Small Business Tax Q&A: December ’16 — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
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Small Business Tax Q&A: December ’16

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in Small Business Tax

Keeping it all in the family

Q. Referring to your article (SBTS, May 2016 Special Issue), can the home sale exclusion be elected for a sale between related parties if the home is leased back? J.O., CPA, Los Angeles, Calif.

A. Yes. There doesn’t appear to be any prohibition in the tax law or regulations against electing the home sale exclusion for a sale from parents to a child if the parents otherwise qualify. The home must be owned and used as the parents’ principal residence for at least two of the five years prior to the sale. However, the $250,000 maximum exclusion ($500,000 for joint filers) is reduced for any “nonqualified use,” such as using the home as a rental property.

Tip: The home should be priced at a reasonable amount.  

Step-up in basis for Medicaid trust

Q. I’m an estate attorney. In your recent article (SBTS, July 2016), how can the heirs get a step-up in basis with an irrevocable trust? J.M., Esq., Brooklyn, N.Y.

A. This is a thorny issue and the exact tax treatment depends on the language in the trust document. As we stated, a “Medicaid trust” is typically set up as an irrevocable trust. However, the assets are then included in the taxable estate because certain rights are retained. Therefore, the heirs benefit from a step-up in basis. Conversely, if the trust assets are excluded from the estate, there’s no step-up in basis.

Tip: Without the step-up in basis, heirs will owe income tax when they subsequently sell appreciating assets.

Vesting options for 401(k) plans

Q. My wife joined a company where it takes years for 401(k) contributions to vest. Does the law allow this? B.K., Omaha, Neb.

A. Yes. Although elective deferral (salary-reduction) contributions to a 401(k) account are immediately vested, matching employer contributions can vest under one of two schedules. With “cliff vesting,” zero vesting occurs until the fourth year, when the participant becomes 100% vested. In contrast, with a gradual vesting schedule, the participant vests 20% in the second year and an additional 20% vests each succeeding year until you become 100% vested in the sixth year.

Tip: An employee must be 100% vested at normal retirement age under the plan.

Tune into state tax deductions

Q. Can I deduct the state sales tax I paid on a big-screen TV for my home movie theater? H.F., Norwich, Conn.

A. It depends. First, you can deduct state sales tax only in lieu of deducting state and local income taxes. High-income taxpayers in your area often fare better by claiming income tax deductions. Second, you can deduct sales tax for all purchases for which you have records, including TVs and other electronics. Alternatively, you can use the IRS table for a deduction for a family of your size in your area, while adding the actual sales tax amounts paid for certain big-ticket items like cars and boats.

Tip: The list of big-ticket items doesn’t include big-screen TVs.

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