Mastering 1099-B Reporting on Schedule D and Form 8949: Meeting Capital Gains Basis Reporting Challenges

Transcription

1 FOR LIVE PROGRAM ONLY Mastering 1099-B Reporting on Schedule D and Form 8949: Meeting Capital Gains Basis Reporting Challenges TUESDAY, AUGUST 1, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 Mastering 1099-B Reporting on Schedule D and Form 8949 Aug. 1, 2017 Jolaine L. Hill, CPA, Director Katz Sapper & Miller, Indianapolis jhill@ksmcpa.com

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 Mastering 1099-B Reporting on Schedule D and Form 8949: Meeting Capital Gains Basis Reporting Challenges Aug. 1, 2017 Jolaine L. Hill, CPA The information presented herein is general in nature and should not be acted upon without the advice of a professional KSM Business Services, Inc.

6 Agenda Basis reporting requirements on Form 8949 Background Definitions Adjustment codes Basis adjustments to information reported on Form 1099-B Reconciliation of multiple 1099-B forms High volume traders - Wash sales - Mark-to-market election Bond amortization Sales of publicly traded partnerships Basis reporting for real estate transactions 6 ksmcpa.com

7 Agenda Basis in assets received By gift By inheritance By distribution from an entity Section 1202 small business stock 7 ksmcpa.com

8 Background Prior to 2011, brokers were not required to report adjusted basis in securities sold The Emergency Economic Stabilization Act of 2008 added Code Section 6045(g), which requires brokers to report the adjusted basis in securities sold Effective dates - January 1, 2011 for corporate stock - January 1, 2012 for stock where the average basis method is permitted - January 1, 2013 (or later as determined by the Secretary) for other types of specified securities 8 ksmcpa.com

9 Background Code Section 6045(h) was also added by this Act and requires reporting for certain option transactions Effective January 1, ksmcpa.com

10 Definitions Related to Basis Reporting Specified security A share of stock in a corporation A note, bond, debenture or other evidence of indebtedness A commodity, or contract or derivative regarding the commodity, if the Secretary deems basis reporting appropriate Any other financial instrument, if the Secretary deems basis reporting appropriate 10 ksmcpa.com

11 Definitions Related to Basis Reporting Covered and noncovered transactions A covered security is a specified security acquired on or after the effective date that was: - Acquired through a transaction in the brokerage account in which the security is held or - Transferred to such an account from an account in which the security was a covered security, but only if the broker received a basis statement from the other broker Securities received by gift or inheritance are not covered securities 11 ksmcpa.com

12 Definitions Related to Basis Reporting A noncovered security is any security that does not meet the definition of a covered security - Examples - Securities transferred between brokerage accounts - Securities received by gift or inheritance - Publicly traded partnerships Adjusted basis Broker is to use first-in, first-out unless the customer notifies the broker by making an adequate specific identification of the stock sold or transferred 12 ksmcpa.com

13 Definitions Related to Basis Reporting For stocks where the average basis method is allowed (e.g. mutual funds), adjusted basis is determined according to the broker s default method unless the customer notifies the broker of another acceptable method Adjusted basis is determined without regard to the wash sale rules under Code Section ksmcpa.com

14 Form ksmcpa.com

15 Form 8949 Adjustments Columns F and G are used to report adjustments to the gain or loss reported on Form 8949 Column F is for the adjustment code - The list of codes are in the instructions to Form Multiple codes can be entered for a single transaction - Codes are listed in alphabetical order if multiple codes are used Column G is the amount of the adjustment to the gain or loss - If multiple codes apply, the adjustment is entered as a net adjustment 15 ksmcpa.com

16 Form 8949 Adjustments Code B You receive a Form 1099-B and the basis shown in Box 1E is incorrect If Box B of Part I or Box E of Part II is checked on Form 1099-B, enter the correct basis in Column E of Form 8949 and 0 as the adjustment in Column G If Box A of Part I or Box D of Part II is checked on Form 1099-B, enter the basis reported on the 1099-B in Column E of Form 8949 and the amount of the gain or loss adjustment in Column G 16 ksmcpa.com

17 Form 8949 Adjustments Example - A stock is sold for $1,000. You purchased the stock for $500, but the 1099-B shows a cost basis of $400. You held the stock for five months. The transaction would be reported on Part I of Form 8949 with Box A checked. The cost basis reported in Column E would be $400. Code B would be shown in Column F and an adjustment of ($100) would be reported in Column G. Code T You received a Form 1099-B and the type of gain or loss shown in Box 2 is incorrect Report the transaction in the correct part of Form 8949 and enter 0 for the adjustment in Column G 17 ksmcpa.com

18 Form 8949 Adjustments Code N You receive a Form 1099-B or 1099-S as a nominee for the actual owner Report the transaction as if you were the actual owner. Column G of Form 8949 would then show a negative adjustment if there is a net gain or a positive adjustment if there is a net loss. Column H would then be 0. Code H You sold your principal residence, must report the gain on Form 8949 and some or all of the gain can be excluded 18 ksmcpa.com

19 Form 8949 Adjustments Report the transaction as if the gain is not excluded. The Column G adjustment on Form 8949 would be the excluded amount of the gain, shown as a negative number. Example Code D - Form 1099-S reported $600,000 of gross proceeds and the taxpayer s cost basis is $400,000. Column G would report ($200,000) as the adjustment for the excluded gain. You received a Form 1099-B showing accrued market discount in Box 1F 19 ksmcpa.com

20 Form 8949 Adjustments There is a worksheet in the instructions to Form 8949 for calculating the accrued market discount adjustment If a partial payment is received on the bond, the adjustment is the lesser of: - The accrued market discount reported or - The proceeds. This amount is also picked up as interest income on Schedule B. If you chose to include the market discount in income currently, the Column G adjustment on Form 8949 will be 0. The basis in the bond should be increased by the accrued market discount that has been picked up in income for all years. 20 ksmcpa.com

21 Form 8949 Adjustments Code Q You sold qualified small business stock (Section 1202) and can exclude part of the gain Enter the transaction as if the gain is not excluded. Enter the amount of the exclusion as a negative number in Column G. Code X You can exclude all or part of your gain under the rules for DC Zone assets or qualified community assets Enter the transaction as if the gain is not excluded. Enter the amount of the exclusion as a negative number in Column G. 21 ksmcpa.com

22 Form 8949 Adjustments Code R You are electing to postpone all or part of your gain for any rollover of gain, for example, rollover of gain from QSB stock Report the gain as in the election is not going to be made. Enter the amount of the postponed gain as a negative amount in Column G. Code W You have a nondeductible loss from a wash sale Enter the sale on Form 8949 and show the amount of the disallowed loss as a positive amount in Column G. If Form 1099-B reports an incorrect amount for the wash sale, enter the correct adjustment in Column G. 22 ksmcpa.com

23 Form 8949 Adjustments Code L You have a nondeductible loss other than a loss from a wash sale Report the sale on Form 8949 and enter the amount of the nondeductible loss as a positive amount in Column G. Example - You receive a Form 1099-S with gross proceeds of $600,000 and the taxpayer s basis in the property is $700,000. The property is the taxpayer s principal residence. Column G would show an adjustment for $100, ksmcpa.com

24 Form 8949 Adjustments Code E You received a Form 1099-B or Form 1099-S and there are selling expenses or option premiums that are not reflected on the form as an adjustment to either the proceeds or the basis Enter the proceeds and basis as reported on the Form B received. In Column G of Form 8949, enter as a negative amount any selling expenses or option premiums paid that are not reflected and enter as a positive amount any option premiums that you received that are not reflected. 24 ksmcpa.com

25 Form 8949 Adjustments Code S You had a sale or worthlessness of small business stock (Section 1244) and the total loss is more than the maximum amount that can be treated as an ordinary loss Enter the entire sales price in Column D of Form 8949 and the entire basis in Column E. In Column G, enter the ordinary portion of the loss reported on Form 4797 as a positive amount. Code C You sold collectibles Column G would report an adjustment of 0 25 ksmcpa.com

26 Form 8949 Adjustments Code M You report multiple transactions on a single row as set forth in the instructions for exceptions to reporting each transaction separately - Exception One: The transactions are covered and there are no adjustments to cost basis - Exception Two: Statements are attached that provide the detail of the transactions Enter 0 in Column G unless an adjustment is required under another code 26 ksmcpa.com

27 Form 8949 Adjustments Code O You have an adjustment not explained under any other codes Enter the appropriate adjustment in Column G 27 ksmcpa.com

28

29 Reconciliation of Multiple Form 1099-Bs Practice tips Use exceptions one and two in the Form 8949 instructions for entering multiple transactions - Exception one allows for covered transactions with no adjustments to be reported in total on Schedule D, line 1a for short term and line 8a for long term - Exception two allows for detailed statements to be attached to the return instead of entering the line by line detail on Form For example, a taxpayer has five brokerage accounts that have sale transactions. Each brokerage account can be listed as a line item on Form Transactions will still need to be reported as short term or long term and covered and noncovered. 29 ksmcpa.com

30 Reconciliation of Multiple Form 1099-Bs 30 ksmcpa.com

31 Wash Sales Governed by Code Section 1091 Example Transaction: Taxpayer sells property in order to trigger a tax loss and immediately repurchases the same property to keep the same economic exposure Occurs when you sell stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities Acquire substantially identical stock or securities in a fully taxable trade (e.g. an incentive pay plan) Acquire a contract or option to buy substantially identical stock or securities 31 ksmcpa.com

32 Wash Sales Acquire substantially identical stock or securities in your traditional or Roth individual retirement account You or a corporation you control buys substantially identical stock or securities The disallowed loss is deferred until the new stock or securities are sold The loss is added to the basis of the new stock or securities The holding period for the new stock or securities includes the holding period of the stock or securities that were sold 32 ksmcpa.com

33 Wash Sales Substantially identical Facts and circumstances are considered - Generally, stocks of one corporation are not substantially identical to stocks of another corporation - One exception can be in a reorganization. The stocks and securities of the predecessor and the successor corporations may be substantially identical. - Generally, bonds or preferred stock of a corporation are not considered substantially identical to common stock of a corporation - One exception can be where the bonds or preferred stock are convertible to common stock 33 ksmcpa.com

34 Wash Sales - For example, preferred stock is substantially identical to common stock if:» It is convertible into common stock» Has the same voting rights as common stock» Is subject to the same dividend restrictions» Trades at prices that do not vary significantly from the conversion ratio, and» Is unrestricted as to convertibility If more or less stock is bought than sold, a determination must be made as to which shares the wash sale applies Matching of shares is done Ordering starts with the first shares purchased 34 ksmcpa.com

35 Wash Sales - For example, if shares are bought both before and after the sale that generates the wash sale, the shares bought before the sale have the basis adjustment Loss from a wash sale of one block of stock cannot be used to offset the gain on identical blocks sold on the same day Issue for high volume traders Absent any specific exceptions, the wash sale rules apply - Wash sale rules do not apply to: - Dealers in stocks or securities - Individuals who incur the loss in the course of their ordinary trade or business 35 ksmcpa.com

36 High Volume Traders To be engaged as a trader in securities, the following must be met: You must seek to profit from the daily market movements in the prices or securities instead of profiting from dividends, interest or capital appreciation The activity must be substantial The activity must be carried on with continuity and regularity 36 ksmcpa.com

37 High Volume Traders The following facts and circumstances should be considered in determining if a taxpayer is a trader in securities: Typical holding periods for securities bought and sold The frequency and dollar amount of trades during the year The extent to which the activity is pursued to produce income for a livelihood The amount of time devoted to the activity Securities held for investment should be in a separate brokerage account from securities held for the trading activity 37 ksmcpa.com

38 Mark-to-Market Election The mark-to-market election is under Code Section 475(f) For a trader who has made the election, all gains and losses from the sale of securities held in connection with the trading activity are reported as ordinary on Form 4797, Part II Securities held at the end of the year are marked to market by treating the securities as if they were sold and then reacquired at fair market value on the last business day of the year. This gain or loss is also reported on Form 4797 Part II. 38 ksmcpa.com

39 Mark-to-Market Election Advantages under the mark-to-market election No limitations for losses Wash sale rules do not apply Since the losses would be ordinary, significant losses could generate a net operating loss How the election is made A statement that is - Attached to a return filed by the original due date or - Attached to an extension for the tax year preceding the year the election is effective. - To be effective for 2017, the election had to have been attached to the 2016 return filed by April 18, 2017 or attached to the 2016 extension. 39 ksmcpa.com

40 Mark-to-Market Election The election statement needs to include the following: - The election is being made under Section 475(f) of the Internal Revenue Code - The first tax year for which the election is effective - The trade or business for which the election is being made Form 3115 is filed in the year the election is effective There will be a Section 481(a) adjustment - A net positive adjustment is taken into income ratably over a four year period beginning with the year of change - A net negative adjustment is taken into account in the year of change 40 ksmcpa.com

41 Mark-to-Market Sample Election 41 ksmcpa.com

42 Bond Amortization Brokers are now reporting bond premium amortization for both taxable and tax-exempt bonds As a preparer, what do I do with those amounts? Taxable bonds Code Section 171 governs the treatment of bond premium amortization for taxable bonds In order to receive benefit from premium amortization on a taxable bond, an affirmative election must be made - Once the election is made, the election applies to all taxable bonds owned at the beginning of the year the election is made and all taxable bonds acquired in subsequent years - The election may only be revoked with the consent of the Internal Revenue Service 42 ksmcpa.com

43 Bond Amortization Treatment of bond amortization after the election has been made - For bonds purchased before Oct.23, 1986, the bond amortization is treated as a miscellaneous itemized deduction not subject to the two percent AGI limitation - For bonds purchased after Oct. 23, 1986 and before Jan. 1, 1988, the bond premium is treated as investment interest expense - For bonds purchased after Dec. 31, 1987, the bond amortization is a direct offset to interest income The basis of the bonds are also adjusted for the bond amortization - Note that brokers are making the adjustment under the assumption that the election has been made - If the election is not made, the information provided by the brokers cannot be used 43 ksmcpa.com

44 Bond Amortization Sample Election 44 ksmcpa.com

45 Bond Amortization Tax-exempt bonds Code Section 171 does not apply to tax-exempt bonds - Bond premium amortization on tax-exempt bonds is required Tax-exempt bond premium does not provide a tax deduction - Bond amortization reduces tax-exempt interest income The basis of the bonds are adjusted for the bond amortization 45 ksmcpa.com

46

47 Sale of Publicly Traded Partnerships Issues with the sale of publicly traded partnerships (PTPs) If basis is reported by the broker on 1099-B, amount is almost always incorrect - The only basis information the broker has is the original investment and the amount of distributions that have been received in the brokerage account - Schedule K-1 activity from the PTP has not been taken into account in the basis reported - In many PTPs, there is an ordinary gain portion that needs to be reported 47 ksmcpa.com

48 Sale of Publicly Traded Partnerships 48 ksmcpa.com

49 Sale of Publicly Traded Partnerships Cost basis to be used The Schedule K-1 capital account is presented on the tax basis Bifurcation of gain or loss on sale Due to the ordinary gain element associated with the sale of many PTPs, any gain or loss on the sale is bifurcated between Form 4797, Part II and Form The ordinary gain element is reported on Form 4797, Part II - Any remaining gain or loss on the sale is reported on Form ksmcpa.com

50 Sale of Publicly Traded Partnerships Example of an overall gain transaction Gross sales proceeds are $4,500 Cost basis per the Schedule K-1 capital account is $1,000 Ordinary gain per the Schedule K-1 supplemental information is $ ksmcpa.com

51 Sale of Publicly Traded Partnerships 51 ksmcpa.com

52 Sale of Publicly Traded Partnerships Example where there is a gain on the sale and the net Schedule D is a loss Gross proceeds are $2,000 Cost basis per the Schedule K-1 capital account is $1,000 Ordinary gain per the Schedule K-1 supplemental information is $1, ksmcpa.com

53 Sale of Publicly Traded Partnerships 53 ksmcpa.com

54 Basis For Real Estate Transactions 54 ksmcpa.com

55 Basis For Real Estate Transactions 55 ksmcpa.com

56 Basis For Real Estate Transactions Cost basis Cost basis starts with the contract price per the HUD statement or equivalent closing document Cost basis includes related settlement charges - The settlement charges can be found on the HUD statement or equivalent closing document - Some settlement charges may be paid outside of the closing on the purchase Cost of any improvements made to the property 56 ksmcpa.com

57 Basis in Property Received by Gift Cost basis in property received by a gift is equal to the donor s basis on the property at the time of the gift Also includes all or part of the gift tax paid by the donor on the gift Exception for property sold at a loss The basis of property received by a gift that is sold at a loss is the lesser of the donor s basis or fair market value at the date of the gift 57 ksmcpa.com

58 Basis in Property Received by Inheritance Cost basis in property received by inheritance is equal to the fair market value at the date of death Exceptions: - The fiduciary elects to use the alternative valuation date - Cost basis becomes fair market value at the alternate valuation date - The fiduciary elects the special use valuation method for farms or closely held business real property - The fiduciary elects the qualified conservation easement exclusion - Cost basis becomes carryover basis 58 ksmcpa.com

59 Basis in Property Received by Inheritance Basis information reporting by the executor to the beneficiaries and the IRS Code Section 6035(a) requires that the executor of any estate required to file an estate tax return furnish to the IRS and each person acquiring an interest in property from the estate a statement identifying the value of each interest of property as reported on the estate tax return Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, is the IRS form use to comply with Code Section 6035(a) The original effective date was for property reported on estate tax returns filed after July 31, ksmcpa.com

60 Basis in Property Received from an Entity Basis in property received from a corporation The cost basis is equal to the fair market value on the date of the distribution Basis in property received from a partnership The cost basis is equal to adjusted basis of the property in the hands of the partnership 60 ksmcpa.com

61 Section 1202 Small Business Stock Code Section 1202 provides noncorporate taxpayers with an exclusion of a percentage of gain from the sale or exchange of qualified small business stock held by the taxpayer for more than five years Exclusion percentages are based on the date when the stock was acquired For stock acquired on or before Feb. 17, 2009, the exclusion percentage is 50 percent For stock acquired after Feb. 17, 2009 and before Sept. 28, 2010, the exclusion percentage is 75 percent For stock acquired after Sept. 27, 2010, the exclusion percentage is 100 percent 61 ksmcpa.com

62 Section 1202 Small Business Stock Small business stock definition Qualified small business stock must meet the following criteria: - The issuer must be a domestic C corporation during substantially all the taxpayer s holding period for the stock - The stock must be originally issued after Aug. 10, The stock must be issued directly by the issuer or through an underwriter to the taxpayer - Generally, the stock must be issued in exchange for money or other property or as compensation for services provided to the issuer 62 ksmcpa.com

63 Section 1202 Small Business Stock - The corporation must meet the following tests: - The $50 million capitalization test» Aggregate gross assets may not exceed $50 million immediately after issuance» Controlled group rules apply - The active business test» The corporation is a domestic corporation that is not a DISC or former DISC, a corporation with a Code Section 936 election in effect or a RIC, REIT, REMIC or cooperative 63 ksmcpa.com

64 Section 1202 Small Business Stock» At least 80% of the corporation s assets, by value, are used in the active conduct of one or more qualified trades or businesses Qualified trade or business is any trade or business other than: A personal service corporation A bank, insurance, financing, leasing, investing or similar business A farming business A business involved in production or extraction of products that permits depletion A business operating a hotel, motel, restaurant, or similar business 64 ksmcpa.com

65 Questions? Jolaine Hill P E jhill@ksmcpa.com 65 ksmcpa.com