

Eligible IRAs

Traditional

Roth IRA (up to earnings)

Ineligible

SEP

SIMPLE IRA

Inherited IRA (unless beneficiary is 70 ½ )30

Eligible IRAs

p. 194

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Income Tax:

Subject to income tax on all earnings whether

they are employees or self-employed

If employee – Can deduct unreimbursed

business expenses on Sch A as misc.

itemized deductions subject to 2% floor

If self-employed – Can deduct expenses on

Sch C 31

Ministers

p. 195

Not subject to federal withholding if:

Minister is a duly ordained, commissioned, or

licensed minister; a member of a religious

order (who hasn’t taken a vow of poverty); or

a Christian Science practitioner or reader;

and

Salary is for ministerial services. 32

Ministers – Tax Withholding

p. 195

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Services performed as a minister are

considered SE earnings

If minister is an employee, no FICA

deductions should be on W-2

Minister should file Sch SE and pay SE

tax33

Ministers – SE Tax

pp. 195 - 196

Minister can request exemption from SE tax for

ministerial services

To apply:

File F4361 by due date of F1040 by 2nd tax year in

which they received $400 in net SE earnings

Certify that request is for other than economics

Notify church about their opposition

Establish that church is tax-exempt 34

Ministers – Exemptions

from SE Tax pp. 195 - 196

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May be able to exclude housing allowance or

rental FMV from income tax, subject to SE tax

Housing Allowance exclusion is lowest of:

Amt actually used to provide home

Amt designated as housing allowance

Fair rental value (including furnishings & utilities)

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Ministers – Housing Exclusion

pp. 195 - 196

If housing provided, can exclude FRV

Utilities pd by minister can also be excluded

Excess allowance must be included in

gross income

Can still claim mortgage interest & RE taxes

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Ministers – Housing Provided

p. 197

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Minister must allocate business expenses

between taxable & nontaxable income

Nondeductible portion computed by:

1. Excluded housing allowance (or FRV) ÷ total

ministry income = nontaxable income percentage.

2. Total business expenses x nontaxable income

percentage = expenses allocable to nontaxable

income (not deductible).37

Ministers – Expenses and

Tax-Exempt Income p. 198

Facts:

Salary = $52,000

Annual Travel allowance = $6,000

Annual business expenses = $6,750

Excluded housing allowance = $14,000

Computation:

$14,000 ÷ ($52,000 + $6,000 + $14,000) = 19.4%

19.4% x $6,750 = $1,310 (non-deductible)

$6,750 - $1, 310 = $5,440 (deductible)38

Example 6.25

p. 198

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Can request an exemption by filing Form 4029

Must show the following:

Sect or division is conscientiously opposed to

accepting benefits of any private or public insurance

Sect or division has provided and currently make

reasonable provisions, for their members.

Sect or division has existed continuously since

December 31, 1950.

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Amish & Mennonite Taxpayers

pp. 199 - 200

Form 4029 application for exemption

requires a social security number (SSN)

Members may object to applying for a

social security card

Can provide a statement to not get a card

but they will get assigned a number 40

Amish & Mennonite Taxpayers

Social Security Numbers p. 200

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Generally TPs must have an SSN for a

child to claim an exemption

Write “exempt Form 4029” instead of SSN

TP must deliver or mail a copy of the birth

certificate and approved F4029 to IRS

May not be eligible for EITC

If exempt & self-employed, no earned income

No SSN for child 41

Amish & Mennonite Taxpayers

Exemptions & Credits pp. 200 - 201

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Lease-Option Agreement

p. 201

Rent-to-Own for specified period

Nonrefundable credits treated as rental

income

Tax consequences delayed until option is:

Exercised

Sold

Expires

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Lease-Option Exercised

p. 202

Option exercised:

Lessee adds pymt to basis

Lessor adds pymt to selling price

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Lease-Option Sold

p. 202

Option sold:

Lessee determines gain/loss as if they sold

the property

Nature of the gain/loss depends on the

underlying property

Lessor has a non-taxable event

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Lease-Option Expired

p. 203

Option Expired (not exercised):

Lessee reporting depends on property use:

• Residence – non-deductible personal loss

• Business property – deductible business loss

Lessor treats pymt as ordinary income

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Lease-Option Rental Payments

p. 203

Lessor includes payments as ordinary

income on Sch E

Lessee can only deduct rental payments

if property is used for business

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Recharacterized as Installment Sale

p. 204

Factors indicating sale:

Option fee + total rent pymts > FMV

Rent > market rate, option pymt < market rate

Option & rent pymts credited toward purchase price

Buyer required to make capital improvements

Tenant guaranteed title

Part of each rent pymt is interest

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Effects of Recharacterization

pp. 204 - 205

Option fee deemed as down payment

Lease pymts split between principle & interest based

on imputed interest rules

Lessee (buyer) no longer entitled to rent deduction

Lessor (seller) loses depreciation & other deductions

Lessor (seller) reports gain on Form 6252

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Crowdfunding

pp. 206 - 207

Multiple websites which offer crowdfunding

Tax consequences depends on purpose

4 most common types:

• Donation Based

• Rewards Based

• Equity Funding

• Loan Based

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Crowdfunding – Donation Based

p. 207

Contribution is deemed a gift

No tax consequences if under $14,000

May be able to claim a charitable

contribution deduction

No tax consequences for recipient

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Crowdfunding – Reward Based

pp. 207 - 208

Contributor receives reward with little or no

value, no tax consequence

If > de minimis, could be sale/payment

Example 6.34:

Total Contribution - $16,500

Gross income - $ 7,500 (50 donors x $150)

Gift - $ 9,000

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Crowdfunding – Equity Funding

p. 208

Funds contributed in exchange for ownership

in company

No tax consequences for either the

contributor or recipient at time of donation

Future tax consequences based on

income/loss from company operation

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Crowdfunding – Loan Funding

pp. 208 - 209

Promise made to repay contributor with

interest

Recipient = borrower, Contributor = Lender

Contributor will report interest income

Recipient may have interest deduction

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Fantasy Sports

pp. 209 - 210

Participants earn cash

& prizes

Prizes reported based

on how they are

characterized

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Fantasy Sports –

Gambling exceptions p. 210

Not based on current membership in an actual team

Prizes/awards made known in advance

Prizes/awards not determined by # participants or

amount of fees

Winning outcome based on knowledge/skill of

participant & statistical performance

Outcome not based on score, point spread or

performance of real team or event

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Fantasy Sports –

Hobby or Business pp. 210 - 211

1. Business-like manner

2. Expertise of taxpayer or advisers

3. Time and effort expended

4. Appreciation of assets

5. Success in other activities

6. History of income and losses

7. Amount of profits, if they are occasional

8. Taxpayer’s financial status

9. Elements of personal pleasure

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Fantasy Sports –

Information Reporting pp. 211 - 212

Fantasy sport sites must report earnings of

$600 or more

Report on 1099-MISC, box 3

Sites should report using “Net Method”:

Add gross amts during year

Deducts entry fees for each tournament

where a prize was won

Players should maintain their own records

THANK YOU

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