As a follow-up to the June 2010 and January 2011 Tax Practice Corner columns “Don’t Neglect to Elect” and “Don’t Neglect to Elect, Part II,” here are elections available to estates, partnerships and individuals.
Estate tax portability election. As a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, spouses dying after Dec. 31, 2010, can transfer the unused portion of the $5.12 million (for 2012) estate exclusion amount to their surviving spouse. To make the portability election, the estate must file a timely and complete estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) even if there is no estate tax due. As a result of the election, the unused exclusion amount of the decedent spouse is added to the surviving spouse’s exclusion amount. Where the estate cannot file the return within the nine-month deadline, an extension should be filed. The IRS extended the period to make the portability election to 15 months for eligible estates of decedents dying between Jan. 1, 2011, and June 30, 2011.
Election to waive the right to claim administration expenses on Form 706. An executor or administrator of an estate can elect to deduct administration expenses of the estate on Form 1041, U.S. Income Tax Return for Estates and Trusts, instead of on Form 706. This election applies to expenses that would be deductible under Sec. 2053(a)(2) (funeral and general administrative expenses and debts secured by property included in the gross estate) or Sec. 2054 (casualty and theft losses). The statement must be filed before the expiration of the statutory period of limitation applicable to the tax year for which the deduction is claimed.
Election to capitalize carrying charges. Taxpayers can elect to capitalize the carrying costs of unimproved and nonproductive real property, real property under development or construction and personal property before its installation or use (Regs. Sec. 1.266-1(b)(1)). These costs can include mortgage interest and property taxes. Where taxpayers are subject to the alternative minimum tax and further deduction of property taxes will not change their overall tax liability, this election allows them to capitalize the excess property taxes and thus reduce any future capital gain. The election is made with the tax return by its due date, including extension, by attaching a statement.
Election to recognize a Sec. 1244 stock loss as ordinary. Sec. 1244 allows an individual holding small business corporation stock to deduct an ordinary loss rather than a capital loss on the stock’s sale or upon its becoming worthless. A small business corporation is one with capital stock and additional paid-in capital of less than $1 million. If the stock was issued after July 19, 1984, it can be either common or preferred stock issued to an individual or partnership in exchange for cash or property. Stock issued before that date must be common stock. The corporation must have generated during its five most recent tax years more than 50% of its gross receipts from activities other than rent, royalties, dividends, interest, annuities, and sales and exchanges of stock or securities. Losses are limited to $50,000 per shareholder ($100,000 on a joint return). The election is made by claiming an ordinary loss for the sale on Form 4797, Sales of Business Property.
Election to apply the consolidated audit rules to small partnerships. If a partnership is audited, all partners are notified by the IRS. Each partner controls the conduct of the audit and extends the statute of limitation by separate agreement with the IRS. Consolidated partnership audit procedures require partnership items to be examined at the partnership level, not the partner level, and the IRS cannot examine the partnership’s allocation of items as part of the audit of an individual partner. The rules also state that partners must report items consistently with how the partnership treated them.
Partnerships with 10 or fewer partners at all times during the year are exempt from these consolidated audit procedures. However, they can elect to be covered by them, which can make handling an audit much more efficient and less burdensome. The partnership must attach Form 8893, Election of Partnership Level Tax Treatment, or a statement in the same form signed by each partner to the Form 1065, U.S. Return of Partnership Income, for the effective year of the election. The election must be filed by the due date of the return, including any extensions. The election is effective for all future tax years and can be revoked only with IRS consent.
CONFIRMING STATE TREATMENT
These elections may significantly influence tax planning. Also, practitioners should be aware that many states accept elections made at the federal level but should confirm such treatment.
By C. Andrew Lafond, CPA, DBA, ( email@example.com ) assistant professor, The College of New Jersey, and Jeffrey J. Schrader, CPA, MST, ( firstname.lastname@example.org ) shareholder in Jeffrey J. Schrader, CPA, PC, Trenton, N.J.
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