As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 8 covers legal expenses, disaster losses, and gambling income and losses, AMT, kiddie tax, tax credits, tax penalties, and other issues including: child & dependent care credit, child (CTC) & other dependent credit, earned income tax credit (EITC), claim of right, saver’s credit, adoption credit, pension start-up credit, automatic enrollment credit, solar and home energy credits, premium tax credit, general business credits, employee retention credit, credit for building an energy efficient home, business energy credits, work opportunity credit, repayment of first-time homebuyer credit, recovery rebate credit, electric vehicle credit, fuel cell vehicle credit, 2-wheeled vehicle credit, refueling property credit, research credit, paid family & medical leave credit.
QUESTION: Stimulus question. Taxpayer claimed brother aged 68, who is on social security, as dependent. Taxpayer got the $1,200 stimulus payment but not stimulus for her dependent brother. The brother received his own $1,200 stimulus since he is on social security. Is this how it was intended to work? In other words, is the brother as social security recipient entitled to his own $1,200 when his sister claimed him as a dependent?
ANSWER: The 2020 stimulus payments for a dependent under the age of 17 was $500. This brother dependent did not qualify for the $500…so that answers that question. Then the IRS used the SS Admin list and sent payments to all SS recipients that did not file a return. Obviously, the Treasury did not reconcile those on the SSA list with those also being a dependent of another taxpayer. However excess payments do not have to be returned.
Since there is no longer an exemption amount for a dependent, he might not want to claim his brother any longer unless there is some other reason.
For the rebate coming up it also a dependent under the age of 17.
QUESTION: Can a parent claim a child's 1099R Income from the deceased other parent?
ANSWER: Parents may elect to include their child's interest and dividend income (including capital gain distributions) on their own tax return instead of the child filing a return of his/her own. If the child has other types of income, either earned or unearned, this election cannot be made. Thus, the child will have to file their own return.
QUESTION: Are energy credits available on rental properties?
ANSWER: Property that is eligible for the general business credit is tangible property for which depreciation is allowable (Sec. 48(a)(5)(D)). Solar panels installed on a residential rental would meet that requirement.
But, as noted in the Form 3468 instructions and per the code, business credits are generally not available for property that is used predominantly to furnish lodging (Sec. 50(b)(2)). However, there is an exception: Sec. 50(b)(2)(D) provides the restriction to property used predominantly to furnishing lodging does not apply to the energy credit. Thus, rental property would qualify.
One more hurdle: because rentals are considered passive activities for purposes of the Sec 48 energy credits, before the credit from the 3468 can pass onto the Form 3800, the credit must first pass-through Form 8582-CR – Passive Activity Credit Limitations or Form 8810 – Corporate Passive Loss and Credit Limitations. See Chapter 911 in the Big Book of Taxes.
QUESTION: Wasn't Kindergarten considered optional and did qualify previously?
ANSWER: It has been that way since 2007 - The expenses of nursery, pre-school, or similar programs for children below the kindergarten level are considered to be for care and may be employment-related expenses, if otherwise qualified, even if education is a significant part of these programs. In contrast, expenses for programs at the level of kindergarten and above aren't employment-related. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be for the care of a qualifying individual. (Reg § 1.21-1(d)(5)), effective 8/14/2007.
QUESTION: If a business owner's son is unemployed for a long time and if he hires his son, can the business claim work opportunity credit? Any limitations to family members?
ANSWER: No credit is allowed for an employee who is related to the employer or to certain owners of the employer, or who is a dependent of the employer.
QUESTION: Lee, is there any information available for 2020 related to married filing jointly with dependents that did not get the stimulus for the dependents, how will this be reconciled on the 1040? I know it is not in this course, but it has not come up in course 1-3 or 5-8...so I am curious and wanted to ask. We get a lot of questions on the stimulus.
ANSWER: The CARES Act included a refundable 2020 credit referred to as an Economic Impact Payment. The IRS subsequently decided to refer to them as stimulus payments. Because the need was so great, the payments were paid in advance. However, on the 2020 return taxpayers must reconcile the advance payments against the credit computed on the 2020 return. If it turns out the advanced payment exceeds the amount computed on the return the excess is forgiven. However, if the advanced payment was less than computed on the 2020 return, the additional amount will be allowed as refundable credit on the 2020 return. Thus, if the $500 credit for the child was not paid in advance the TP will get it on the 2020 return.
QUESTION: On adoptions, can it be an adoption from a foreign country?
ANSWER: For a foreign adoption, the credit is allowed only in the year the adoption becomes final (Code Sec. 23(e)(2)), and no credit is allowed if the adoption doesn't become final. (Code Sec. 23(e)(1)) However, for expenses paid or incurred in a tax year after the adoption becomes final, the credit may be taken in the year the expenses are paid or incurred.
QUESTION: EITC Documentation - Besides completing and retaining Form 8867 & EITC worksheet - what reasonable inquiries should be documented?
ANSWER: The data entered on the Form 8867 must be based on information provided by the taxpayer or otherwise reasonably obtained by the preparer. The preparer must retain for the period described in the Form 8867 instructions copies of any documents provided by the taxpayer and on which the preparer relied on completing Form 8867 and the EIC worksheet.
The tax return preparer must also contemporaneously document in the files the reasonable inquiries made and the responses to these inquiries. If the preparer receives conflicting information from two different taxpayers, the return preparer has an affirmative duty to request verification from both taxpayers to determine which information is correct and only file a return with the information the return preparer does not know or have reason to know is incorrect.
QUESTION: Can we take the paid family leave when we gave COVID leave but can’t take that credit due to accepting PPP Loans?
ANSWER - We do know the FFCRA program is mandatory so if your client had any employees that qualified under FFCRA the employer was obligated to make the sick and family leave payments under that program. Did not cost the employer anything since they reimbursed employer for the leave payment either as a payroll tax credit or cash reimbursement where payroll credit was not enough. Thus, since the government paid those wages, the employer cannot double dip and also claim PPP loan forgiveness for same wages.
Q&A #19 - FFCRA leave wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness for a PPP Loan under Sec 1106 of the CARES Act. (Q&A #19)
From the sounds of your question the employer did not comply with the FFCRA mandate which came out long before PPP. However, the employer can back into the program…If an employer does not initially pay an employee qualified leave wages when the employee is entitled to those wages, the employer can pay those wages at a later date and claim a credit for those wages as long as the qualified leave wages relate to leave taken during the period beginning on April 1, 2020, and ending on December 31, 2020. (Q&A #43)
While the wages can only be for periods of leave between April 1, 2020, and December 31, 2020, a payment of qualified leave wages that is made after the end of this period may nonetheless be eligible for the credits if the wages are for leave that an employee took between April 1, 2020, and December 31, 2020. Q&A #48)
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