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Tax Law Explained FLASHPOINTS October 2019

October 15, 2019Print This Post Print This Post

Keith B. Baker, CPA, JD, Law Offices of Keith B. Baker, Ltd., Skokie
847-933-0200 | E-mail Keith Baker

2019 IRS Draft Forms, Limited Relief for Farmers and Ranchers, and IRS Clarification on Distribution Checks from Qualified Plans

2019 Draft Forms

The IRS issued a draft Form 1065, a draft Form 1120-S, and Schedule K-1’s for the 2019 tax year. Here are links to the PDF’s of the draft Forms and Schedules:

1. Form 1065: https://www.irs.gov/pub/irs-dft/f1065--dft.pdf

2. Form 1065, Schedule K-1: https://www.irs.gov/pub/irs-dft/f1065sk1--dft.pdf

3. Form 1120-S: https://www.irs.gov/pub/irs-dft/f1120s--dft.pdf

4. Form 1120-S, Schedule K-1: https://www.irs.gov/pub/irs-dft/f1120ssk--dft.pdf

While they are drafts, and cannot be used, the IRS indicated that they are “near-final” forms. The final versions are scheduled to be released in December 2019.

Limited Relief for Farmers and Ranchers

Many ranchers and farmers have sold their livestock solely due to drought, floods, and other weather-related conditions. In certain cases, the sales can be considered “involuntary conversions.” If the taxpayer replaces the livestock and makes the proper election on a timely basis, they can defer the gain realized on the sale under Internal Revenue Code §1033. The basis in the livestock sold then “carries over” to become the basis of the replacement livestock.

The determination of when a taxpayer must replace the involuntarily converted livestock begins with the close of the first taxable year in which any portion of the gain was realized. The taxpayer then has four years that to replace the livestock.

The IRS announced that taxpayers may (but are not required to) extend the replacement period by one year if all if the following are satisfied:

1. The sale qualifies as an involuntary conversion.

2. The livestock was sold solely on account of drought.

3. The livestock were in one of the specified counties (or counties contiguous thereto) designated by the IRS.

4. The drought conditions were somewhere among “exceptional, extreme or severe” during any week between September 1, 2018, and August 31, 2019. IRS, IRS relief provides drought-stricken farmers, ranchers more time to replace livestock (Sept. 30, 2019).

Whether and how long the IRS will extend the replacement period depends in part upon the severity of the drought and by reference to U.S. Drought Monitor maps that are published by the National Drought Mitigation Center.

Distribution Checks from Qualified Plans

Often, individuals receive distribution checks from a qualified plan. The distribution from a traditional plan (vs. Roth) is generally taxable as ordinary income. If the distribution is not a required minimum distribution (RMD), the taxpayer may be eligible to roll over the distribution to another qualified plan and avoid income recognition.

In case it was not already clearly and generally understood, the IRS Published Rev.Rul. 2019-19, 2019-36 Int.Rev.Bull. 674, reiterating that the distribution is taxable even if the taxpayer does not cash the check. As the character Maxwell Smart, secret agent, would say: “The old constructive receipt trick.”

It is a best practice, if a taxpayer qualifies to roll over a distribution, for the taxpayer to cause a direct fund to fund transfer and not obtain a check. If the taxpayer qualifies and the distribution is a direct fund to fund transfer, not only is it foolproof in qualifying for nonrecognition of income, but the plan handling the distribution will indicate this on the IRS Form 1099-R. This will make it clear to the taxpayer, the tax preparer, and the IRS that no part of the distribution should be taxable.

For more information about tax law, see STATE AND LOCAL TAXATION — 2017 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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