Question: Paul, Ringo, George and John are attorneys with their own separate law firms, each lawyer owning 100% of their respective company. One of the companies is a C corporation, the other three are Schedule C disregarded entities. The four law firms form a partnership and purchase a building with four floors, each entity owning a 25% partnership interest in the partnership, and each law firm renting one whole floor in the building. The building will be the sole partnership asset. The lawyers would like to qualify for the qualified business income (QBI) deduction with their new rental partnership. Does the use of the partnership entity qualify the rental income for the QBI deduction?

Answer: No. Although the partnership’s rental activity does not generally rise to the level of a §162 trade or business, for QBI deduction allowance purposes, Reg. §1.199A-4(b)(1)(i) would treat an entity as a trade or business, where there is 50% or more common ownership. To meet the common ownership requirements, the same person or group of persons must own [directly or by attribution under §§267(b) or 707(b)] 50% or more of the rental activity and the tenant’s §162 trade or business. This is not the case with the lawyers; their partnership group owns 100% of the rental, while it does not own any portion of the respective law firms. As such, the partnership rental income will not qualify for the QBI deduction.

Question: Aaron is 25 and serves as a member of the Army Reserve. He was ordered to active duty for 190 days. One month after being ordered to active duty, he took a distribution of $10,000 from his 401(k) retirement plan. The distribution was entirely allocable to elective deferrals, and Aaron met all of the requirements to take the qualified reservist exception to the 10% early distribution penalty. One year after his active-duty period ended, he decided he wanted to put the $10,000 back into his retirement account. Can Aaron repay the distribution, or will it be considered a new contribution into his account?

Answer: Yes, Aaron can repay the qualified reservist distribution. Although the distribution was originally from his 401(k) plan, he should make the repayment to an individual retirement plan such as an IRA or individual retirement annuity. To qualify, the repayment must be made within the two-year period beginning on the day after his active-duty period ends. He is not required to make a lump-sum repayment, but his repayment cannot exceed the original distribution amount and is nondeductible. It is also not included when determining his allowable IRA contribution for the year; meaning he can also still make a full IRA contribution as long as he otherwise qualifies to do so [IRC Sec. 72(t)(2)(G)(ii)].

Question: Lina filed Form 990, Return of Organization Exempt From Income Tax, by May 15, 2024, which is the due date for Alley Cats Rescue, a tax-exempt organization filing on a calendar year basis. Shortly after, the Form 990 was returned to her along with IRS Letter 2694C indicating there was information missing from her submission. She immediately called the IRS and found out that when information is missing from the Form or Schedules are omitted, the return is sent back to the filing organization and considered “not timely filed” – hence the letter to spur a correction. When she reviewed her submission, she noticed that she did not include Schedule O (Form 990), Supplemental Information to Form 990 or 990-EZ. Was Lina required to file Schedule O with Form 990?

Answer: Yes, Schedule O is a required attachment for all filers of Form 990, as seen in Part IV, Checklist of Required Schedules, Line 38. It is recommended that the schedule be prepared at the same time as the other sections of the Form 990 so that essential explanations are not inadvertently omitted. The specific use of the form is explained in its instructions: 2023 Schedule O (Form 990).

An incomplete Form 990 is considered not timely filed, and the penalty is $20 a day for each day the return is late, not to exceed lesser of $12,000 or 5% of gross receipts. If annual gross receipts exceed $1,208,500, the penalty jumps to $120/day with the maximum penalty of $60,000 [§6652(c)(1)(A)].

The IRS recommends that the preparer “… return a complete and accurate return within 10 days of the date of the letter to avoid penalties. The date we receive a complete and accurate return is the date we consider your return filed.”

Question: Joe has owned a residential rental real estate property since 1993. He has taken straight-line depreciation, using 27.5 years as the life of the property. He is selling the property in 2024. Does Joe have any potentially ordinary income to report from the gain, or from the gain due to previous depreciation allowed or allowable, known as “depreciation recapture”?

Answer: No. Rental real estate depreciation rates have been mandatorily straight-line since 1987 with residential rentals being depreciated over 27.5 years and commercial property depreciated over 31.5 years or 39 years if placed in service after May 12, 1993. Thus, in nearly all cases, real estate property sold currently was depreciated using straight-line. Therefore, no amount of depreciation is recaptured as §1250 gain, which is taxed at ordinary income rates. However, any gains due to §1250 depreciation are classified as unrecaptured section §1250 gains, which are capped at 25%. Any gains in excess of the unrecaptured section §1250 gains are classified as section §1231 gains.

Question: Erek is a retired public safety officer. He separated from service due to disability. He wants to take out $3,000 tax-free from his retirement plan to pay for his Medicare premium. Is he allowed to do so?

Answer: No. If Erek withdrew the funds from his retirement plan to pay for his Medicare, it would be taxable to him.

To begin, who is a retired public safety officer? They are law enforcement officers, firefighters, chaplains or members of a rescue squad or ambulance crew who separated from service as a public safety officer with the employer who maintains the retirement plan for them after reaching the normal retirement age. They could also be an officer who separated from service because of disability.

The IRS says retired public safety officers can reduce their taxable income by excluding up to $3,000 from their retirement plan distribution to pay for qualified insurance premiums like accident or health insurance or long-term care insurance. However, it does not include Medicare, which is under title XVIII of the Social Security Act.