MA Paid Family & Medical Leave Taxation Issues

Now that a few months have passed and this new tax has been deducted and/or

employer only paid, have we handled it correctly? What’s to handle, you might ask?

I haven’t seen anyone draw down on this fund (with good reason---it’s too soon for

benefits to kick-in). Yes, but is it taxable when it does suddenly appear in a subsequent

year – or currently for a RI resident (more on this later).

What about the employee payroll deductions? If you are like me, at least half of the

W-2 forms which should have shown something in box #14 did not have an entry. If

there is an entry, did you do anything with it? It qualifies as a SALT (state and local

[income] tax) so it should be posted to Schedule A---subject to the $10,000 annual

limitation. For authority, see CCA 200630017 (7/28/2006).

Is it taxable income when received. YES, according to the Chief Counsel’s Advice cited

above. If you received an itemized deduction for the employee payment, the entire

benefit is taxable when received. If you were unable to itemize, the amount of the

payroll deduction becomes your tax basis and it is excluded from taxable benefit

income.

While this is the federal rule for the Massachusetts and Rhode Island State plans, other

state plans may be treated differently.

And, if you have not forgotten, the RI “tax” qualifies as a state tax when computing the

maximum amount of credit on the MA resident return for taxes paid to another state.

See MA Revised Directive 12-1 (3/15/12). Does RI reciprocate? Not at this time. The

regulation in effect since 1/1/1998 is PIT 98-12 and it specifies (see part IV) that the

allowable state income tax must be similar to what is allowed on the RI personal income

tax return. The RI personal return only allows (Schedule W) a credit for withholding tax

shown on form W-2, box #17). RI does not follow the MA “rule.”

Earned Income Credit for Seniors?

 

William Delaney, EA
Westwood, MA

SENIOR CITIZENS (OVER AGE 64) ARE NOT ELIGIBLE FOR THE EARNED INCOME CREDIT (at least they were not for 2020).  HAS ANYTHING HAPPENED TO CHANGE THAT? 

 

Is my software going crazy---it is allowing an EIC (when the income qualifies) for my 69 year old taxpayer who works part-time at the supermarket, bagging groceries!  This can’t be right—he didn’t get it last year!  So, your Editor looked it up in The Tax Book and, sure enough, there it is on page 11-10:

 

NEW FOR 2021 – Individuals over age 65.  For 2021, this age limit is eliminated.

 

That’s close, but not quite right.  The American Rescue Plan Act of 2021 removed the  age 64 limitation, but only for tax year 2021.  See Subtitle F, Part 3, §9621(a)(n)(2) of the Act.  Don’t look a gift horse in the mouth---go for it!

Backup Withholding Required When No TIN

Mary Mellem, EA

We find two issues in this case:  1) backup withholding, and 2) the statute of limitations.

 

James Quezada works as a stone mason and owns Quezada Masonry.  Mr. Quezada hired subcontractors to perform much of the work, and timely filed his Forms 1099.  For 2005, Mr. Quezada filed 39 Forms 1099, of which 30 lacked Taxpayer Identification Numbers (TINs).  Forms filed for 2006, 2007, and 2008 were similar.

 

BACKUP WITHHOLDING – IRC Section 3405(a) addresses the backup withholding requirements by stating a taxpayer must withhold at the 4^th individual tax rate (currently 24%) in any of four events.  The first event listed (Section 3405(a)(1)(A)) is “the payee fails to furnish his TIN to the payer in the manner required.”

 

Most of the Forms 1099 filed with IRS failed to show TINs.  Therefore, Mr. Quezada was required to do backup withholding.  He did not file Form 945 to show the backup withholding, nor did he turn over any monies to IRS.  The Court of Appeals agreed Mr. Quezada was responsible to backup withhold.

 

This should be a warning to taxpayers who do not have the recipient’s TIN at the time payment is to be made, that the taxpayers should backup withhold and subsequently file Form 945 to turn the funds over to IRS.

 

STATUTE OF LIMITATIONS – In 2014 IRS assessed about $1.2 million for amounts Mr. Quezada failed to backup withhold from 2005-2008, plus penalties and interest.  Mr. Quezada argued the statute of limitations had expired on these years, starting when his Form 1040 and Forms 1099 were filed since IRS could determine his liability for backup withholding.  IRS contended the statute had not started yet, since IRS’ regulations prescribe Form 945 as the “return” to be filed to show backup withholding and this form was not filed for any of these years.

 

Court of Appeals, 5^th Circuit, sided with the taxpayer.  The net result of these two issues is IRS’ assessment was past the statute of limitations, even though Mr. Quezada was responsible to backup withhold.

 

Also of note – the time frame between the years involved (2005-2008) and the IRS initial assessment in 2014.

 

IRS has stated it will not acquiesce to this position.  In other words, IRS will not follow the 5^th Circuit’s position outside of the 5^th Circuit.  (The 5^th Circuit Court of Appeals includes Texas, Louisiana, and Mississippi.)

 

 

James Quezada & Simona Quezada, CA-5, No 19-51000, December 11, 2020

 

 

This text has been shared courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065, fax 920-496-9111, ataxprof.com.

Last Week's Partnership Question - What is The Answer?

In general, when a partner receives property in a complete liquidation of his partnership interest, it is not a taxable event; his basis in the property is his outside basis (adjusted basis) in the partnership.  However, as has been said so many times and in so many situations, the devil is in the details!

 

In our example from last week, Jeff received $5,000 in cash.  §732(b) provides that any money distributed (i.e. cash) is applied to reduce the partner’s adjusted basis in the property.  So, now we reduce $185,000 (adjusted basis before distributions) to $180,000 (adjusted basis after money distributions). 

 

But, we are asked for Jeff’s basis in the building only, not his adjusted basis in all of the property distributed, so we need to do an allocation and split up the $180,000.  §732(c) to the rescue, but easy it is not…

 

(c)(1)(A)(i)(ii) do not apply so we move on to (c)(1)(B)(i) and assign basis to the building and the land in accordance with inside basis (partnership’s basis).   $100,000 + $50,000 = $150,000, which is short of $180,000 by $30,000.  When we have unallocated basis (i.e. $30,000) we then look to (c)(1)(B)(ii) which tells us to defer to either (c)(2) or (c)(3), “whichever is appropriate.”  To avoid making matters more complicated than needed to throw you all off (including, alas, your Editor), it turns out that (c)(2)(A) applies (since both properties have appreciated in value) and we never get to (c)(2)(B) (thank God for little favors).

 

(c)(2)(A) requires us to allocate the $30,000 proportionate to FMV ($100,000 + $50,000 = $150,000) FMV…

 

Building $100,000/$150,000 x $30,000 = $20,000

Land $50,000/$150,000 x $30,000 = $10,000

 

To the answer:

 

Building - $100,000 + $20,000 = $120,000 (answer 4 to last week’s question)

Elective Pass-through Entity Excise – Important Information from MASS DOR

 

Elective Pass-through Entity Excise – Important Information

On September 30, 2021, the Massachusetts Legislature enacted an elective pass-through entity excise in response to the $10,000 cap on the federal state and local tax deduction added in the 2017 federal Tax Cuts and Jobs Act. IMPORTANT INFORMATION: Eligible pass-through entities must register for the 63D-ELT tax type before making a payment. Do not make a 63D-ELT payment on other pre-existing tax types. A pass-through entity must file its annual return and make the election before filing the 2021 Form 63D-ELT. A pass-through entity can elect to pay the excise when filing Form 3, Form 355S – Schedule S, or Form 2 and will confirm the election by submitting the new Form 63D-ELT. Detailed information is provided on the Frequently Asked Questions page linked below. INFORMATION AVAILABLE: Extensive information is available about the new elective pass-through entity excise including: Frequently Asked Questions webpage where you will find information on who’s eligible to make the election and how to make the election. Working Draft Technical Information Release which explains the elective excise on pass-through entities as enacted in the Fiscal Year 2022 Budget. If you have a question that’s not covered on the FAQ page, please send that along to us. You can also log in to your MassTaxConnect account and send a secure email specifically related to your account.

Upcoming IRS Stakeholder Zoom Meetings

Stakeholder Liaison will be holding a series of filing season updates discussions. Join us and learn about:

 

• Refundable credits you may be entitled to claim, even if you are not normally required to file a tax return, including:
• Child Tax Credit
• Recovery Rebate Credit
• Earned Income Tax Credit
• Child & Dependent Care Credit
• What tax records to retain to make filing your tax return easy
• The importance of filing electronically and direct depositing of refunds when possible
• Free tax preparation services offered by the IRS Free File and the VITA (Volunteer Individual Tax Assistance) programs

 

Attached is a flyer with additional information and below are the upcoming dates for these events.  If you are not able to join us on any of these dates please let me know as there are other events in different states that you can also attend.

 

February 23, 2022, 1:00 p.m. – 2:00 p.m. ET

Join Zoom Meeting :

https://irs.zoomgov.com/j/1616913538?pwd=ZjNXbGpkdzJvZDhtby9nZUhmTHNidz09

Or join the audio portion only by dialing 646-828-7666 and entering Meeting ID: 161 691 3538

February 24, 2022 – Spanish, 1:00 p.m. – 2:00 p.m. ET

Join Zoom he meeting:

https://irs.zoomgov.com/j/1611642678?pwd=bGNmY05pMGdpVUlZMWpBWW5XeWpnZz09

Or join the audio portion only by dialing 646-828-7666 and entering Meeting ID: 161 164 2678

March 9, 2022, 10:00 a.m. – 11:00 a.m. ET

Join Zoom meeting:

https://irs.zoomgov.com/j/1602190810?pwd=R1Z5bDVrMUx6SncxakdlUU5IM0luQT09

Or join the audio portion only by dialing 646-828-7666 and entering Meeting ID: 160 219 0810

  

Thank you and we look forward to you joining us! 

 

Sincerely,

Jill A. Maniacci

IRS Stakeholder Liaison

Attachments area

Do You Know The Answer?

Taken from a recent EA examination…

 

Jeff’s outside basis in ABC partnership is $185,000.  He receives this complete liquidation of his interest in the partnership:

                                                                                  Fair       

                                                            Inside           Market  

                                                            Basis*           Value

 

Cash                                                      5,000            5,000

Building                                                50,000        100,000 

Land                                                     40,000          50,000

 

Q.  What is Jeff’s basis in the building?

 

1.   $50,000

2.   $100,000

3.   $116,667

4.   $120,000

 

*Inside basis (i.e. partnership basis) should not be confused with outside basis (Jeff’s basis in the partnership).  They are usually not the same.

 

The applicable rules are found in IRC §732(b) and (c).  Good luck.  Answer and technical explanation to be published next week.   

Important Massachusetts Income Tax Changes

William Delaney, EA
Westwood, MA

Debt Forgiveness Income – PPP Loans: For sole proprietors, federal PPP loan debt forgiveness was not taxable in MA for tax year 2020. However, due to careless drafting of state statute, this benefit did not extend beyond that one tax year. The MA legislature has now made it clear in recently enacted HB4269 under Section 78 that

“…for any taxable year beginning on or after January 1, 2021, any amount received…..and any portion of a loan subsequently forgiven, shall be deducted from federal gross income for the purposes of determining Massachusetts gross income…” 

This means that the state issue regarding bringing back into MA income on an S corporation K-1 any federal debt forgiveness and taxing it to corporation shareholders is off the table; likewise, taxing this income to sole proprietors is retroactively cancelled. A win, win for MA taxpayers.

State Deduction for Charitable Contributions: A number of years ago, legislation was enacted which allowed a deduction for charitable contributions (whether or not itemized on federal Schedule A) when certain state budget surplus targets were achieved. Last year (tax year 2021) the Governor proposed that this deduction (which the legislature had deferred for tax 2020) be allowed for tax 2021, but his proposal was not enacted. The legislature then proposed to delay it once again in the current budget bill.

According to a recent release from the Governor’s office announcing his signing of the budget bill… 

“Given the Commonwealth’s fiscal position, Governor Baker vetoed an outside section (of the state budget bill) which would have delayed the implementation of the charitable tax deduction. This deduction was approved by voters twenty years ago and slated to go into effect when the state finances allow, and the combination of strong state revenue and serious needs facing non-profits and charitable organizations necessitate this tax deduction going into place.

It appears, at least as of this writing, that the MA charitable deduction is in place for tax year 2022. Keep in mind that MA allowable deductions do not include non-cash donations (i.e. clothing, vehicles, goods in general).