Practitioner Updates - Questions & Answers

The following are questions and answers from the tax practitioner meetings held in late 2013.

General

Question: Are there CPE credits for Wisconsin Department of Revenue (DOR) tax update presentations?

Answer: DOR did not seek formal CPE approval.  DOR supplied certificates of attendance for events it sponsored that many accrediting organizations will accept along with a copy of the agenda.  Exception:  The IRS does not recognize DOR's sponsored updates for Enrolled Agent CPE credits.

IRC Update

Question: For federal tax purposes, income from abandonment of personal residence reported on Form 1099-A, is excluded from federal income. Is this included in the discharge of indebtedness for Wisconsin such that income is included for Wisconsin?

Answer: Based on the 1099-A instructions, there could be discharge of indebtedness income from the abandonment of a home. This would not be taxable for federal purposes for a home that is a principal residence. The principal residence exception does not apply for Wisconsin. The income from discharge of indebtedness would be taxable for Wisconsin unless the taxpayer was insolvent at the time or in a bankruptcy case.

Following are the instructions for Form 1099-A for the borrower.

"Certain lenders who acquire an interest in property that was security for a loan or who have reason to know that such property has been abandoned must provide you with this statement. You may have reportable income or loss because of such acquisition or abandonment. Gain or loss from an acquisition generally is measured by the difference between your adjusted basis in the property and the amount of your debt canceled in exchange for the property, or, if greater, the sale proceeds. If you abandoned the property, you may have income from the discharge of indebtedness in the amount of the unpaid balance of your canceled debt."

Note that the 1099-A does not have a box for income. It only reports the balance of principal outstanding and the fair market value of the property.

Question: DOR summarized an update to the IRC for "Rollover to Roth IRA not treated as a distribution," I thought that was a change from several years ago?

Answer: There was a change in 2009 where Wisconsin picked up the federal treatment of IRA distributions rolled over to a Roth IRA. Wisconsin has now adopted the federal expansion of conversions of traditional employer-sponsored retirement accounts (like 401(k), 403(b), and 457 accounts) to employer-sponsored Roth accounts. There is no longer a requirement that funds from these employer-sponsored accounts be otherwise "distributable."

Private School Tuition

Question: What amounts paid may be used for the subtraction?

Answer: The subtraction only applies to tuition and mandatory student fees.  Separate charges for other items, such as room and board, athletic tickets, or other costs, may not be subtracted.

Question: Can a subtraction be claimed for amounts paid out of Coverdell account for elementary school tuition?

Answer: Yes. The tuition subtraction has no disqualifications based on the source of the payment for the tuition.

Question: Does pre-K tuition qualify for the subtraction?

Answer: No. "Elementary pupil" for purposes of this deduction means an individual who is enrolled in grades kindergarten to eight at an eligible institution.

Question: Can a nonresident subtract tuition paid in or outside Wisconsin?

Answer: Yes. There is no requirement that the taxpayer be a Wisconsin resident. The private school may be in or outside Wisconsin.

For example, a New York resident who has an ownership interest in an S corporation that does business in Wisconsin, requiring the New York resident to file a Wisconsin Form 1NPR. The New York resident may subtract from the Wisconsin S corporation income tuition paid to attend a private elementary school in New York. The subtraction is claimed on Schedule M, which should be attached to Form 1NPR.

Farm Losses

Question: With the elimination of farm loss limits, can I claim farm losses I have not been able to use in prior years in their entirety for 2014?

Answer: Accumulated farm losses limited previously because of income levels or passive participation can be subtracted for 2014, but only up to the amount of farm income. The losses may be carried forward until offset against farm income or the 15-year carry forward period expires. Farm losses occurring in 2014 and thereafter are not subject to income or participation limitations.

Depreciation and Section 179 Expense

Question: My business is on a fiscal year ending May 31.  When will the new depreciation and Section 179 expense rules first apply to my business?

Answer: The new depreciation and Section 179 expense rules first apply to the return filed for the period beginning June 1, 2014 and ending May 31, 2015.  You will determine the difference in basis for the five-year amortization as of May 31, 2014.

Question: The cost of an asset was deducted previously for federal tax purposes under sec 179, but is being depreciated for WI. The asset is sold in 2014. Are the federal and Wisconsin asset bases used in the five-year amortization calculation on December 31, 2013? How do I determine the gain or loss on the asset?

Answer: Yes. The difference in bases for federal ($0) and Wisconsin is subtracted from Wisconsin income equally over five years beginning in 2014. There is no difference in gain reported on the sale or disposition of assets on or after January 1, 2014, because the Wisconsin bases of assets will be the same as the federal bases of assets. This answer assumes federal law does not change on or after January 1, 2014.

Question: Is it mandatory to amortize the depreciation difference over five years or can I keep the bases of assets different and just have less gain or more loss for Wisconsin when the assets are sold.

Answer: The subtraction is mandatory for both individuals and corporations. The gain or loss on the sale of the asset is the same for both Wisconsin and federal tax purposes for years beginning after 1/1/2014.

Question: What happens when an asset is fully depreciated or disposed of in 2015 or later but prior to expiration of five-year amortization period?

Answer: The subtraction modification is computed as of December 31, 2013 (for calendar year taxpayers). The subtraction modification continues for five taxable years from the date of computation, regardless of sale or disposition of an asset during that period.

If an asset is sold after 1/1/14, it will have the same gain/loss as computed for federal purposes. In most cases, this will result in a higher gain than would have been reported than under old law. That is why the taxpayer will continue to get the subtraction modification after the sale if it is within the five-year period.

Question: Is the amortization of the difference in basis claimed as a subtraction or on Schedule I?

Answer: It is a subtraction modification from federal adjusted gross income.

Question: Can I elect different amounts of Section 179 expense for Wisconsin now that there is conformity with the IRC?

Answer: Yes. Wisconsin franchise and income tax law only requires the method of accounting to be the same as federal; therefore, if the IRS considers an item to be an election rather than a method of accounting, different treatments between Wisconsin and federal are allowed. A Section 179 expense is considered an election, so a taxpayer may elect different Section 179 amounts for Wisconsin as long as the election conforms with the IRC in effect for Wisconsin at the time the election is made.

Question: A sole proprietor incorporates his business on January 1, 2014, by transferring all depreciable assets of the business to a new corporation in exchange for 100% of the stock. Who is entitled to the five-year subtraction for the difference between the federal and Wisconsin bases?

Answer: The difference in the bases of the assets is determined as of December 31, 2013, when the assets were held by the sole proprietor. The sole proprietor is entitled to the subtraction from income for the 2014 through 2018 tax years (five years at 20% of the difference in bases as of December 31, 2013).

Question: What amount of depreciable basis would the new corporation above have in the assets?

Answer: As a result of transferring assets to a corporation for which a tax-free contribution is made under sec. 351, IRC, the corporation will have a tax basis in the assets equal to the tax basis of the assets in the hands of the sole proprietor on the day of contribution. Since the contribution is made on January 1, 2014, the Wisconsin basis used by the corporation to compute depreciation will be the same as the federal basis on January 1, 2014.

Question: A partnership liquidates on December 31, 2013, and distributes its assets to its partners. On January 1, 2014, the partners contribute the distributed assets to a newly formed corporation in exchange for stock. Who is entitled to the five-year subtraction for the difference between the federal and Wisconsin bases of depreciable property?

Answer: Since the partnership liquidated and distributed its assets to its partners on December 31, 2013, the partners hold the assets at the end of the 2013 taxable year. The partners are entitled to the 20% subtraction first available for the 2014 taxable year and each of the next four succeeding taxable years, regardless of whether the corporation continues to hold the assets. In a tax-free contribution of assets to a newly formed corporation under sec. 351, IRC, the corporation has a basis in the depreciable assets equal to the adjusted bases of the assets in the hands of the partners immediately prior to the contribution. The Wisconsin adjusted basis of the assets on January 1, 2014 in the hands of the partners is the same as the adjusted basis determined for federal tax purposes. Since there is no difference in federal and Wisconsin adjusted basis in the assets on January 1, 2014, and Corporation did not hold the assets on December 31, 2013, Corporation is not entitled to a subtraction for the difference in tax bases of the assets.

Question: A partnership has three equal owners. The partnership computes a difference of $500,000 between the federal and Wisconsin basis of its depreciable assets on December 31, 2013. On January 1, 2016, the partnership liquidates and distributes its assets to its three partners. On the date of liquidation, the partnership had an unamortized bases difference of $300,000. How is the unamortized balance treated?

Answer: On the partnership's 2016 tax return, the partnership should report to each partner, the partner's proportionate share of the unamortized balance and the remaining amortization period. In this case, the partnership would report as a supplement to each partner's 2016 Schedule 3K-1, a statement identifying the partner's $100,000 unamortized balance and remaining amortization period of three years.

Question: A corporation liquidates on December 31, 2015. On the date of liquidation, the corporation had an unamortized bases difference balance of $80,000. Is the corporation able to claim the balance of $80,000 as a deduction in the year of liquidation or is the corporation only allowed to claim the current year's portion of the balance?

Answer: The corporation may deduct the $80,000 unamortized balance in the year of liquidation.

Question: A tax-option (S) corporation for federal and Wisconsin tax purposes is sold on December 31, 2014. On the date of sale, the S corporation had an unamortized bases difference balance of $120,000. How is the unamortized balance treated?

Answer: The corporation may deduct the $120,000 unamortized balance in the year of sale.

Question: There is a difference between the amount of depreciation claimed for Wisconsin regular and minimum tax purposes. Do I need to make a subtract modification on Schedule MT to account for the difference in adjusted bases of the assets?

Answer: The difference between the federal basis and the Wisconsin basis of depreciable assets for AMT purposes will be an adjustment to federal alternative minimum taxable income on Schedule MT. The same five-year adjustment that applies for regular tax purposes will apply for AMT purposes.

Example: An individual files a Wisconsin income tax return on a calendar-year basis. On December 31, 2013, for regular income tax purposes, the individual determines a difference between the federal basis and the Wisconsin basis of depreciable assets of $25,000. The individual will claim a subtraction for 20% ($5,000) of this difference on his 2014 income tax return.

On December 31, 2013, for AMT purposes, the individual determines a difference between the federal basis and the Wisconsin basis of depreciable assets of $35,000 ($10,000 more than the basis difference for regular tax purposes). When computing Wisconsin alternative minimum taxable income on Schedule MT, the individual is allowed a subtraction for 20% ($7,000) of this difference on his 2014 Schedule MT.

Over the five-year adjustment period, the difference in basis for regular tax purposes is $25,000 and for AMT purposes is $35,000. The subtraction for AMT will be shown on two separate lines on Schedule MT; one line will represent the portion of the subtraction from Form 1 ($5,000) and the other the remaining amount to be accounted for AMT purposes ($2,000).

Credits

Question: For the tax credits that are being eliminated over the next few years, what do I do with carryovers I have accumulated?

Answer: The credits can be carried forward for the length of time provided by statute prior to repeal. Exception: For individuals and fiduciaries, the Community Development Finance Authority Credit expires entirely with the 2013 tax year.

Question: A person has been claiming homestead credit for many years.  Last year, the person switched to claiming the veteran's property tax credit. Is it correct that because of the timing of the person's property tax payment, he won't be eligible for either credit last year?

Answer: Not necessarily. It depends on whether he pays his taxes the year they are assessed (in December) or the following year.

The homestead credit is based on the real estate taxes assessed for the year of the claim (2012 claim is based on real estate taxes shown on the 2012 tax bill). The taxes do not need to be paid. The veterans property tax credit is based on the taxes paid during the year the return applies to (2012 credit is based on taxes paid in 2012). The taxpayer may not claim both credits using the same taxes.

If the taxpayer files a 2012 homestead credit claim on their 2012 real estate taxes, he can then file for a 2013 veterans property tax credit if he paid his 2013 taxes during 2013. However, if he paid his 2013 taxes in 2014, he would have to wait until 2014 to claim the veteran's property tax credit.

If the taxpayer files a 2012 homestead credit claim on their 2012 real estate taxes, but pays those taxes in 2013, they cannot file for a 2013 vets credit on those taxes unless they amend the 2012 return to repay the homestead credit.

Question: Is the farmland preservation credit claimed on Schedule FC and FC-A taxable for Wisconsin regardless of federal treatment?

Answer: The farmland preservation credit on Schedule FC-A is reported as income on federal Schedule F which would carry over to adjusted gross income on Wisconsin Form 1.

The farmland preservation credit claimed using Schedule FC is based on property taxes of the farmland and personal residence. Depending on when the property taxes were paid, the farm portion of the credit would be reported on Schedule F either as a reduction of the property taxes paid or as income if the taxes were paid in a prior year. The credit related to the farm portion of the taxes is included in federal adjusted gross income. However, the credit related to the personal residence requires an addition to federal adjusted gross income for Wisconsin tax purposes.

Question: What is the post-secondary education credit that is being eliminated? Does this affect the tuition I can deduct for my dependents?

Answer: This credit is different than the tuition deduction. This credit is available to businesses that reimburse certain individuals for the tuition paid to attend a qualified postsecondary institution. See Fact Sheet 1109 for more information.

Question: Is the manufacturing and agriculture credit mandatory?

Answer: No. The law states the "claimant may claim as credit . . ."

Question: Is the amount of my veteran's and surviving spouse's property tax credit taxable on my income tax return for the year in which I receive it?

Answer: Federal treatment:

The amount of the credit may be taxable for federal income tax purposes. The credit is considered a refund of property taxes (real estate taxes).

If you itemized deductions for federal tax purposes on Schedule A and claimed a deduction for the amount of real estate taxes paid, the amount of veterans and surviving spouses property tax credit received during the year is taxable on your federal income tax return to the extent you received a tax benefit from the deduction.

If you did not itemize deductions for federal tax purposes, the amount of veterans and surviving spouses property tax credit received during the year is not taxable on your federal income tax return.

Example 1:

You paid real estate taxes of $3,000 on your principal residence in 2012. You claimed the veterans and surviving spouse's property tax credit of $3,000 which was refunded to you when you filed your Wisconsin income tax return in 2013. You deducted the $3,000 as a federal itemized deduction on your 2012 Schedule A. Your total itemized deductions were $8,000. Your federal standard deduction for 2012 would have been $5,950. Therefore, your tax benefit from the itemized deductions was $2,050 ($8,000 less $5,950). The $2,050 must be reported as income on your 2013 federal income tax return as a recovery of an itemized deduction.

Example 2:

The facts are the same as in Example 1 except that your total itemized deductions were $10,000 for 2012. Your tax benefit from the itemized deductions was $4,050 ($10,000 less $5,950). The entire $3,000 must be reported as income on your 2013 federal income tax return as a recovery of an itemized deduction.

Wisconsin treatment:

The amount of the veterans and surviving spouse's property tax credit is not income on your Wisconsin income tax return. Wisconsin law allows a subtraction from federal adjusted gross income for any amounts that are recoveries of federal itemized deductions for which no Wisconsin tax benefit was received. Because no deduction has been allowed for property taxes or the property taxes cannot be used in the computation of the Wisconsin itemized deduction credit, no tax benefit was received for Wisconsin income tax purposes.

Withholding

Question: Do I have to provide wage statements to DOR for farm employees, domestic help, and other employees where I don't have to withhold Wisconsin income taxes? I am not registered for Wisconsin withholding.

Answer: Yes. The withholding tax statutes require submission of the W-2s to DOR even if there is no Wisconsin withholding. Previously, the department waived the requirement to submit W-2s if they were provided to the IRS and there was no withholding.

Question: I am not currently registered for Wisconsin withholding because I don't have to withhold for my employees. Will I have to register in order to submit the Form W-2s?

Answer: No.  For wage and information returns with no Wisconsin withholding, a Wisconsin withholding number is not required. Instead, enter your FEIN in the box entitled "Employer's State ID Number" on the Form W-2. Wage statements may be filed electronically at http://www.revenue.wi.gov/eserv/w-2.html or by completing Form WT2.

If completing Form WT2:

Data Verification

Question: Will the identify verification determination impact the time it takes to process a refund?

Answer: No, assuming the return is not one that is selected to take the quiz. If the return is selected for a quiz (which will be a very small percent of all refund returns), the delay will only be as long as it takes the system to generate the letter, mail delivery, and the taxpayer to take and pass the quiz or provide required documents.

Question: What if a person doesn't have the ability to take the quiz (disabled, language barrier, etc.)?

Answer: The person can contact Customer Service who can dispense the quiz and record answers or he or she can send in the documentation required to prove identity without taking the quiz.

Levy

Question: Can DOR levy a partnership's bank account for the individual debt of one of the partners? Debt is unrelated to the partnership.

Answer: No.

Question: For continuous levies, will the Department differentiate between collecting balances resulting from estimated returns as opposed to those that are agreed upon with the taxpayer?

Answer: The continuous levy collection tool may be used for both types of debt (estimates and actual amounts due). However, before issuing a continuous levy, the agent responsible for collecting the debt will consider a number of factors, including the size of the debt and other actions taken to encourage the debtor to resolve the debt.

My Tax Account (MTA)

Question: Is it correct that I cannot gain third party access if my client's prior return amount was zero?

Answer: No.  The system should recognize zero as a prior return amount.

Question: I am a third party preparer. MTA access has been ceased for some of my clients. Is there a way for me to only see those accounts where my access is active?

Answer: Yes.  On the screen listing all your third party accounts, click on the tab to the right titled "Hide History," which should hide all accounts where your access has been ceased.

Last updated January 16, 2014