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topten June, 2010

This is a monthly reference source. By providing samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. You should discuss your particular situation with your Fiducial Business Advisor to answer your specific problem or concerns. (You may not rely on any answer given to avoid a penalty.)


Q.1 I am the sole shareholder of an S corporation. I want to establish a medical plan that will be deductible as self employed health insurance. Must the premium payments be reported
on my W-2?

A.1 Recently the IRS issued a notice wherein it was stated that for a more-than-two-percent S corporation shareholder to deduct the corporate payment of health insurance attributable to that shareholder as self-employed health insurance, the payment of the premiums must be reflected on the shareholder’s Form W-2. If the plan is not discriminatory, the premium payments are deductible by the S corporation and included as income by the shareholder, but are not subject to payroll taxes.

Q.2 My parents, who are both still living, established a trust for the benefit of me and my sister. They transferred a piece of land held for investment that is valued currently at $100,000. It was their only gift to us for 2009. Their basis is $20,000. Does a gift tax return need to be filed?

A.2 Yes, given that the trust does not benefit your parents for their lifetime (in which case the trust would be considered a grantor-type trust and would be disregarded for tax purposes until the trust converts- likely on the death of the first or second spouse). As the gift given in trust is a present gift of a future interest, it does not qualify for the $13,000 annual gift tax exclusion- the gift will be taxable at its fair market value from the first dollar. However, your parents may split the gift and each applies their $1 million lifetime exemption, so no out-of-pocket tax will be due.

Q.3 My mother established a revocable living trust several years ago and transferred two investment accounts into the trust. She has reported all of the income from the accounts on her individual return. Is she required to prepare a trust return?

A.3 If the trust is a revocable living trust, until an event occurs to change the trust’s status (e.g., your mother’s death), she would continue to report all items of income, loss and deduction associated with trust property on her individual tax return. A revocable trust is considered a disregarded entity for tax purposes. Generally, the trust instrument calls for the trust to convert to either a simple or complex trust on the death of the grantor.

Q.4 I received an e-mail from IRS informing me my tax return was in error and I am owed a refund of $480. I am to provide bank account information to allow a direct deposit. Can you please check my return to determine the error?

A.4 There was no error in your return. The e-mail you got was an attempt to defraud you. IRS does not contact taxpayers individually with unsolicited e-mails and does not request taxpayer information via e-mail. You may forward the e-mail to IRS at Do NOT answer the e-mail and do not open any attachments to the e-mail.

Q.5 In looking over the information from the court regarding my father’s estate (he died last year), I can deduct the funeral expenses incurred. In preparing the Form 1041 for the estate, why weren’t these expenses deducted?

A.5 You may deduct funeral expenses in determining the amount of estate tax due. As your father’s estate was under $3.5 million when he died last year, no Form 706 was due. The funeral expenses are not deductible for purposes of determining any income tax due from the estate as reported on Form 1041. Legal expenses, probate fees, accounting and tax preparation fees are examples of deductible administrative expenses for the estate.
Q.6 I am considering establishing an auto allowance for my workers. Will I have to add the amount to compensation; subject to payroll taxes and withholding?  
A.6 If you simply pay a set amount each week (or month) under a non-accountable plan, your employees will have to recognize income and the allowance will be subject to payroll taxes and withholding. If, however, you institute an accountable plan for the auto expenses wherein your employees must within a reasonable time provide proof of the time, place and business expense incurred the employee will be able to exclude the reimbursed expense from income and it will not be subject to payroll taxes or withholding. To fall within a reasonable time, it is recommended that the plan should call for the employer to reimburse the expense no later than 30 days after the expense is incurred, the employee to adequately account for the expense within 60 days after the expense is paid or incurred, and the employee to return any excess reimbursement within 120 days.

Q.7 My mother died in February of 2010. My father predeceased her (many years ago). I understand that there is no estate tax for 2010, but is there no basis step-up either?

A.7 For 2010, the estate tax is repealed. Each estate will be permitted to increase basis on a decedent’s assets by up to $1.3 million - with up to an additional $3 million for property passing to a surviving spouse. The basis increase may not exceed fair market value. There is, therefore, a limited step-up in basis available. The basis increase does not apply to IRAs, annuities or similar assets (such as inherited installment notes).

Q.8 My daughter works for me full time during the summer and when she is home from college during the rest of the year. I want to establish an education program so that I can pay
up to $5,250 of her college expense and exclude it from her income.
Is this allowable?

A.8 Educational assistance programs are qualified employee benefits available under Section 127 of the Internal Revenue Code. Under that provision, no more than 5% of the benefits paid under the plan may go to a more than 5% owner (or spouse or dependents). If so, any benefit received is deemed to be taxable compensation, subject to payroll taxes and withholding.
It would likely serve you better to simply pay your daughter a reasonable wage that takes into account her services in an amount sufficient to cover at least some of her education expense.

Q.9 We own a rental property. In March of 2009 the tenant vacated the property and we have not been able to rent it since. It has been advertised for rent since that tenant left. Do we have to stop depreciation on the property?

A.9 You may continue to depreciate the rental property as long as the rental property remains available for rent. The fact that the property remains available for rent allows depreciation to continue regardless of whether the property is, in fact, rented. You may also deduct all expenses necessary to keep the property in rentable condition, subject to the passive activity rules.

Q.10 I am the 75% shareholder of an S corporation. The corporation has been an S corporation from inception. My son owns the other 25%. I intend to lend the corporation about $60,000.
I do not want to charge interest and I do not want to change my ownership percentage. What can we do?

A.10 Given the degree of your ownership, and your desire not to charge interest for the loan, you are better off considering the money placed in the corporation as additional paid-in capital. By so doing, you add to your basis in the S corporation and would eliminate the need to impute interest. If necessary, distributions could be taken up to your capital basis without tax consequence. Your basis would be reduced by those distributions, however. As long as you receive fair market compensation for any services rendered the S corporation you should not be challenged by IRS. If services are not compensated, IRS may re-characterize distributions as compensation and assess income tax, payroll taxes, penalties and interest).

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