Business Issues
Chapter 6 pp. 177 - 222
2015 National Income
Tax Workbook™
Business Issues
P. 177
1. Net Investment Income Tax & Grouping
Considerations.
2. Sale of Section 1250 Property.
3. Business Travel Expenses.
4. Car and Truck Expenses.
5. Form 1099-K Payment Card and Third Party
Network Transactions
6. Businesses under Common Control.
Net Investment Income Tax &
Grouping Considerations
p. 177
 Rentals are generally passive activities
subject to:
▪ Passive Activity Limits (PAL) and
▪ Net Investment Income Tax (NIIT).
 Rentals are nonpassive if the taxpayer:
▪ Is a real estate professional and
▪ Materially participates in each rental
activity.
Net Investment Income Tax &
Grouping Considerations
p. 178
Two methods to group activities to meet:
▪ Material participation and thus
▪ Re-characterize passive rental income to
nonpassive rental income
1. Real Estate Professionals can elect to treat
all rentals as one activity.
If rental income is nonpassive & from a
trade or business it is not subject to NIIT
2. Regs allow grouping of trade or businesses
to meet the material participation rules.
Exclusions from Net Investment
Rental Income
p. 178
 Rental income is generally passive.
 Rental income can become nonpassive if:
▪ The activity is self-rental or
▪ The activity qualifies as a trade or
business or
▪ The taxpayer elects to group passive
rentals with nonpassive activity and
materially participates in the grouped
activity.
Exclusions from Net Investment
Rental Income
p. 178
Self Rental:
▪ If gross rental income is from a trade
or business it is considered
nonpassive &…
▪ since it is nonpassive…
▪ the gross rental income is excluded
from NII if the taxpayer materially
participates in the trade or business.
Exclusions from Net Investment
Rental Income
p. 178, Ex 6.1
 Mary owns land she rents to her family
owned PS.
 Mary’s husband’s farm activities meet the
material participation test.
 Her husband’s work is attributed to Mary.
 Mary’s rental income is excluded from NII
under the self rental rule.
Planning Pointer – There is a downside:
▪ Losses from self-rentals are still subject to
passive activity loss limitations.
Trade or Business Exception
p. 178
 Rental real estate in a trade or business of
a real estate professional is:
▪ Nonpassive and
▪ Not subject to NIIT
 Rental real estate NOT in a trade or
business of a real estate professional is:
▪ Nonpassive BUT
▪ Is NII and subject to NIIT
Trade or Business Exception
pp. 178 - 179
 To be a real estate professional one
must:
▪ Spend more than 750 hours
materially participating in real
property trade or business AND
▪ Spend more than 50% of one’s time
in trades and businesses materially
participating in real property trade or
business(es).
Trade or Business Exception
pp. 178 - 179
Seven Tests for Material Participation:
1. TP spends more than 500 hours on activity.
2. TP’s participation in activity is substantially all of the time
spent on the activity.
3. Participation is more than 100 hours and more than any
other individual’s time on the activity.
4. Participation is more than 100 hours and participation in
similar activities is 500 hours.
5. Taxpayer materially participated in 5 of 10 preceding
years.
6. Taxpayer materially participated in 3 years preceding
current year in a personal service activity.
7. Facts & circumstances show regular continuous activity.
Election to Treat All Rental Real Estate
Activities as a Single Activity
p. 179
 Real Estate Professional must
materially participate in each separate
rental property to make the rental
income nonpassive and exempt from
NIIT.
 To more easily meet the material
participation rules the RE Professional
can elect to treat all rentals as one via
grouping the rentals.
Grouping Activities
pp. 179 - 180
 General Rule – You group once and are stuck with
that grouping.
 Exceptions:
▪ Original grouping was not an appropriate
economic unit.
▪ There’s a material change in facts &
circumstances.
▪ You can regroup (one time only) in the first year
after 2013 in which the taxpayer meets the
threshold for NIIT.
Appropriate Economic Unit
p. 180
 To group the activities must be an
appropriate economic unit.
 Five factors used to determine if there is an
appropriate economic unit:
1. Similarities and differences
2. Extent of common control
3. Extent of common ownership.
4. Geographical location.
5. Interdependence between or among the
activities.
Appropriate Economic Unit
p. 180
 Election to group made by attaching a
statement to the return which includes:
▪ Names, addresses and employer
identification numbers of all trade or
business or rental activities that are
being grouped and
▪ Declaration that each group is an
appropriate economic group.
Grouping Real Estate with Other Trade
or Business Activities
p. 180
 Rental activities can be grouped with a trade or
business so that the rental income becomes
nonpassive and not NII.
 To combine rentals and nonrentals:
▪ The activities must form an appropriate
economic unit
▪ and
▪ One activity must be insubstantial to the other
or
▪ Ownership must be the same
Rental Activity is Insubstantial
p. 180, Ex 6.2
 Norm & Tom operate a CPA practice.
 They purchase an office building.
 They lease 10% of the building to a law
firm.
 Norm and Tom can group the real
estate rental activity with their CPA
practice.
 The rental income is not subject to NIIT.
Suspended Passive Losses & Grouping
p. 181
 Suspended losses of a passive activity are
allowed to offset future income of the
activity even though the activity became
nonpassive as a result of grouping.
 Generally suspended losses are allowable in
the year the activity is disposed of.
▪ Exception: If you have grouped activities
they are one and thus the suspended
losses are only deductible when all parts
of the grouped activity are disposed of.
Sale of Section 1250 Property
p. 181
 IRC §1250 Property – Depreciable
real property other than §1245
property.
 IRC §1245 Property – Depreciable
personal property & certain real
property.
Sale of Section 1250 Property
p. 181
 IRC §1250 Property – Depreciable real
property includes:
▪ Residential real property, commercial
buildings and general-purpose barns
unless acquired prior to 1987 and
depreciated using regular ACRS.
▪ If acquired prior to 1987 and depreciated
using ACRS these are §1245 property.
Sale of Section 1250 Property
p. 181
 IRC §1250 Property – Gain from sale taxed
as:
▪ Ordinary income to the extent allowed or
allowable depreciation exceeds straight
line depreciation.
▪ At 25% to the extent of allowed or
allowable straight line depreciation.
▪ Capital Gain to the extent gain exceeds
allowed or allowable depreciation.
Sale of Section 1250 Property
p. 181
Ex. 6.3
 1975 Ima bought commercial bldg. $275,000
 Allocated to land
( 50,000)
 Building
$225,000




2015 Ima sold commercial bldg. for $575,000
Allocated to land in contract
(300,000)
Building
$275,000
Building was fully depreciated by sale date.
 What’s her gain and how is it taxed?
Sale of Section 1250 Property
p. 181
Ex. 6.3
 Observation:
 There is no ordinary income from the
sale.
 Since the building was fully
depreciated the allowed accelerated
depreciation does not exceed the
allowed straight line depreciation.
Sale of Section 1250 Property
p. 182
Ex. 6.3, Fig. 6.1
Land
Sales Price
Building
$300,000
$275,000
Cost
$ 50,000
$225,000
Depreciation
(
(225,000)
Adjusted Basis
$50,000
0)
( 50,000)
0
(
0)
Gain
$250,000
$275,000
§1250 Recapture
(
(
Unrecaptured
§1250 gain (Depre)
§1231 Capital Gain
(
0)
$250,000
0)
0)
(225,000)
$ 50,000
Pages 182 – 186 show placement on tax Forms & Worksheet.
Sale of Section 1250 Property
p. 186
Ex. 6.3
 Practitioner Note:
 Ima used the building in her trade or
business…..
▪ Therefore the gain is not NII and is
not subject to NIIT.
 If the building had been a passive
investment or rental property it would
have been subject to the additional
3.8% NIIT.
Accountable Plan
p. 187
 Reimbursement of business expenses under an
“Accountable Plan” are not included in the
recipient’s income.
 Under an “Accountable Plan”:
1. Expenses must be business expenses,
2. Employees must account to employer in a
reasonable time period (generally 60-days), &
3. Employees must return any excess
reimbursement in a reasonable time period
(generally 120-days).
Accountable Plan
p. 187

An “Accountable Plan” must:
1.
Expenses must be business expenses,
2.
Employees must account to employer in a reasonable time period (generally 60days), &
3.
Employees must return any excess reimbursement in a reasonable time period
(generally 120-days).
Failure to comply with all three of the rules for an
“Accountable Plans” means:
1. Reimbursements are reported as taxable
income to the employee.
2. Employee can deduct the business expenses
on Form 2106 and then Sch A.
3. Employee must have records of bus. expenses.
Per Diem Allowance
p. 187
 Business can pay workers a Per Diem
in lieu of actual business expenses.
 Per Diem can cover Meals & Incidental
Expenses (M&IE) as well as Lodging.
▪ Record of expenses are not needed.
▪ Records of date, place and business
purpose must be maintained.
Per Diem Allowance
p. 187
 Per Diem rate is lesser of
employer’s per diem or Federal
Gov’t’s rate for location.
 Federal Gov’t rates are updated
annually in IRS Notices and are on
the GSA website (textbook page
188) at www.gsa.gov/perdiem
Practitioner Note
p. 187
Incidental Expenses Limited to Some
Tips:
 Per Diem rate includes M&IE.
▪ Incidental expenses includes tips.
▪ Travel between lodging and places of
business, to get meals, etc., while
traveling can be deducted in addition
to M&IE.
Per Diem Allowance
p. 187
 Per Diem rate can be used by:
▪ Employers and employees,
▪ Businesses for independent contractors,
▪ Partnerships for partners,
▪ Entities for volunteers
 Related parties and self-employed
individuals must use actual lodging costs
but can use the Per Diem portion of M&IE.
Per Diem
pp. 187 - 188
 Per Diem is limited to the Federal rate.
 Federal employees are limited to 75% of
M&IE on the first and last day of travel.
 Taxpayers must also adjust the first and last
day of M&IE travel but do not have to use
the Gov’t 25% reduction and can use any
reasonable, consistent method.
Practitioner Note
p. 188




Fiscal Year V Calendar Year:
Per Diem is limited to the Federal rate.
Federal rate is based on Gov’t 9/30 fiscal
year.
So rate changes on Oct 1st.
Taxpayers can choose to use the:
▪ Gov’t rate for nine months for the whole
year or
▪ Allocate & use the different Gov’t rates.
Per Diem Reimbursement
pp. 188 – 189
Ex. 6.4
 Mary traveled on Sunday & Thursday.
 She attended a business conference Monday thru
Wednesday.
 She spent 4 nights in a hotel.
 Lunch was included in the conference.
 Federal per diem for the area is:
▪ M&IE
$ 71.00
▪ Lodging
219.00
▪ Total
$290.00
What should be her per diem
reimbursement?
Per Diem Reimbursement
pp. 188 – 189
Ex. 6.4
Nights
Lodging
Work
Days
Travel
Days
Lodging 4 X $219
M&IE
M&IE
Per Diem
Per
Diem
$ 876.00
$71 X 3
213.00
$71 X 2
X 75%
106.50
$1,195.50
She can exclude the reimbursement from income.
If she spent less than reimbursed she can keep the savings.
If she spent more – Deduction on Sch A subject to 2% AGI limit.
Per Diem
p. 189
 Practitioner Note:
▪ Cohan Rules allows estimation of
expenses.
▪ §274, IRC, prohibits estimation (Cohan
Rule) for travel, entertainment and gifts.
 Reconstructing Records:
▪ For suggestions see the 2014 Text Book,
pages 398 – 402 which is on your CD.
Related Party & Self-Employed Rules
p. 189
 Related parties can use per diem rates
for M&IE but not for lodging.
 For lodging related parties must use
actual expenses and have records for
the expenses.
 Related Parties are defined in
§267(b)(1) thru (13)
Substantiation by Related Party
p. 189
Ex. 6.5
 Same as Ex. 6.4 but Mary is the sister of company’s owner.
 Mary traveled on Sunday & Thursday.
 She attended a business conference Monday thru
Wednesday.
 She spent 4 nights in a hotel.
 Lunch was included in the conference.
 Federal per diem for the area is:
▪ M&IE
$ 71.00
▪ Lodging
219.00
▪ Total
$290.00
What should be her per diem reimbursement?
Per Diem Reimbursement
p. 189
Ex. 6.5
Nights
Lodging
Work
Days
Travel
Days
Lodging 4 X $219
M&IE
M&IE
Per Diem
Per
Diem
$ 876.00
$71 X 3
213.00
$71 X 2
X 75%
106.50
$1,195.50
Unless she is required to report actual to her employer with
substantiation she must include the $876.00 in income and can
deduct as an employee business expense if she has substantiation.
Deduction Limitation
p. 190
 §274(n) limits M&IE deductions to 50%.
 Sole proprietor applies the 50% to the Sch C
deduction.
 Employer reimbursing via an accountable plan is
limited to deducting 50% of the M&IE actual or per
diem reimbursement.
 50% limitation for an independent contractor:
▪ Controlled by an agreement between parties.
▪ If no agreement – The one who is ultimately
paying the M&IE is limited to deducting 50%.
Deduction Limitation
p. 190
 Don’t Forget Some Exceptions:
▪ Transportation workers subject to
Dept. of Transportation service hours
may deduct 80% of meal expenses
instead of 50%.
▪ They can elect special rates.
▪ They do not have to use the Gov’t
local rates.
Car & Truck Expenses
p. 190
 Deduction Options:
A. Standard Mileage Rate (SMR) or
B. Actual Costs:
Operating costs – Gas, oil,
repairs, etc. plus
Fixed Costs – Depreciation,
lease, license, insurance, etc.
Standard Mileage Rate
p. 190
 SMR can be used for owned &
leased vehicles.
 SMR must be elected in the 1st year
vehicle is placed in service
 Later years can use the SMR or
actual expenses but depreciation is
then limited to SL.
Business Standard Mileage Rate
p. 190
Fig 6.5
Year
2013
2014
2015
Business
SMR
56.5¢
56.0¢
57.5¢
Don’t forget you have these and other rates in a Chapter
at the end of this text book and on your CD.
SMR Eligibility
pp. 190 - 191
SMR CanNOT be used if:
 5 or more vehicles are used in business at the same time
 Depreciation other than SL has been claimed (including
§179 deduction)
 The vehicle is leased AND actual expenses were claimed
on it after 1997.
 TP is a rural mail carrier & received qualified
rimbursement.
 Practitioner Note: Vehicles used for hire (taxis, etc) did not
qualify prior to 2011 but qualify now.
Additional Expenses
p. 191
Expenses deductible in addition to the SMR:
 Ad valorem taxes (PP, etc) on
Sch A (as an itemized deduction) but
SE taxpayers deduct business % on Sch C
 Parking fees & Tolls but no Penalties or Fines.
 Business portion of Interest:
Employees -- No Deduction (Personal interest)
SE taxpayers – Deductible on Sch C:
Ex 6.6 -- 80% bus use x interest on car
loan = Sch C Interest Deduction
Depreciation Component
pp. 191
 SMR includes a depreciation
component.
 The depreciation component
reduces basis but not below zero.
 Figure 6.6, page 191 shows the
depreciation component in the
SMR from 1994 thru 2015…….
Mileage-Based Depreciation
Ex 6.7, Fig. 6.7
pp. 191 - 192











Year
Miles x SMR Dep. Rate Dep Adj. Basis Gain
S/P
$15,000
Cost
$34,000
Dep 2011 14,000 x
0.22 =
$3,080
2012 18,400 x
0.23 =
$4,232
2013 19,700 x
0.23 =
$4,531
2014 17,500 x
0.22 =
$3,850
2015 18,100 x
0.24 =
$4,344
Total Depreciation
$20,037 ( 20,037)
Adj Basis
$13,963 (13,963)
Section 1245 Gain (Taxed as Ordinary Income) $ 1,037
Depreciation Deduction Limits
p. 193
 Automobiles, pick-ups, vans & SUVs are:

5-year MACRS property

Eligible for the §179 if used more than
50% in business.
 However, §280F limits depreciation
(including §179) deductions on passenger
automobiles -But, what is a passenger automobile?
Passenger Automobile
p. 193
Passenger automobiles are:
 4 wheeled vehicles made for use on the road
 Cars weighing 6,000 pounds or less –
unloaded.
 Vans or trucks weighing 6,000 pounds or
less – loaded.
Heavier vehicles are not subject to the
depreciation caps of §280F and…..
Passenger Automobile
p. 193
Passenger automobile does not include
non-personal use vehicles such as–
 Ambulances and hearses used in the
business.
 Vehicles for hire to transport people or
property – taxis, delivery vehicles, etc
 Qualified non-personal use trucks or vans.
▪ See list on p. 198.
Depreciation Limits
p. 194
 Figure 6.9 gives the §280F depreciation
limits for passenger automobiles.
 Recovery period is extended if Dep
deduction is limited by caps.
 2013 -- $8,000 can be added to the
§280F limit if the additional first year
depreciation is claimed on the vehicle.
 2015 – No Additional First Year Dep.
Depreciation Limits
Ex. 6.8, Fig. 6.10
p. 194
Sec §280F Depreciation limit:
June 2015 Bgt 5,000 pound auto – W/O
100% used for business
Limit
Cost
$30,000
 Depreciation
 MACRS 1st yr 20% x $30,000= ( 6,000)
 Maximum under §280F=
 Adjusted Basis
$24,000
 MARCS 2nd yr 32% x $30,000= ( 9,600)
 Maximum under §280F=
 Adjusted basis at end of 2nd yr $14,400
With
§280F
$30,000
( 3,160)
$26,840
( 5,100)
$21,740
Sec. 179 Deduction
p.195
Section 179, IRC, Automobile Expense Deduction :
 Can deduct all or part of cost of §1245 property in
year placed in service -- Maximum is $25,000.
 Phased out dollar for dollar if more than $200,000
placed in service in the 2015.
 Limited to net income from active business.
 Must be purchased from an unrelated party.
 Must be used more than 50% in trade or business.
Acquisitions for activities for profit (such
as rentals, etc) do not qualify
 Only the business use portion (%) qualifies for
§179 deduction.
Sec. 179 Deduction
Limit for SUVs
p.195
SUVs have a $25,000 §179 limitation.
However, this has no effect in 2015 since
the overall limitation is also $25,000.
Four wheeled vehicles, weighing less
than 14,000 pounds and not a bus,
pickup, van, etc.
Adjustment for Business Use
Ex 6.9
p. 195





2015 bought & put in service SUV.
Weight = 6,500 pounds
Cost = $40,000.
Business use = 60%.
Not subject to §280F limit since weighs
more than 6,000 pounds.
 Depreciable basis = 40,000 X 60% = $24,000
 The entire $24,000 can be deducted using
§179.
Related Party Transactions
p.195
Sec 179 Automobile Deduction Expense.
Purchase must be from an unrelated party:
 Acquisitions via gift or inheritance, etc do not
qualify. Must be bought.
 Cannot be bought from a member of a controlled
group.
 Cannot be bought from family…BUT.. for this
purpose family means only spouse, ancestors
and lineal descendants so purchase from brother
or sister is ok.
Related Party Disqualification
Ex. 6.10
p. 195
▪ Pick-up bought from corporation.
▪ TP and spouse own 51% of corporate
stock.
▪ Bought from “related party”.
▪ No §179 deduction.
Use in Lodging Business
Ex. 6.11
p.196
Vehicles used primarily in lodging rental
activity do not qualify under §179 unless:
▪ Rental is a hotel or motel renting to transients
OR
▪ It is available on same basis to people using
and not using the lodging facility (Ex. Taxis,
tours vans, etc)
 Ex. 6.11 – 7,100 pound SUV bought and used in
B&B business. Average rentals less than 7-days.
Not a rental. Can expense entire $25,000 cost
under §179.
Variable Business Use
p. 196
 Vehicle has business and personal usage
which varies from year to year.
 Cost basis is adjusted for change in bus.
use before depreciation is computed.
 If business % is less in a later year there
maybe no depreciation deduction in that
particular later year.
 But, no recapture of §179 unless bus %
drops to 50% or less, or vehicle is sold.
Fluctuating Depreciable Basis
Ex. 6.12, Fig 6.11
Year
Cost
Basis
Bus Bus.
§179
Use Basis Adjust
p. 196
SL
Dep
Basis
SL
Dep
2010 40,000 90% 36,000 25,000 11,000 1,100
Total
Deduction
26,100
Fluctuating Depreciable Basis
Ex. 6.12, Fig 6.11
Year
Cost Bus Bus.
§179
Basis Use Basis Adjust
p. 196
SL
Dep
Basis
SL
Dep
2010 40,000 90% 36,000 25,000 11,000 1,100
2011 40,000 80% 32,000 25,000
7,000 1,400
Total
Deduction
26,100
1,400
Fluctuating Depreciable Basis
Ex. 6.12, Fig 6.11
Year
Cost
Basis
Bus Bus.
§179
Use Basis Adjust
p. 196
SL
Dep
Basis
SL
Dep
2010 40,000 90% 36,000 25,000 11,000 1,100
2011 40,000 80% 32,000 25,000
2012 40,000 60% 24,000 25,000
7,000 1,400
-0-
Total
Deduction
26,100
1,400
-0-
-0-
No depreciation deduction in 2012 because Business basis is less than
depreciation (including §179) already deducted.
§179 Deduction does not reduce depreciable basis below 0.
Fluctuating Depreciable Basis
Ex. 6.12, Fig 6.11
Year
Cost
Basis
Bus Bus.
§179
Use Basis Adjust
p. 196
SL
Dep
Basis
SL
Dep
2010 40,000 90% 36,000 25,000 11,000 1,100
2011 40,000 80% 32,000 25,000
7,000 1,400
Total
Deduction
26,100
1,400
2012 40,000 60% 24,000 25,000
-0-
-0-
-0-
2013 40,000 70% 28,000 25,000
3,000
600
600
2014 40,000 90% 36,000 25,000 11,000 2,200
2,200
2015 40,000 80% 32,000 25,000
7,000
700
700
$ 31,000
§179 Recapture Upon Sale
p. 197
 §179 deductions are depreciation.
 So when there is gain on sale or
exchange there can be:
▪ §1245 property recapture
resulting in ordinary income.
§179 Recapture Upon Disposition
Ex 6.13
p. 197
 2013 John bought truck.
 Weight = 6,900
 Cost = $36,000
 Business use = 100%
 §179 Deduction claimed = $20,000
 2015 John sold truck for $17,500
 Depreciation and gain are….
§179 Recapture Upon Disposition
Ex 6.13, Fig 6.12
p. 197
100%
Business Use:
SP
Cost
2013 §179
2013 AFYD
2013 MACRS
2014 MACRS
2015 MACRS
Cost Recovery
Adj. Basis
Dep.
Basis
Rate
Cost
Adjusted
Recovery Basis
Gain
$ 17,500
$36,000
$36,000
$16,000
$ 8,000
$ 8,000
$ 8,000
50%
20%
32%
9.6%
$20,000
$ 8,000
$ 1,600
$ 2,560
$ 768
$32,928
( 32,968)
$ 3,072 ( 3,072)
Listed Property
p. 197
 All vehicles are “Listed Property”
 Bus use is 50% or less:
▪ SL Dep and no §179 deduction
 Bus use is more than 50%:
▪ MACRS Dep & §179 deduction allowed.
 Above test uses only trade or business use.
 For dep. deduction use trade or business %
and / or profit activities (rentals, etc) %.
Substantiation of Business Use
pp. 197 - 198
Must substantiate business use for listed
property:
▪ Amount of expense;
▪ Date and place of expense or use of vehicle;
▪ Business or investment purpose of expense.
Exception to substantiation rules for Qualified
Non-Personal Use Vehicles.
▪ Such as ambulances, hearses, cement mixers,
etc
▪ List on page 198
Aggregation & Sample Use
Exs. 6.14 & 6.15
pp. 198 - 199
 Single record for uninterrupted
business trips is acceptable.
▪ Ex. 6.14, Page 198
 Record for part of year can be used
as a sample to prove entire year.
▪ Reg. 1.274-5T(c)(3)(iii).
▪ Ex. 6.15, Page 199
Other Car & Truck Expense Issues
p. 190
 §179 deduction must be recaptured if
bus use of listed property falls to 50%
or less.
 Recapture amount due to change in
business use is subject to both income
and SE tax.
 Recapture from a sale is treated as sale
of §1245 property and not subject to SE
tax.
Business Uses Decreases to 40%
Ex. 6.16
p.199 - 200







2013 Marcia bought truck.
Cost = $30,000
Weight = More than 6,000 pounds.
Not subject to §280F
2013 and 2014 = Business Use = 100%
Claimed §179 deduction = $10,000
2015 Business use dropped to 40%
What is the recapture income amount?
What is the basis in the truck?
What is the depreciation in 2015?
Business Uses Decreases to 40%
Ex. 6.16, Figs 6.13, 6.14 & 6.15
Basis
$30,000
Rate
Dep
 Cost
 2013 §179
$10,000
 2013 MACRS
$20,000 20%
4,000
 2014 MACRS
$20,000 32%
6,400
 Total actual depreciation claimed
$20,400
In 2015 bus use dropped to 40%
 Allowable Depreciation:
 Total §179
-0 2013 SL
$30,000
10% $ 3,000
 2014 SL
$30,000
20% $ 6,000
 Total allowable depreciation
$ 9,000
 §280F Recapture (Ord. Income & subject to SE Tax)
p.199 - 200
Total Dep
$20,400
( 9,000)
$11,400
2015 Adj. Basis in truck is $21,000 (30,000 – 20,400 + 11,400)
2015 Dep = $30,000 x 40% Bus Use x 20% Rate = $2,400.
Leasing an Automobile
p. 200
Listed Property Rules Apply to Leased Vehicles
 Section §280F Inclusion – Lease amount is
reduced by an inclusion amount for rentals over
30-days for:
Passenger cars with a FMV over $17,500
Trucks and Vans with a FMV over $18,000
 “Inclusion amounts” are in Rev Proc 2015-19 and
Text Chapter “Tax Rates & Useful Tables”.
100% Business use – Use table amounts
Bus & Personal use – Use table & Adjust.
Trade-In (Like Kind Exchanges)
p. 201
 §1031 – No gain or loss recognized on
exchange of qualifying property.
 Usually, basis of new asset is the adjusted
basis of traded-in property plus / minus any
boot.
 If there is an exchange the §1245 recapture
from the exchanged vehicle carries over to
the replacement vehicle.
Employer-Provided Vehicle
p. 201
 Employee excludes from income the
business portion of usage.
 Use of Qualified Non-Personal Use vehicle
is excludable.
 FMV of personal usage is taxable and
should be on W-2.
 Employee needs to keep record of use.
 Employer deducts 100% of expense.
Form 1099-K Payment Card and Third
Party Network Transactions
p. 201
 Form 1099-K Payment Card and
Third Party Network Transactions
is an informational filing that
reports income that was generated
through:
▪ Payment card transactions and
▪ Third-party network transactions.
 Effective in 2012.
Who Must File A 1099-K
pp. 201 - 202
 Payment Settlement Entity (PSE)is
responsible for:
▪ Filing the 1099-K and
▪ Providing a “participating payee”
a statement of filing.
 A PSE is obligated to make
payments (or provide instructions)
to a “participating payee” of a
reportable payment transaction.
Bank and Credit Cards
p. 202
Ex. 6.17
 Rob paid his grocery bill with a credit card.
 The grocery store’s bank has an obligation
to pay the funds from the sale to the grocery
store.
 That transaction is reported on a 1099-K.
 Rob also got a cash advance on his credit
card.
 The credit card company does NOT have to
issue a 1099-K since the money went to the
card holder.
Online Providers
p. 202
Ex. 6.18
 Sam started an antique business in his
home.
 He contracted with an online provider to
help sales through auctions.
 Sam’s customers buy antiques through the
online provider.
 The online provider then transfers the sale
proceeds to Sam.
 The online provider must file a Form 1099-K.
Avoiding Duplication
Who is a “Participating Payee?”
p. 202
 To avoid duplicate issuing of Forms 1099-K the
PSE that submits instructions to transfer funds is
responsible for the 1099-K.
 Unless the PSE has contracted otherwise.
 “Participating Payee” is any person who accepts:
▪ Payment card transactions or
▪ Payment from a third party settlement
organization.
 Income on 1099-K is taxed to the Participating
Payee
When Form 1099-K Is Required
p. 202
▪ Payments by payment card –
• Regardless of amount or number
of transactions.
▪ Payments through a third party
payment network –
• When gross amount exceeds
$20,000 AND
• Total number of transactions
exceeds 200.
When Form 1099-K Is Required
pp. 202 – 203
Ex. 6.19
▪ John used a credit card to purchase
an antique chair for $15,000.
▪ This was the only sale made by the
antique shop this year.
▪ The antique shop’s bank must report
the sale on 1099-K.
▪ Number of sales or dollars does not
matter.
When Form 1099-K Is Required
p. 203
Ex. 6.20
▪ Will contracted with an online provider to
sell antique figurines.
▪ Will sold 199 figurines through the site in
different transactions.
▪ Will grossed $35,000 in sales.
▪ The online provider does NOT need to
complete Form 1099-K.
▪ Will’s number of sales did not exceed 200.
▪ Note: Will stills needs to report his sales.
Content Requirements of Form 1099-K
p. 203
 Form 1099-K is similar to Form 1099
reporting information on the Filer, Payee
and Transactions.
 Practitioner’s Note: A TIN verification
system allows PSEs to verify TINs.
 Starting in 2015 the Form 1099-K provides
the amount of sales where the “Card not
present.”
 Participating payees should received 1099-K
by January 31st.
Confused?
Pp. 203 - 204
Instructions for the 1099-K and
1099-MISC try to explain which
form is used for reporting
which transactions.
Now…..
p. 204
Let’s talk about….
Businesses Under Common
Control……
Businesses Under Common
Control
p. 204
Shared ownership (direct or indirect)
of disparate businesses can present
unexpected tax issues.
For Example…….
Businesses Under Common Control
p. 204
 When can consolidated tax returns be filed
or when are they required to be filed?
 When do corporations of a controlled group
share one graduated tax rate?
 When are corporations aggregated for
computing AMT?
 Are there limits on deductions, losses, etc
when transactions involve related parties?
 How are the §179 limits applied to business
with common control?
 And there are more issue too!
Commonly Controlled Corporations
p. 205
Ex. 6.21
 TPH owns C Corp repairing cars.
 Taxable income of $50,000 to $75,000 annually.
 TPW owns dental practice which is a PSC.
 PSC pays out all profits to avoid 35% PSC tax rate.
Are there problems due to relationship? Maybe:
 TPH’s C Corp may be entitled to only ½ of each corporate
tax rate bracket.
 If TPW adopts a qualified pension or profit sharing plan
then TPH may have to cover his employees so TPW can
avoid non-discrimination tests.
 One IRC § 179 deduction is allocated to the 2 businesses.
 Combined gross receipts might require accrual method.
Controlled Group Relationship
p. 205
Ex. 6.22, Fig. 6.16






Five individuals have ownership of three corporations as:
Shareholder
Hiway
Maxcar
Walla Villa
Ownership
Hauling
Motors
George
30%
50%
5%
Vicki
10%
20%
10%
Andy
40%
10%
5%
Kathy
20%
20%
80%
Totals
100%
100%
100%
George and Vicki are cousins.
Who is related to who under IRC § 267(b)?
Controlled Group Relationship
p. 205
Ex. 6.22, Fig. 6.16
 Shareholder
George
 Vicki
 Andy
 Kathy
 Totals
Hiway
30%
10%
40%
20%
100%
Maxcar
50%
20%
10%
20%
100%
Walla Villa
5%
10%
5%
80%
100%
 None of the individuals are related. Attribution does not
make cousins related parties.
 George is not related to Maxcar – Must have >50%.
 Kathy is related to Walla since she owns over 50%.
 Corporations not related under §267 – No >50% mutual SH.
 But rules on controlled groups of corporations might bring
some of the corporations under related party rules.
Related Parties Defined
§267(b), IRC
Most Common Related Parties under §267(b):
1. Family members – brothers, sisters, etc.
2. Individual and Corp where individual owns
more than 50% of Corp.
3. Two corps in a controlled group.
4. Grantor & fiduciary of a trust.
5. Fiduciaries of trusts with same grantor.
6. Fiduciary and beneficiary of trust.
7. Fiduciary and beneficiary of trusts with same
grantor.
8 thru 13
There are 6 more – See §267(b), IRC.
Affiliated Groups and Controlled
Corporations
pp. 205 - 206
 An affiliated group of corporations may
file a consolidated tax return.
 One C Corp must own 80% of another
C Corp’s stock.
 Attribution rules do not apply.
▪ But, Corps’ ownership interests can
be combined to meet the
requirement.
Direct Ownership
p. 206
Ex. 6.23, Fig. 6.17
Ownership of Corps #1, #2 and #3 are as follows:
Corp # 1 Corp # 2 Corp # 3
Corp # 1
0
90%
79%
Allan
100%
0
21%
Unrelated Mr. X
0
10%
0%
Totals
100%
100%
100%
Which Corps are an affiliated group?
Direct Ownership
p. 206
Ex. 6.23, Fig. 6.17
Ownership of Corps #1, #2 and #3 are as follows:
Corp # 1 Corp # 2 Corp # 3
Corp # 1
0
90%
79%
Allan
100%
0
21%
Unrelated Mr. X
0
10%
0%
Totals
100%
100%
100%
Corps #1 and #2 are affiliated – 80% common control
Corp 3 is not affiliated.
Combined Ownership
p. 206
Ex. 6.24, Fig. 6.18
Ownership of Corps #1, #2 and #3 are as follows:
Corp # 1 Corp # 2 Corp # 3
Corp # 1
0
90%
79%
Allan
100%
0%
0%
Corp # 2
0%
0%
21%
Unrelated Mr. X
0%
10%
0%
Totals
100%
100%
100%
Which Corps are an affiliated group?
Combined Ownership
p. 206
Ex. 6.24, Fig. 6.18
Ownership of Corps #1, #2 and #3 are as follows:
Corp # 1 Corp # 2 Corp # 3
Corp # 1
0
90%
79%
Allan
100%
0%
0%
Corp # 2
0%
0%
21%
Unrelated Mr. X
0%
10%
0%
Totals
100%
100%
100%
All three of the Corps are an affiliated group.
An Affiliated Groups of
Corporations
p. 206
 An affiliated group of corporations may
file a consolidated tax return.
 Election to file consolidated is made by
filing Form 1122 with the tax return by
the due date + extensions.
 An election applies to all future years
and can only be revoked with IRS
permission.
Benefits & Disadvantages of
Consolidated Returns
p. 207
 Benefits:
▪ Gains and losses of group members can
offset one another.
▪ Property sale gains from one member to
another are deferred until property leaves
the group.
▪ Only one return needs to be filed.
 Disadvantage – Complexity, especially if a
member leaves or enters the group.
Controlled Groups –
IRC Sec 1563
p. 207
 Constructive ownership rules apply.
 Many Code Sections must be
aggregated…including:
▪ §11 graduated tax rate structure.
▪ §55 AMT exemption.
▪ §535 accumulated earnings credit.
▪ §179 expense election.
▪ §38 general business credit $25,000 limit
▪ Etc….See page 207
Controlled Groups –
IRC Sec 1563
p. 208
 A controlled group includes:
▪ Parent-subsidiary corporations and
▪ Brother-sister corporations.
 Component members are treated as single
taxpayer for many tax benefits.
 S corporations are excluded for some purposes.
 Constructive ownership rules apply.
 Only $50,000 of entire group’s income can be
taxed at 15% lowest rate.
Constructive Ownership Rules
pp. 208 - 209
 Constructive ownership rules apply to
determining whether there is a controlled
group.
 Examples of Constructive Ownership rules:
▪ Stock is owned if there is an option to buy
the stock.
▪ Stock owned by a PS is attributed to the
Partners.
 See pages 208 – 209 for all details.
Controlled Group Defined
p. 208 - 210
 Parent-Subsidiary:
▪ One corporation owns controlling interest
(at least 80% by vote or value) of the
other.
 Brother-Sister:
▪ Five or fewer individuals own at least 80%
of two or more corporations and minimum
common ownership is more than 50%
Direct and Indirect Ownership
p. 209
Ex. 6.25
Bigco
Littleco
90%
Smallco
45%
Bigco owns 90% of the stock in Littleco so
they are members of a controlled group.
Bigco owns less than 80% of the stock of
Smallco so they are NOT members of a
controlled group…….But suppose Littleco
owns at least 35% of Smallco….then….
Direct and Indirect Ownership
p. 209
Ex. 6.25
Bigco
Littleco
Littleco
90%
Smallco
45%
35%
All three corps are members of a controlled group
because:
Bigco owns more than 80% of the stock in Littleco AND
Bigco owns 45% of the stock of Smallco and is also
considered to own Littleco’s 35% of Smallco so there is
80% common control of Smallco.
Brother Sister Controlled Group
p. 210
 Brother-Sister:
 Five or fewer individuals own at least
80% of two or more corporations and
minimum common ownership is
more than 50%
 So, let’s look at an example where 4
people own stock in 3 Corporations…..
Brother Sister Testing
p. 210
Ex. 6.26, Fig 6.19
 1st test met:
 Same 4 people own more than 80%
of stock of each corporation.
Shareholder
Hiway
Maxcar Walla Villa
George
30%
50%
5%
Vicki
10%
20%
10%
Andy
40%
10%
5%
Kathy
20%
20%
20%
Total
100%
100%
100%
Brother Sister Testing
p. 210
Ex. 6.26, Fig 6.19
 1st test met:
▪ Same 4 people own more than 80% of
stock of each corporation.
 BUT now must look at 2nd test:
▪ Minimum common ownership must be
more than 50%.
▪ This requires looking at ownership of 2
corporations at a time.
Brother Sister Testing
p. 210
Ex. 6.26, Fig 6.20
 2nd test met:
 Same 4 people own more than 50%
of stock of these two corporations.
Shareholder
Hiway
Maxcar
Lowest
George
30%
50%
30%
Vicki
10%
20%
10%
Andy
40%
10%
10%
Kathy
20%
20%
20%
Total
100%
100%
70%
Brother Sister Testing
p. 210
Ex. 6.26, Fig 6.21
 2nd test not met:
 Same 4 people do not own more than 50%
of stock of these two corporations
Shareholder
Hiway
Walla
Lowest
George
30%
5%
5%
Vicki
10%
10%
10%
Andy
40%
5%
5%
Kathy
20%
80%
20%
Total
100%
100%
40%
Brother Sister Testing
p. 210
Ex. 6.26, Fig 6.22
 2nd test not met:
 Same 4 people do not own more than
50% of stock of these two corporations
Shareholder
Walla
Maxcar
Lowest
5%
50%
5%
Vicki
10%
20%
10%
Andy
5%
10%
5%
Kathy
80%
20%
20%
Total
100%
100%
40%
George
Brother Sister Testing
p. 210
Ex. 6.26, Figs. 6.19, 6.20, 6.21 and 6.22
 All 3 corporations met the 1st test.
 Hiway and Maxcar met the 2nd test
and so are members of a
controlled group.
 Walla did not meet the 2nd test and
so is not part of the controlled
group.
Brother Sister Testing
p. 211
Ex. 6.27, Fig. 6.23
 What happens if 2 of the individuals in
the prior example are married and the
other two are brother & sister?
 Well, just for fun let’s say:
▪ George and Kathy are married and
▪ Vicki and Andy are brother and
sister.
Brother Sister Testing with
Family Attribution
p. 211, Ex 6.27, Fig 6.23
 Spouses with direct ownership in multiple
corporations are treated as one shareholder.
Siblings are not treated as one SH. All 3
corps end up in a controlled group.
Shareholder
Hiway
Maxcar Walla Villa
Lowest
George and Kathy
50%
70%
85%
50%
Vicki
10%
20%
10%
10%
Andy
40%
10%
5%
5%
Total
100%
100%
100%
65%
Brother Sister Testing with
Family Attribution
p. 211, Ex 6.27, Fig 6.23
 Spouses with direct ownership
in multiple corporations are
treated as one shareholder.
Siblings
are
not
treated
as
one
Shareholder
Hiway
Maxcar Walla Villa
Lowest
SH.
All
3
corps
end
up
in
a
George and Kathy
50%
70%
85%
50%
controlled group
. 20%
Vicki
10%
10%
10%
Andy
40%
10%
5%
5%
Total
100%
100%
100%
65%
Special Rules for Spousal
Attribution
p. 211
 Escape hatch for spouses owning separate
businesses…….
 No spousal attribution for stock if the spouse has
in other spouse’s corp:
1. No direct ownership and
2. Is not an employee or director and
3. 50% or less of corp’s income is from
investment income and
4. No required consent for sale of stock.
 Example 6.28: No common control
Practitioner Note and Ex. 6.29
pp. 211 & 212
 Minor child treated as owning shares in both
parents’ corporations.
 Separate corporations become a controlled group.
 Example 6.29: Baby complicates tax situation.
▪ TPH and TPW own stock in their respective
corps which are not related because…
▪ They meet the 4 tests for non-attribution.
▪ But, they have a child.
▪ Child indirectly owns 100% of parents’ stock.
▪ Corps are now related.
Applying Tax Benefit Limits
p. 212
 Corporate benefits are divided evenly by the group
unless group agrees on allocation formula.
▪ Benefits include right to apportion the
graduated tax rate brackets between corps.
▪ If elect to allocate benefits Schedule O (Form
1120) is filed with each member’s tax return.
▪ Best option - Empty the lower tax brackets.
 Equal sharing of benefits is not beneficial if
income is unequal or one corp is a PSC.
Application of Limits
p. 212
Ex. 6.30, Fig. 6.24
 Hiway and Maxcar are related corps.
 Taxable incomes: $20,000 for Hiway & $180,000 for Maxcar.
 Maxcar’s share of tax rates and tax are as follows:
Brackets
0 - $50,000
$50,000-$75,000
$75,000-$100,000
$100,000-335,000
Totals
Default
Allocation
Maxcar
Share
Tax
Rate
Tax
50%
50%
50%
$25,000
12,500
12,500
15%
25%
34%
$3,750
3,125
4,250
130,000
$180,000
39%
100%
50,700
$61,825
Impact of using the default allocation & not allocating is....
Application of Limits
p. 212
Ex. 6.30, Fig. 6.24
Brackets
0 - $50,000
$50,000-$75,000
$75,000-$100,000
$100,000-335,000
Totals
Default
Allocation
50%
50%
50%
Maxcar
Share
$25,000
12,500
12,500
130,000
$180,000
Tax
Rate
15%
25%
34%
39%
100%
Maxcar
Tax
$3,750
3,125
4,250
50,700
$61,825
 Equal allocation means that the corps lose the
15% tax rate on $5,000 & Maxcar pays 39% on that
$5,000 because
 The $20,000 taxable income of Hiway did not use
the full $25,000 taxable at 15%.
Alternative Minimum Tax Rules
pp. 213 - 214
Controlled group must share:
 One $40,000 corporate AMT exemption.
 One $2M environmental tax exemption.
Controlled group may be required to
aggregate:
 Gross receipts with those entities for the
$7.5M or $5M small corporation exception
from AMT
Plan and Consent Format
p. 214, Fig 6.25
 Text Figure 6.25 gives a suggested
format for adopting a plan for
uneven allocation of:
▪ Tax Rates
▪ AMT Exemption
▪ General Business Credit Limit
▪ §179 Expensing
Limits on Losses & Deductions
p. 215
 §267 disallows certain losses and
deductions on transactions between
related parties.
 Related seller cannot recognize loss.
 Related buyer starts with cost basis,
but can reduce a later gain by first
seller’s loss.
Sales Between Related Parties
p. 215
Ex. 6.33
TPH’s corp sells asset to TPW for $ 45,000 $ 45,000
 Corp’s Adjusted basis
( 75,000)
 Since they are related the Corp
cannot recognize loss of
( $ 30,000) (
-0-)
 TPW’s basis is her cost
$ 45,000
If TPW later sells to unrelated party she can
increase her basis up to $30,000 for the loss
the related party could not deduct.
Disallowed Loss – Controlled Group
Ex. 6.34
p. 215
 If buyer and seller are in controlled group, seller’s
loss deduction is deferred until later sale outside
of group.
 Ex. 6.34:
▪ Since same 4 people own 2 corporations they
are a controlled group for related party sales.
▪ If one corp sells an asset to another corporation
in the controlled group it cannot deduct any
resulting loss.
▪ If the buying corp later sells to unrelated party it
can then claim the loss.
§1239 – Related Party Sale of
Depreciable Assets
pp. 215 - 216
Ex. 6.35
 §1239 - Sale of depreciable property between
corps in a controlled group resulting in a gain is
taxed as ordinary income.
 Ex. 6.35:
Maxcar sells bldg. to Hiway for FMV $400,000
Basis $340,000 – Dep $190,000 =
( 150,000)
Gain
$250,000
 Gain taxed as capital if sold to unrelated party.
 Gain taxed as ordinary if sold to related corp.
Accruals to Related Cash Method
Taxpayers
p. 216 Ex. 6.36
 §267(a)(2) – Accural method taxpayer cannot
deduct an amount owed to a related cash basis
taxpayer until the recipient reports the item in
income.
 Ex. 6.36:
 C Corp owes rent to S Corp owned by one man.
 All events have passed and C Corp on accrual
method could normally deduct year end rent.
 But, S Corp on cash method did not receive and
so did not report the rent in the year.
 C Corp cannot deduct rent until S Corp reports it.
Employee Benefit Rules §414
pp. 216- 217
 Businesses operating through multiple entities
are treated as single employer for nondiscrimination rules.
 Common control embraces all business
structures including Schedule Cs, P/Ss, Trusts,
Estates, C Corps & S Corps.
 Determination uses capital and profits interests
for ownership.
 Example 6.37……..
Employee Benefit Rules §414
C Corporation & S Corporation
p. 217
Ex 6.37
 C Corp and an S Corp are members of a
controlled group.
 The corporations are related for purposes of nondiscrimination rules.
 Employees of both corporations are combined in
applying qualified retirement plan rules, fringe
benefit rules and Affordable Care Act coverage
rules.
 Same result if one of the businesses was a P/S
and other was a corporation.
Affiliated Service Group
p. 217
 Employees of an “Affiliated Service Group” are
treated as if employed by one employer for
employee benefit aggregation rules.
 “Affiliated Service Group”:
▪ Organizations with principal business of
providing services (accounting, law, etc), plus
▪ Organizations that are shareholders or partners
in the service provider, plus
▪ Organizations that regularly provide services to
the service organization.
Affiliated Service Group
Ex. 6.38
p. 217




3 unrelated doctors practice together.
Each doctor works for his own corporation.
The 3 corporations are partners in a medical P/S.
All employees of the corporations and the
partnership must be aggregated in applying nondiscrimination tests for qualified plans and fringe
benefits.
 Rules embrace all forms of business….S Corp, C
Corp, sole proprietors, LLCs.
§179 Deduction
p. 217
 Members of a controlled group (other
than excluded members (defined on
text page 208)) must allocate one §179
deduction.
 The IRS does not say how the
allocation is to be made.
 No member can deduct more of the
179 deduction than it actually incurred.
§38 General Business Credit
p. 218
 Members of a controlled group (other
than excluded members (defined on
text page 208)) must allocate the §38
credits.
 IRS is charged with writing
Regulations on how to allocate the
credits but has not yet done so.
§51 and §52 Work Opportunity
Credit
p. 218
 All commonly controlled businesses
are treated as a single employer for
computing the credit.
 If a worker works for more than one of
the businesses the credit is allocated
proportionately.
 See Examples 6.26 and 6.27, text page
218.
Accounting Methods
p. 219 - 220
 Accrual method required of most businesses including:
▪ C Corporations
▪ Partnerships with C Corp partner(s).
▪ Tax shelters
 Exempt from accrual method:
▪ C Corps and Partnerships with less than $5M in average
gross receipts in most recent 3-year period.
▪ Taxpayers with less than $1M in gross receipts.
▪ Certain businesses with less than $10M in gross
receipts.
Affordable Care Act Aggregations
Businesses with Common Control
p. 221
 If two or more companies have a
common owner or are related under
414(b),(c),(m), or (o) they are treated as
a single employer for determining
whether they have at least 50 full time
employees for the Affordable Care Act
rules to apply.
Common Paymaster Election
pp. 221 - 222
 Controlled group of corporations with shared employees
can use a paymaster to aggregate wages for FICA and
FUTA tax purposes.
▪ Could eliminate overpayment of FICA that employee
could get back but employers cannot recoup.
 One corporation must be designated as paymaster and
pay employees of all corporations.
▪ Employees must be employees of the paymaster.
▪ Ineligible if separate employers issue pay checks to
employees.
 Only Corporations qualify -- Other business forms are
excluded.
That’s All for NOLs