Terry D EA

6 minutes ago, BrewOne said:

I have heard of custodians accepting items into an IRA and then deciding they really don't want to deal with them (i.e. real estate).  Maybe something along those lines occurred?

I don't know. As soon as the client calls the custodian, they will three-way me in to get to get the details

5 minutes ago, Lee B said:

Perhaps the 1099 R is correct?

Maybe. The box is checked for a IRA/SEP. I think I remember reading that you are using Drake. I have a dummy client (my own and not a test return) and I have entered the 1099R and as I expected the full amount is taxable. But there is a box to check "No distribution received (ignore screen)" on the 1099R input screen, and checking this removes the 1099R from income. Nothing flows to the state either after the box is checked. My concern here is what gets transmitted to the IRS? How will they know that no distribution was received and not issue a CP2000. Maybe a call to Drake to find out what transmits.

I'm in SC and they begin calculating the tax at the federal taxable income. So no concerns there.

15 hours ago, DANRVAN said:

Then he needs to ask why a distribution was reported.

That is the 65k question. I hope this company (Equity Trust Company) is cooperative and will quickly issue a corrected 1099-R

17 hours ago, Lee B said:

The K means it was not a cash distribution.  It sounds like you need more information about the IRA and the kind of assets it held.

"Use Code K to report distributions of IRA assets not having a readily available FMV. These assets may include: • Stock, other ownership interest in a corporation, short- or long-term debt obligations, not readily tradable on an established securities market; • Ownership interest in a limited liability company (LLC), partnership, trust, or similar entity (unless the interest is traded on an established securities market); • Real estate; • Option contracts or similar products not offered for trade on an established option exchange; or • Other asset that does not have a readily available FMV. "

 

 

 

 

Thanks Lee for the detail. I was already aware of what you are saying. Box 2a of the 1099R shows the total distribution as taxable with the box checked taxable amount not determined. Box 16 also shows the state distribution. the 1099R certainly looks like a distribution took place. The client wants to three-way me in when they call again. 

Client received a 1099R with K7 in box 7. I understand this is a code indicating a distribution of an IRA  etc that doesn't have a FMV. However, the client never received any distribution. The called the broker and were told nothing was distributed. I haven't tried but I am nearly 100% positive if I input this 1099R, it will be included in taxable income. Any suggestions?

On 1/29/2024 at 1:04 PM, Lion EA said:

I try to get my clients to use Scannable, a free app that cleans up their scans, removes creases, changes that grainy gray background to white, straightens it out, etc. And, I try to get them to then email it to me instead of text, so I can save it in my computer to their file. Of course, first I tell them to upload to my portal, but as you say, if they can't do it quick and easy on their phone...

I remember reading something from the IRS or maybe in a webinar that we were cautioned to not accept any documents with sensitive information via email or text due o both being unsecure. There was a push for a method of securing your email but I forgot what that was and have advised all of my clients to upload to my portal.

There is an app to convert HEIC files to jpg or Png. I sent my clients a QR code link to Adobe Scan for their phones that work on both iPhone and androids. I agree pictures are garbage and hard to view.

Be careful with cam scanner. Cam Scanner for iPhone is good. However, the cam scanner for androids has been eliminated due to being really unsafe to use.

I think it would greatly depend on whether an EIN was obtained or not. If an EIN was obtained, then a zero return marked as final should be filed.

I know you're not asking for clarification but you are correct my client can prove the investment was worthless making it ordinary loss. No remaining basis as the loss is, as you say, is recognized on the partner's K-1's. Biggest thing here is me not explaining everything correctly. 

Thanks,

Sorry if I offended you. Certainly was not my intention to do so. I only wanted to protect my client. The scenario is not hypothetical just wrong numbers were given and the other information was somewhat vague which I realized later. Anyway, I have it figured out now.

Thanks DANRVAN, I really appreciate your responses. I tried to use figures and information that wasn't directly connected to this client. Sorry for the confusion. The real partnership interest was 50, 25, & 25. The partnership invested into another business that failed miserably, making the partnership interest worthless. This resulted in each partner's interest being worthless as well. I did find a few references in the code specifically section 165a that deals with this very scenario for the partners. Also, a lot of information under Rev. Rul. 93-80; 1993-2 C.B. 239. that includes examples and court cases.

This client's attorney had provided the client with two different scenarios without mentioning any codes or code sections that determine whether the partner's abandoned interest is ordinary or capital loss. For the partnership, section II of form 4797 is to report ordinary gains/loss from business transactions. Drake provided a few check boxes such as abandoned, intangible; etc., that causes the amounts to properly flow to the partner's K-1 and showing the partner's capital account is zero. 

My first approach in my original post was wrong and I did not feel good about it at all for various reasons. 

Are you saying the partners can't report their losses on their tax returns? The partnership cannot return any capital therefore, the partner's should be able to report their loss. Year one partnership experiences 800.00 loss in ordinary income. Their capital accounts are reduced by the loss. 2023 again small loss in ordinary income reduces the capital accounts further. The remainder of each capital account is a loss. 

75,000 cash contribution - 2022 ordinary income loss $400.00 = 74,600.00 remaining capital - 2023 loss $600.00 = 74,000.00 remaining capital. partnership dissolves, partner's have ordinary loss providing no debt, no assets, no return in any form. 

Am I correct?

I want to add to my post. My initial thoughts was the partnership reports the loss on part II of form 4797. I would think doing so should cause the loss to flow through to the partners k-1 forms at their respective percentages. Again, please confirm.

Background - Three folks get together and form a partnership and make total contributions of $150,000.00 in 2022. Partnership invests the funds contributed into a venture (another business) with a return structure that looks favorable at the time. (I don't want to give all the details here). No income for 2022 just a loss on some operating expenses. In 2023 the venture goes out of business making the worthless. The partners lose all of their remaining capital. 2023 is the final year for the partnership. The loss experienced by the partnership is the same as the partner total remaining capital.

1. Is this reported as a capital loss by the partnership with the loss passing through to the partners. This method makes the loss a capital loss to the partners and reduces their remaining capital to zero.

2. Because the partners are walking away or abandoning their interest because it is worthless, there are no assets, no debts, none of the partners receive anything that would cause their abandoned interest to be characterized as a capital loss.

Number 2 seems to me the right choice. No sale, no real disposition. Is the partnership required to report this on form 1065? If so, where? The loss to the partners I feel is reported on Sch K-1 line 11 (other income/loss) with code A. I would appreciate some help with this.

I based my response on the employee knowing the max contributions he has made. The employer would have no idea nor any reason to ask. My thinking was why would the employer contribute if they knew the employee was or would be maxed out. So forgive me for the misstatement.

Just something to add to the mix. if the employee takes a different job and has already contributed the max, then he would not be able to make any contributions for the remainder of the year. So, most of the 401 plans that are an employer "match" why would the new employer make any contributions when they should well know the employee cannot? if the employer wanted to do so out of kindness, then it should be pertinenet for them to know how much the previous employer contributed.

Efiling for 1099s opens the 10th.

Try Hiscox.

On 1/6/2024 at 3:22 PM, DANRVAN said:

I think part of the issue is the confusion with the two types of ERC.  They are similar in some ways and quite different in other ways; particularly in the manner the credits are claimed.

The ERC for an inoperable business due to a designated disaster falls under sect. 38 as a general business credit and used as an offset to income tax via form 5884-A.  

They should have been given different names to avoid the confusion!

You are correct. Also correct on the different names to avoid the confusion. I do appreciate you brining this up in the beginning as it caused me to do additional research and study. Initially, I didn't have any clients who qualified for any of the ERC which is why I did not take a deep dive in the beginning. Now I have a good understanding, certainly not an expert, but enough if I by some chance someone contacts me regarding these credits.

Thanks Lion and I do agree with you, but again, I don't have all of the details to make the decision as to whether they qualified or not. The client says they did and worked with Paychex. This client for years has been straight up with everything. Matter of fact, they are no leaving Paychex because of the cost and the fact Paychex did not tell them they had to adjust the 941 (Paychex did this without informing them they learned this from me after the fact), they are part of the Paychex PEO program which costs considerably more, and they never received any information telling them they would have to amend their 1120S. 

I have told the client that they MUST amend the 1120S for 2020, 2021 & individual 2022. The reduction in the wages obviously affects everything. For 2021 there was a loss carryforward that will be eliminated by the adjustments. I goes without saying, the shareholder basis will be adjusted as well. The client is not happy about the fact they have to pay some significant tax after amending. But, they are still money ahead that they never had when it is all said and done.

This is the irritating thing about all of the scam adds and those that were legitimate but failed to properly inform the client of everything that would take place when claiming this credit. Like us, with the EIC, I think the preparation of these credits should require documented due diligence or suffer the same disciplinary action.

6 hours ago, DANRVAN said:

But OP indicated that ERC was due to a business that became inoperable resulting from a qualified disaster and therefore should be claimed on form 5884-A.  In that situation, both the credit and wage deduction flow from form 5884-A to the actual income tax return; which is 1120-S in OP case.

 

Which ERC credit are you talking about?

The ERC for COVID-19 reduction of business income is reported on 941.

There is also a ERC for businesses that became inoperable because of qualified disasters during the years 2018 - 2020 and continued to pay wages.

After reading your post again, it appears that Paychex amended form 941 for COVID related ERC.  If that is the case, then you simply amend the 1120-S (and K-1s) to reflect the reduction in wage expense.  But you do not file form 8554-A, or you will be double dipping and filing an inaccurate tax return.

You only use form 8554-A when a business was inoperable due to a qualified disaster.  That results in an income tax credit rather than a credit applied to payroll tax deposits on form 941.

I DID NOT prepare anything for the ERC. I am not amending anything with form 941. Yes, I prepared all of the forms 1120-S and had no knowledge whatsoever until October 2023 that this client worked with Paychex for the ERC. Paychex prepared the ERC, as well as any amendments. I immediately told the client they will have to amend their form 1120-S. This client is a PEO client with Paychex so all of the filings were under the Paychex EIN and not the client's.  

All I am doing is amending the TY 2020 and 2021 1120-S to reduce the wage deduction as a result of the ERC. 

I stand corrected on the use of form 5884-A. DANRVAN is correct. This client only had a reduction of gross receipts and was not forced to close operations. The confusing part of 5884-A was the 40% deduction. Below is what I finally found.

Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Code shall apply for purposes of applying the employee retention credit. Section 280C(a) generally disallows a deduction for the portion of wages or salaries paid or incurred equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance applies under section 2301(e) of the CARES Act with regard to the employee retention credit, such that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. (An employer does not, however, reduce its deduction for the employer’s share of social security and Medicare taxes by any portion of the credit).

It seems straight forward at this point, ex; (figures are hypothetical) the credit calculated by Paychex is $400,000.00, wages originally reported were $3,000.000.00, form 1120-S amendment is $2,600,000.00 = $3,000,000.00 - $400,000.00. 

This results in the shareholder having to pay a huge tax bill. However, in this case they received the refund and no I didn't know that either, they can use those funds to pay the balance due. I'm concerned about penalties and interest at this point as well and am looking into the penalty relief provisions to see if anything applies here. As I see it, the client made some mistakes. First mistake was not talking to me about this at the onset. I wouldn't have known much at the time but would have found out what I could. Once they engaged Paychex, they still should have informed me but didn't. The client trusted Paychex to provide them all of the information which they did not. Yes, this client is a good reliable client and probably got taken in by the amount of money that I am assuming was proposed to them. 

I appreciate all of the responses and input here. Lesson I am learning is to not trust completely some of the resources the internet can return. 

I posted this question on another board and didn't get any response. I am assuming the topic is new and folks like me are just now gaining some experience with this. After several hours of research, I have come to the conclusion that amending the 1120-S for the ERC is fairly simple. In Drake, there is an input screen for form 5884-A. Two entries are required, the qualified wages the 40% amount of the qualified wages. This adjusts the payroll wages on page 1, of 1120-S and properly corrects the shareholder K-1 (in my case a single shareholder). All good so far. Another colleague working on one of these is very adamant that I should not rely on any calculations provided by a 3rd party and should start from the beginning to arrive at hopefully the same numbers. In this case Paychex prepared the ERC for this client and provided the figures. I am preparing a statement of the periods and qualified wages to attach to the return in support of the form 5884-A. Isn't there something in circular 230 that covers me on this? To me, this is the same as a client providing me a P&L and balance sheet to prepare their tax return. None of us audits the client's books or reviews them prior to preparing the tax return. I know the ERC was calculated and received, and the I am amending the tax return as required from the information the client provided. I fail to see anywhere in this situation that could constitute tax fraud, evasion, or willful negligence. What would anyone else do in this situation?

Merry Christmas to you and everyone here!

21 hours ago, Sara EA said:

Just don't forget your annual Ethics, Terry.  It does get old.  My best Ethics course was taught by an IRS agent who started the meeting with "I know I'm preaching to the choir."  Second best didn't use a text but scenarios used for class participation.  Worst was one presented by Karen Hawkins, then head of OPR, who literally spent the two hours reading us Circular 230 and making it clear that all tax professionals are dishonest and will be penalized.

Got em! But...now you are making me check the IRS PTIN info for my CE hours and categories just to be sure.

Dennis,

I am assuming you might be referring to MS OneDrive. How do you secure the data before uploading it?

23 hours ago, ILLMAS said:

I here is how I do it, I go EFTPS, click on make payment, then it takes to Login.gov, my information automatically appears, I request for the code to be sent by text, I enter the code, takes me back to EFTPS website, I again click on make payment, then I enter my clients FEIN, PIN and password and I am in.

I do it the same way. I am confident on the timely deposit dates. For all my payroll clients, all are monthly depositors, and all deposits are made the first week of each month to avoid any timing errors.