mastering 1099-b reporting on schedule d and form 8949...

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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

FOR LIVE PROGRAM ONLY

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Aug. 1, 2017

Mastering 1099-B Reporting on Schedule D and Form 8949

Jolaine L. Hill, CPA, Director

Katz Sapper & Miller, Indianapolis

[email protected]

mailto:[email protected]

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.

The information presented herein is general in nature and

should not be acted upon without the advice of a professional.

© 2017 KSM Business Services, Inc.

Mastering 1099-B Reporting on

Schedule D and Form 8949: Meeting

Capital Gains Basis Reporting

Challenges

Aug. 1, 2017

Jolaine L. Hill, CPA

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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

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▪ Basis in assets received

▫ By gift

▫ By inheritance

▫ By distribution from an entity

▪ Section 1202 small business stock

Agenda

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▪ 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

Background

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▪ Code Section 6045(h) was also added by this Act and

requires reporting for certain option transactions

▫ Effective January 1, 2013

Background

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▪ 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

Definitions Related to Basis Reporting

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▪ 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


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▫ 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


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▫ 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 1091


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Form 8949

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▪ 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 8949

- 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

Form 8949 Adjustments

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▪ 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


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▫ 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


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▪ 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


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▫ 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

- 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.

▪ Code D

▫ You received a Form 1099-B showing accrued market

discount in Box 1F


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▫ 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.


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▪ 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.


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▪ 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.


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▪ 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 $100,000.


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▪ 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 1099-

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.


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▪ 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


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▪ 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


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▪ Code O

▫ You have an adjustment not explained under any other

codes

▫ Enter the appropriate adjustment in Column G


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▪ 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 8949

- For example, a taxpayer has five brokerage accounts that have sale

transactions. Each brokerage account can be listed as a line item on

Form 8949. Transactions will still need to be reported as short term

or long term and covered and noncovered.

Reconciliation of Multiple Form 1099-Bs

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Reconciliation of Multiple Form 1099-Bs

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▪ 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

Wash Sales

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▫ 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

Wash Sales

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▪ 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

Wash Sales

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- 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

Wash Sales

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- 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

Wash Sales

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▪ 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

High Volume Traders

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▪ 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

High Volume Traders

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▪ 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.

Mark-to-Market Election

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▪ 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.


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▫ 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


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Mark-to-Market Sample Election

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▪ 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

Bond Amortization

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▫ 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

Bond Amortization

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Bond Amortization Sample Election

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▪ 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

Bond Amortization

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▪ 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

Sale of Publicly Traded Partnerships

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▪ 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 8949

- The ordinary gain element is reported on Form 4797, Part II

- Any remaining gain or loss on the sale is reported on Form 8949


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▪ 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 $500


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▪ 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 $1,200


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Basis For Real Estate Transactions

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▪ 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


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▪ 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

Basis in Property Received by Gift

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▪ 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

Basis in Property Received by Inheritance

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▪ 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, 2015

Basis in Property Received by Inheritance

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▪ 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

Basis in Property Received from an Entity

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▪ 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

Section 1202 Small Business Stock

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▪ 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, 1993

- 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


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- 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


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» 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


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Questions?

Jolaine Hill

P 317.580.2446

E [email protected]

mastering 1099-b reporting on schedule d and form 8949...

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