Recent Questions and Answers from the Tax Help Desk
In this issue, we will also address some topics the Tax Help Desk has encountered, as well as changes in this year’s tax season that came from the Surface Transportation and Veterans Health Care Choice Improvements Act of 2015.
Crowdfunding
The Tax Help Desk has recently had several inquiries regarding how to handle money raised using Kickstarter, Indiegogo and GoFundMe. These websites raise initial capital for new start-up companies and entities. Crowdfunding is a very popular form of raising money for new entrepreneurs these days, as it allows the new business owner to seek money without going to traditional banks and financial institutions.
The classification of raised money as capital, a loan, a gift or income is the currently an unanswered question. The IRS has not officially taken a position on this new form of venture capital. But all indications are that, absent some strong proof to the contrary, these raised funds will be considered income
The IRS defined gross income under IRC Sec 61(a) as all income from whatever source derived. So the onus would be on the taxpayer to prove otherwise.
The other possible options would be that the funds are a loan or represent capital, but either one of these arguments would require a more formal agreement between the new owner and the individuals providing the funds. Apparently none of the crowdfunding websites offer this type of arrangement.
The only other option is to argue that the contributed funds are gifts. This would allow for a non-taxable treatment, but might be difficult to defend if the IRS ever looked to challenge a taxpayers’ position. There is a particular case called Duberstein from 1960 that defines the gift as “… a transfer of property if made from the detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses, and isn’t made from a moral or legal duty, for anticipated economic benefit, or in return for services rendered”.
This would, in most cases, leave the benefactor of a Kickstarter, Indiegogo or like program with income in the eyes of the IRS.
Like-Kind Exchange IRS Sec. 1031
Another tax issue that has been addressed by the Tax Help Desk recently is the general mechanics and timing of the like-kind exchange under IRC Sec 1031.
The problem facing tax practitioners is not the 45-day identification period or the 180-day replacement period but the holding period before the relinquished property is held before it is given-up as part of the exchange in a Sec 1031 deal.
We often receive inquiries as to whether or not a property, a piece of real estate, which is held inside of a partnership can be a part of a like-kind exchange involving the individual partners. This situation will often occur when two or more partners in a partnership holding real estate want to dispose of the property and one or more partners want to cash-out and the other partner(s) want to replace or exchange their interest in the building or real estate with other real estate under IRC Sec 1031.
The problem with this particular tax situation is that the partnership interest in-of-itself cannot be exchanged – so the partnership has to exchange their old property for some new real estate, inside the partnership for the provisions of Sec 1031 to work. This produces a problem for those in the partnership that wish to cash-out of the whole deal.
The solution rests in what is known as a tenants in common (TIC) arrangement whereby the partnership distributes the real estate either in liquidation of the partnership or not, and the partners post-distribution hold the real estate jointly, in common ownership under the tenants in common rules. This individual ownership will then allow the individual partner to either sell their part of their ownership in the property or to enter into a like-kind exchange for their partial interest in the real estate. Now that the property is owned individually, this split-treatment can be achieved.
The problem, according to the IRS, with these TIC deals is that the partners are not individually holding the relinquished property for the requisite holding period prior to the exchange. Although this holding period is undefined in the IRS Code and Regulations, a taxpayer is supposed to hold and or use the business or income-producing property for a period of time prior to its exchange in order for it to qualify as property eligible for the deferral provisions of IRC Sec 1031.
The TIC and a good like-kind exchange accommodator should be able to help you and your clients work through any partnership or real estate like-kind exchange issues under IRC SEC 1031.
S-Corporations and Health Care Reform
The Tax Help Desk has handled hundreds of requests and inquiries regarding health insurance, the S-Corporation shareholder and health care reform under the Affordable Care Act.
On December 15, 2016, President Obama signed the 21st Century Cures Act. Within that Act is yet another chapter in the long history of this ever-changing provision. We would encourage those dealing with the issue of reimbursed health insurance premiums for your S-corporation shareholder clients to review Section 18001 of this newly passed Act. Basically, it has extended the provision of IRS Notice 2008-1 through 2016, so that most S-corporation health reimbursement arrangements (HRAs) will not be in violation of health care reform—the ACA—and the penalties associated with IRC Sec 4980.
This change, or extension, also brings with it many compliance issues that will need to be addressed during 2017. There are some dollar caps and limitations as well notification and disclosure issues that the S-Corporation that must be aware if keeping a reimbursement based health insurance benefit in place.
The details are too lengthy to list or go into here, so we would encourage those who are affected by this issue to check out the details of Sec 18001 of the 21st Century Cures Act.
As NSA members, we thought you might appreciate a couple of due date and holiday reminders for this upcoming 2017 tax season. and filing deadlines.
Saturday, Sunday or legal holiday.
Generally, if a due date for performing any act for tax purposes falls on a Saturday, Sunday, or legal holiday, the act is considered to be performed timely if it is performed no later than the next day that isn’t a Saturday, Sunday, or legal holiday. The term legal holiday means any legal holiday in the District of Columbia. An exception to this rule for certain excise taxes is noted later under the Excise Tax Calendar.
In 2017, April 15th falls on a Saturday. The following Monday, April 17th is Emancipation Day, so the filing deadline of Form 1040 has been moved to April 18th.
Note that a couple of traditional tax due dates have changed in 2017 for the filing of 2016 returns. The 2016 Form 1065 which was traditionally due on April 15th is now due on March 15th. The C-Corporation tax return, the Form 1120, along with Form 1040, which was due on March 15th, will now be due on April 15th, or in the case of 2017, April 18th. The S-Corporation tax return and Form 1120-S will continue to be due on March 15th.
The traditional deadlines have been in place for a very long time and this changes how we, as practitioners, approach and plan our tax season. The loss of one month for filing partnership returns and the additional month gained for filing C-Corporation return will change some of our planning during the tax season this year.
Another due date that has recently been changed is for the Report of Foreign Bank and Financial Accounts, the FinCEN Form 114. This form previously had a due date of June 30th with no extension period. This form is now due by April 18th but does have a 6-month extension available.
For more information about 2017 filing deadlines, review this IRS publication.
Active, Associate and Life members of the NSA get five questions answered per year free. Visit the Tax Help Desk for more information and to submit questions online.
