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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I am the sole shareholder of an S corporation. The corporation converted from a C corporation several years ago with retained earnings. This year, I want to take a distribution as a dividend instead of taking compensation. I do not want to distribute pre S corporation earnings and profits. Is that OK?
   
   No. Reasonable compensation should be paid for services rendered to the corporation by the shareholder(s). This is especially true if any distributions are taken. The amount that should be paid in compensation is the “amount that would be paid to an unrelated party in the same area for similar services”. Once the “reasonable compensation plateau is reached, IRS is not prone to attack distributions. IRS is prone to examine S corporation compensation, as it is perceived as an area that has been abused and IRS has announced that it will give increased scrutiny to S corporation compensation (or the lack thereof), especially if there are distributions. Pay no compensation whatsoever and taking money or property out of an S corporation is a certain way of drawing unwanted attention from the IRS.
   
2. I am single and have a traditional IRA and contribute the maximum amount possible each year. I now want to establish and fully fund a Roth IRA in addition to the traditional IRA. My AGI is less than $95,000. Can I fully fund both?
   
   The annual IRA funding limit is a single limit that applies to a traditional IRA or a Roth IRA. You may fully fund on or the other, or may fund a combination up to that single annual contribution limit ($4,000 if under age 50, or %5,000 if age 50 or over for 2007). You may not fund each one up to $4,000 (or $5,000). For 2008 the funding limits will increase to $5,000 ($6,000 if over age 50).
   
3. My mother established a revocable grantor trust to hold some assets (generally real property). She unexpectedly died last month. The trust called for all the assets to be distributed to her children after death. She also had assets outside of the trust. I am her executor (I am also the trustee) and I think the estate and the trust will be wound up early next year (well within 12 months). No Form 706 is required. Do you have to prepare a Form 1041 for the trust for the period ending 12-31?
   
   An election may be made to have the revocable trust treated as part of the estate for income tax purposes. Doing so would allow the trust income and expenses to be reported on the first and final Form 1041 for the estate. The election is made by filing Form 8855. Make sure the form is filed before the assets of the estate or trust have been distributed.
   
4. May an S corporation have an LLC as a shareholder?
   
   If the LLC is a single member LLC that is taxed as a disregarded entity and that member is a qualified individual, the LLC may be a shareholder of the S corporation. Alternatively, if the LLC has elected to be taxed as an S corporation and is the 100% shareholder of the second S corporation, the second S corporation may be a Qualified Sub S Subsidiary (QSSS).
   
5. I am the sole shareholder of a corporation. I prepared the returns in prior years for the corporation. I bought several pieces of equipment year before last (2006). I filed the tax return on the original due date (no extension) without claiming a Section 179 expense. May the returns be amended now to claim the expense? The corporation had a profit that year.
   
   The Section 179 expense may be claimed on an original or amended tax return for 2006 that is filed while the tax year is still open (generally the statute of limitations runs to the later of three years from the filing of the original return or two years from the time the tax for that year is paid).
   
6. I moved out of my old house about 2 years ago and began renting it. I am planning to sell it within 3 years of moving out to claim the exemption under Section 121. If I have trouble selling it is there any extension of time?

   There is no extension of time under Section 121 for the requirement that you own and occupy the house as your principal residence for at least two out of the five years prior to sale. You should make every effort to sell the house within the required time frame. Even though Congress is aware of the soft real estate market, there is nothing pending to date that we know of that would give you an extended period of time to sell. You may consider moving back in for a period of time.

7. I am employed by a church. I am not ordained and my duties for the organization have nothing to do with the ministry. I am receiving a housing allowance and have been told that the entire housing allowance is completely tax free. Is this true?
   
   A parsonage allowance received by an ordained minister is excluded from income for regular income tax purposes under IRC §107. It is, however, subject to self-employment tax, even for the ordained minister. A lay person receiving a housing allowance is not eligible for any exclusion. The housing allowance received should be included in compensation and is subject to all payroll taxes and withholding.