If You Don’t Want 100 Percent Depreciation, Elect Out or Else

As you likely know, the TCJA increased bonus depreciation to 100 percent. Unlike most tax provisions that involve a tax election, this one requires you to elect out if you don’t want it.

For example, you (or your corporation) buy two $50,000 trucks, each with a gross vehicle weight rating of 6,500 pounds and a bed length of 6.5 feet. You use the trucks 100 percent for business. Because of the weight and bed size, the trucks are exempt from the luxury passenger vehicle depreciation limits.

You have five choices on how to deduct the vehicles on your 2019 tax return (the one you are filing or about to file—we are in tax season):

1. Do nothing. This forces you to use bonus depreciation and deduct the entire $100,000 cost in year one. In addition, you deduct your operating expenses such as gas, oil, and insurance.
2. Elect out, choose Section 179 expensing of any amount of your $100,000 cost of the trucks, and depreciate the balance. For example, you could elect to deduct $30,000 of Section 179 expensing on each truck and then depreciate the remainder using MACRS. In addition, you deduct your operating expenses such as gas, oil, and insurance. (Note. The trucks are not subject to the $25,000 SUV ceiling because of their weight and bed length.)
3. Elect out, don’t use Section 179, and depreciate the trucks using the five-year MACRS depreciation schedule (which takes six years).
4. Elect out, don’t use Section 179, and depreciate the trucks using the five-year straight-line depreciation schedule (which also takes six years).
5. Use the 57.5 cents IRS standard mileage rate for each business mile driven. The 57.5 cents per mile rate includes operating expenses and 27 cents a mile for depreciation.

Okay, you get the big picture. Two trucks, each with a cost of $50,000 and both exempt from the luxury vehicle limits. Five choices as to the deduction.

Luxury Vehicles

Because of their gross vehicle weight, the vehicles mentioned above were exempt from the luxury vehicle depreciation limits that apply to

• cars with curb weight of 6,000 pounds or less, and
• SUVs, pickups, and crossover vehicles with a gross vehicle weight rating of 6,000 pounds or less.

Had the vehicles failed the weight test, their bonus depreciation for 2019 would have been limited to $18,100.

• By Leon Clinton
• April 25, 2020

Husband-Wife Partnerships: The Tax Angles

When both members of a married couple participate in an unincorporated business venture, must it be treated as a husband-wife partnership for federal tax purposes? Answer: maybe, or maybe not. Figuring out the answer is important because it can have a huge impact on the couple’s self-employment tax situation.

Husband-wife partnerships must also file annual federal returns on Form 1065 along with the related Schedules K-1. As you know, partnership returns can be a pain. For these reasons, you generally want to avoid husband-wife partnership status when possible.

When Does the Husband-Wife Partnership Actually Exist for Tax Purposes?

Good question. As you can see from the preceding example, the self-employment tax can make the husband-wife partnership an expensive proposition. Of course, the IRS would love it if you had to treat it that way.

Not surprisingly, several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business activity usually creates a partnership for federal tax purposes.

IRS Publication 334 (Tax Guide for Small Business) says the following:

If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.

In other words, you don’t have to believe that you have a husband-wife partnership to have a husband-wife partnership for tax purposes.

Similarly, IRS Publication 541 (Partnerships) says:

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065.

But in many (if not most) cases, the IRS will have a tough time prevailing on the husband-wife partnership issue. Consider the following direct quote from IRS Private Letter Ruling 8742007:

Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise.

The following factors, none of which is conclusive, are evidence of this intent:

1. the agreement of the parties and their conduct in executing its terms;
2. the contributions, if any, that each party makes to the venture;
3. control over the income and capital of the venture and the right to make withdrawals;
4. whether the parties are co-proprietors who share in net profits and who have an obligation to share losses; and
5. whether the business was conducted in the joint names of the parties and was represented to be a partnership.

In many (if not most) real-life situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship, or in an activity that has been operated using a disregarded single-member LLC that has been treated as a sole proprietorship for tax purposes, only some of the five factors listed in Private Letter Ruling 8742007 will be present. Therefore, in many such cases, the IRS may not succeed in making the husband-wife partnership argument.

Regardless of the presence or absence of the other factors listed above, the husband-wife partnership (LLC) argument is especially weak when (1) the spouses have no discernible partnership agreement and (2) the business has not been represented as a partnership to third parties (for example, to banks and customers).

• By Leon Clinton
• April 20, 2020

COVID-19: Tax Season Delayed Until July 15 – Wait or File Now?

As you know, the COVID-19 pandemic has shut down much activity in the United States.

The IRS decided to use its authority in a national emergency to postpone certain tax return filings and payments. This change affects every one of you, and the rules are tricky—after all, this is tax law.

We’ll explain who gets relief; what the IRS postponed; and perhaps more important, what wasn’t postponed. We’ll also tell you whether you should file regardless of the postponement.

Who Qualifies?

First, to qualify for postponement, you must have a tax return that is due on April 15, 2020. In general, the returns due on April 15 include the following:

• An individual filing a Form 1040 series return
• A trust or estate filing Form 1041
• A partnership filing Form 1065
• A corporation filing a Form 1120 series return

In its FAQ, the IRS did not include the Form 1065 for partnerships or the Form 1120S for S corporations when it listed the forms available for relief.

That’s because most partnerships and S corporations have calendar-year returns, making the 2019 tax return due March 15, 2020. But if you have a fiscal-year partnership or S corporation with a due date of April 15, 2020, it should qualify for relief under the official guidance.

Second, you must have one of the following due on April 15, 2020:

• Tax year 2019 federal income tax return
• Tax year 2019 federal income tax payment
• Tax year 2020 federal estimated income tax payment

This grant of relief does not apply to

• federal payroll taxes, including federal tax deposits, and
• federal information returns.

Federal Tax Return Filing Deadline

If you qualify for relief, your 2019 federal income tax return is now due July 15, 2020.

You do not have to file an extension on Form 4868 or Form 7004 or contact the IRS to get the automatic postponement to July 15, 2020.

If you need additional time beyond July 15, 2020, to file your tax return, you can file Form 4868 or Form 7004 on or before July 15, 2020, and get an automatic extension to your normal extension due date:

• September 30 for Form 1041
• October 15 for Forms 1040 and 1120

IRA, HSA, and Retirement Plan Payments

The COVID-19 grant of relief also postpones the following payment deadlines until July 15, 2020:

• 2019 individual retirement account (IRA) contribution
• 2019 health savings account (HSA) contribution
• 2019 employer qualified retirement plan contributions

The relief does not apply to federal information returns; therefore, if you have a tax return that is otherwise postponed, and you need to file an international information return with it, you need to file your tax return or extend by April 15, 2020, or June 15, 2020 (if outside the U.S.).

Examples of international information returns affected include the following:

• Form 8938, Statement of Specified Foreign Financial Assets
• Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
• Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)

Tax Payment Deadline

If you qualify for the relief, your federal income tax payment is due July 15, 2020.

This payment postponement applies only to the following:

• 2019 income tax return balance-due payments
• 2020 income tax estimated tax payments that are due April 15, 2020

There is no limit to the deferred amounts. Earlier guidance provided a $10 million limit for C corporations and a $1 million limit for other taxpayers, but the IRS eliminated these limits in its updated guidance.

The relief does not provide for a waiver of 2020 estimated tax payment penalties for not making the payment on the normal schedule. But we’d expect the IRS to be generous in granting relief when the time comes to file your 2020 tax returns.

If you already filed your 2019 tax return and scheduled a direct debit payment, call the IRS e-file Payment Services 24/7 at 1-888-353-4537 to cancel your payment at least two business days prior to the payment date.

Example 1

Sarah, who is single, owes $10,000 on her 2019 Form 1040. She does not have a 2020 estimated tax payment requirement.

Sarah must

• file or extend her 2019 Form 1040 by July 15, 2020; and
• pay the $10,000 balance due for her 2019 Form 1040 by July 15, 2020 (even if she extends to October 15, she has to pay by July 15, 2020).

Example 2

Jake and Karen’s 2019 Form 1040 shows a refund of $1,500. They have a 2020 estimated tax payment requirement of $2,000 per quarter.

Jake and Karen must

• pay $2,000 for their second-quarter estimated tax payment by June 15, 2020 (yes, June 15—strange but true);
• file their 2019 Form 1040 or extend it by July 15, 2020; and
• pay $2,000 for their first-quarter estimated tax payment by July 15, 2020 (yes, the second quarter was due on June 15).

Example 3

Steve and Joan’s 2019 Form 1040 shows an estimated balance due of $1.1 million. They have a 2020 estimated tax payment requirement of $100,000 per quarter. Due to missing tax forms, they usually do not file until September.

Steve and Joan must

• pay $100,000 for their second-quarter estimated tax payment by June 15, 2020;
• file a Form 4868 by July 15, 2020, for their 2019 Form 1040, to request an extension until October 15, 2020;
• pay $100,000 for their first-quarter estimated tax payment by July 15, 2020; and
• pay $1.1 million for their 2019 Form 1040 balance due by July 15, 2020.

Should You Wait?

If your tax return shows a refund, file it as soon as possible—get your cash as quickly as you can.

If you have the cash and liquidity to make your tax payments on April 15, 2020, but keeping those payments in your bank account earns extra interest income, we see no reason you shouldn’t delay until July 15, 2020.

If you have problems with making timely estimated tax payments, we recommend you keep the normal schedule as long as you have the liquidity and cash to make the payments. We don’t want you to fall into bad habits and possibly create an unpayable balance due on your 2020 tax return.

Be safe and take care.

I’m always here to help you in any way I can. My direct line is 408-778-9651.

• By Leon Clinton
• April 15, 2020