It’s All Relative: Treatment of Gain on Sales of Depreciable Property to Related Parties   Normally, when an individual sells depreciable property, that seller often reports a capital gain on the sale. However, §1239 of the Internal Revenue Code (IRC) instead treats the gain on the sale of such property to a “related party” as ordinary income.   What is the Definition of a Related Party under IRC §1239? The statute defines persons or entities as “related parties” if any of the following relationships exist: A shareholder who owns, directly or indirectly, more than 50% of the stock o ..read more

Divide and Conquer: Maximizing Sales Value by Subdividing Real Property while Retaining Tax Advantages of Investment Property Classification under IRC §1237   A taxpayer selling multiple lots of property risks classification as a real estate dealer resulting in the taxation of any gains at higher ordinary income tax rates rather than as capital gains. The tax rules define a real estate “dealer” as one selling real property to customers in the ordinary course of business in a manner analogous to a taxpayer selling inventory. However, a taxpayer who had not previously sold real estate could ..read more

Recapture of Depreciation Deductions for Real Estate Assets under IRC §1250   Overview Upon the taxable sale or disposition of depreciated property, the taxpayer sometimes must report some or all of the gain as ordinary income rather than capital gain. This is known as depreciation “recapture.” These rules intend to prevent taxpayers from applying favorable capital gain tax rates to gains attributable to accumulated depreciation formerly deducted at higher ordinary income tax rates. These recapture rules exist under §§ 1245 and 1250 of the Internal Revenue Code (IRC). Generally, IRC §1245 ..read more

Determining the Holding Period of Property   It is critical for taxpayers to determine the holding period of any property prior to its sale or disposition in order to receive the most favorable tax treatment. In particular, the Internal Revenue Code (IRC) distinguishes between short-term and long-term capital gains and losses. The IRC taxes short-term capital gains at ordinary income tax rates (up to 37%). However, long-term capital gains typically receive a reduced rate of tax (up to 23.8% if the taxpayer also pays the 3.8% Net Investment Income Tax (NIIT)). Long-term capital gain treatm ..read more

When Business Becomes Personal: Using Funds from a Small Business or Partnership to Pay Personal Expenses   A business taxpayer may not deduct personal expenses, such as mileage deductions on a personal vehicle paid with the funds of a business. Claiming such expenses on a return, whether intentionally or unintentionally, can result in tax penalties and require the reclassification of the amounts as wage or dividend income. Further, expenses paid out of the funds of a partnership, especially if unknown to the other partners, may give rise to various legal claims including breach of fiduci ..read more

IRS Clears Up Some Confusion Regarding the Filing of New Schedules K-2 and K-3 but Major Headaches Remain   The Internal Revenue Service (IRS) will continue to require businesses organized as partnerships or S corporations to comply with the new requirements to file Schedules K-2, Partners’ Distributive Share Items – International, and K-3, Partner’s Share of Income, Deductions, Credits etc. – International. However, updated guidance from the IRS in the form of an FAQ now provides an exemption from the 2021 filing requirements. This relief results from concerns raised by many tax professi ..read more

Avoiding a Failure to Launch: Implementation of the New FASB Leasing Standard for Private Businesses   After much haggling from groups representing stakeholders resulting in delay, the new leasing standard from the Financial Accounting Standards Board (FASB) will finally go into effect in 2022 for private businesses applying U.S. generally accepted accounting principles (GAAP). The new rules, under Accounting Standards Codification (ASC) Topic 842, initially proposed in February 2016, went into effect for publicly traded companies in 2019. The new standard made many changes to the former ..read more

IRS Tightens Documentation Requirements for Claiming Research Credit on Amended Returns and Immediate Expensing of R&D Costs Comes to an End   Two significant changes occurred last month regarding claiming the research credit and deducting R&D costs. First, on October 15, 2021, the Internal Revenue Service (IRS) released a memo, IR-2021-203, announcing that starting on January 10 taxpayers filing amended returns to claim a refund related to the research credit must provide additional supporting documentation and substantiation. Second, with the failure of Congress to pass the soci ..read more

Recent Letter Rulings Highlight When IRS Will Grant Non-Automatic Consent for Late Regulatory Elections   At the end of 2021, the Internal Revenue Service (IRS) released the contents of two private letter rulings (PLRs) responding to requests from taxpayers to receive an extension of time to file certain regulatory elections. PLR 202152007 deals with an election under §754 of the Internal Revenue Code (IRC) to adjust the basis of partnership property after the death of a partner whereas PLR 202152008 addresses the failure of an entity to timely elect to file as a partnership for federal i ..read more

IRS Issues Third Round of Final Foreign Tax Credit Regulations   On January 4, 2022, the Internal Revenue Service (IRS) published a fresh set of final regulations in the Federal Register regarding the foreign tax credit. These regulations, the third set released after the 2017 Tax Cuts and Jobs Act (TCJA), P.L. 115-97, made significant changes with respect to the foreign tax credit and related rules determining the foreign tax credit limitation. The new final regulations include the following provisions: Rules for determining foreign income taxes subject to the credit and deduction disal ..read more