2024 Year-End Seminars: Questions & Answers
Note To All: We did our best with the questions posed at the five Year-End Webinars. There were a few where additional information was needed and could not be addressed fully. Also note the CHANGE to the BOI -Corporate Transparency Act
We left all the questions intact as posed – but please know that the injunction has been overturned. See the section on The Corporate Transparency Act (in red) for the current information as of December 24, 2024.
Form 7203
Q1. In an instance of negative capital account does the client need to recognize income to bring that to positive (assume no partnership debt)?
A1. Possibly. However, there may be other factors that need to be considered.
Q2. Please clarify – the capital account (Schedule L) must be on a tax basis? So, does the partnership has to keep track of all partner’s tax basis?
A2. The partnership has to keep track of all partner’s tax basis. And that is the partners responsibility.
Q3. On 7203 you need the # of shares. What do you recommend entering if LLC electing S-Corp for tax? The company did not issue shares at startup.
A3. Generally, you can start by allocating a number of shares to each based on the agreement. A.J. suggested starting at 100 shares if none are specified.
Q4. The instructor stated that the failure to act IS binding but I think he said can’t hold partnership responsible. Please clarify.
A4. A partnership representative is primarily responsible for acting on behalf of a partnership and its partners in all matters related to tax audits with the IRS, including entering into settlement agreements, making decisions on tax payments, and agreeing to final partnership adjustment notices, essentially serving as the sole point of contact with the IRS during an audit process; they have broad authority to make binding decisions without necessarily consulting individual partners.
The partnership representative has sole authority to act on behalf of the partnership in an audit or tax examination. The partnership’s direct and indirect partners are bound by the actions of the partnership representative. The partnership representative is not required to consult or receive approval from the partners. The partnership representative can bind both current and former partners, who do not have the right to receive notice of or participate in the proceedings.
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- 6223(b) Binding Effect
A partnership and all partners of such partnership shall be bound—
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- 6223(b)(1)
By actions taken under this subchapter by the partnership, and
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- 6223(b)(2)
By any final decision in a proceeding brought under this subchapter with respect to the partnership.
Q5. Let’s say you get a new client with an existing partnership/Scorp and they have no idea of their basis?
A5. You will need to reconstruct as best you can. I would start with prior returns and back into basis as best you can.
Q6. So, I think we can allude to the fact that if I guarantee partnership loans the at risk is reflected in Outside basis?
A6. That is correct.
Q7. Is S Corporation required to give the 7203? My darn software says it is filed with the individual return, so it shows up on the individual filing, but it is not on the S Corp.
A7. Just the individual 1040 that it flows through.
Q8. My basis worksheet does not subtract out the nondeductible meals and penalties, isn’t this supposed to calculate like it does on the K1?
A8. A partner’s capital account decreases by allocations made to him for nondeductible, noncapitalizable expenditures by the partnership. The expenditures do not reduce partnership taxable income, but they must reduce the partners’ capital accounts because they reduce the cash available to make distributions.
Entity Selection
Q1. Isn’t entity choice a legal determination?
A1. Yes, and in many cases the attorney is the one who sets up the entity on the advice of the tax preparer. Many times, individuals do not know the type of entity that will fit the business, and several factors must be considered. The attorney will then set up the business, but many attorneys work with a tax professional and once the setup is accomplished the tax preparer then files the required returns. Or the attorney will be the once who assists the client in filing.
FinCen BOI Filing – Corporate Transparency Act
BOI Update Alert: Appeals Court Reinstates BOI Filing Requirement
The 5th Circuit Court of Appeals has granted the government’s emergency motion to stay a Texas district court’s nationwide injunction against the Corporate Transparency Act (CTA). CTA requires nonexempt companies to report their beneficial owners. Before the Texas court’s injunction, specified businesses formed prior to 2024 were required to file their initial beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) by Jan. 1, 2025, and new businesses were required to file within 30 days.
The stay means the CTA is now in effect. The court found that the government is likely to succeed in appealing that leaving the injunction in place could cause significant harm, and that the public interest in preventing financial crimes outweighs any harm to the plaintiffs. The case will proceed quickly to the next available oral argument panel. FinCEN has yet to issue a response to the 5th Circuit’s order.
In its budget discussions last week, Congress did not extend the BOI compliance deadline for existing businesses to Jan. 1, 2026, so the original deadline of Jan. 1, 2025, remains in place. As a result, the 5th Circuit’s decision has immediate implications for affected businesses.
As we previously advised, it is best to file these reports as soon as possible given the few remaining days left before the Jan. 1, 2025, due date.
We will continue to monitor developments and alert you to any changes or updates as they occur.
Q1. Concerning the filing of BOI documents. We are a law firm that assists the client in establishing their LLC or Corp. We file their biennial reports with the Secretary of State, so it is only natural for us to assist the client to file this requirement with FinCen.
A1. This is perfect for the client but check with your insurance provider to make sure BOI filings are covered under the umbrella of insurance. Some insurance companies are not covering this under the liability coverage.
Q2. Is there a gross income threshold requirement to be classified as a reporting company?
A2. None that I am aware of. If the company is a Corporation, LLC, Single Member LLC, Partnership or an S Corporation have a filing requirement as they are set up with the Secretary of State.
Q3. What’s the likelihood of the penalties being abated if the CTA Report is filed late?
A3. The likelihood is whether you had reasonable cause, and you made a good faith effort to comply with these rules. The penalty has a “willful” attachment, so chance of IRS proving willfulness will be hard.
Q4. LLC created June 2020 administrative dissolution May 2021. Complied with all other #23 rules for non-reporting. Does it need to report BOI?
A4. No reporting needed
Q5. Do you know if an updated BOI report will need to be filed for renewed or updated driver’s license?
A5. It depends upon what information was updated on the driver’s license. If the address changed … yes. If the only purpose of the renewal is expiration of the license and all of the information remained the same (except for dates of validity), then no update BOI.
Q6. Is there any chance that the BOI deadline is delayed past December 31st?
A6. In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports. NOTE: This session was conducted before FinCEN announced the nationwide preliminary injunction, see below.
On Tuesday, December 3, 2024, in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.), a federal district court in the Eastern District of Texas, Sherman Division, issued an order granting a nationwide preliminary injunction that: (1) enjoins the CTA, including enforcement of that statute and regulations implementing its beneficial ownership information reporting requirements, and, specifically, (2) stays all deadlines to comply with the CTA’s reporting requirements. The Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal on December 5, 2024.
Texas Top Cop Shop is only one of several cases in which plaintiffs have challenged the CTA that are pending before courts around the country. Several district courts have denied requests to enjoin the CTA, ruling in favor of the Department of the Treasury. The government continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional.
While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.
Q7. Does a one-man CPA firm have to file for himself, not an LLC or Corporation.
A7. A sole proprietorship is not required to report under CTA. Unless a sole proprietorship was created (or, if a foreign sole proprietorship, registered to do business) in the United States by filing a document with a secretary of state or similar office. An entity is a reporting company only if it was created (or, if a foreign company, registered to do business) in the United States by filing such a document. Filing a document with a government agency to obtain (1) an IRS employer identification number, (2) a fictitious business name, or (3) a professional or occupational license does not create a new entity, and therefore does not make a sole proprietorship filing such a document as a reporting company.
Q8. I have had my S Corp for about 18 years, do I need to file the BOI, or I want to know if all corporation and LLC require to file the BOI before the end of the year.
A8. Please review the injunction information in Q5. First question … unless you have more than 20 employees or gross revenue in excess of $5,000,000 you will need to file with FinCen who the beneficial owner of the S corporation is. Second question … Not all corporations / LLCs are required to file, as there are limited exceptions. For example, a non-profit organization is exempt from BOI reporting.
Q9. Do you need a BOI ID number and why?
A9. You may need a BOI ID number. This is referred to a FinCen Identifier. Once obtained by the BOI, they are responsible for any change notifications.
Q10. What is the threshold of ownership that must be included in the report? Is 10% 15% or more?
A10. 25% or more ownership.
Q11. Can you use a post office box as an address?
A11. No, you cannot, except for individuals that have a special ID disclosure situation.
Q12. The managing partner set up a separate LLC and two of our employees are managing that LLC, how do we file BOIR?
A12. Again, who is the beneficial owner … probably the managing partner.
Q13. Do we need to file BOI for a Company that was closed few years back, but Still Active with the Secretary of state?
A13. When you say still active with the state – I assume that the company is still listed with the Secretary of State and under the title of “inactive or dissolved? If it is still active and has not had any activity, they still have a filing requirement until the company is dissolved. So, an BBOI report would still be required.
Q14. Are CPA forms exempt from BOI filing or is that exemption for the very large CPA firms?
A14. Exemption is available to only large CPA firms … 20 or more employees and $5,000,000 of revenue.
Q15. I thought only Corps had to file and not partnerships.
A15. What companies will be required to report beneficial ownership information to FinCEN? Partnerships are included, there is an exception, but I think all partnership must register with the Secretary of State and if registered must file. Exception is listed in third bullet.
Companies required to report are called reporting companies. There are two types of reporting companies:
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- Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
- Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.
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- If a domestic corporation or limited liability company is not created by the filing of a document with a secretary of state or similar office, is it a reporting company?
- While FinCEN’s BOI reporting regulations define a domestic reporting company as including a corporation or limited liability company, the inclusion of those entities is based on an understanding that domestic corporations and LLCs are generally created by filing a document with a secretary of state or similar office. In an unusual circumstance where a domestic corporation or limited liability company is created, but notby the filing of a document with a secretary of state or similar office, such an entity is not a reporting company.
Q16. So, what do you tell clients that have not done CTA yet?
A16. We are telling our clients about the responsibility to file- however it is your choice- however these rules may change multiple times- nothing is easy.
Q17. I have a client that owns an LLC, sold business in January 2024, name and all. Do they need to file with BOI, or only the new owner?
A17. A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information report.
A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report. This 90-calendar day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.
Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.
Review Q6 in this document under FinCen BOI Filing – Corporate Transparency Act concerning the nationwide injunction.
Q18. Does DOT contact entities re: BOI filing, or are the entities expected to be so informed by the attorney and CPA?
A18. Not that I know of- generally people find out from their attorney or accountant- however FINCEN has done a pretty strong job of getting this out into the media – that being said many will still miss filing. Our firm has told our clients via newsletters -however we do not prepare the form.
Q19. What should my son do if he has created a LLC in the state of Iowa but has since moved to the state of CO and has no income or activity with his LLC?
A19. If an LLC, then once the injunction/court case is finalized depending on the outcome – he would have to file. The law could be overturned. Just note he may have to file depending on the court’s outcome, for now no filing is required. Until the court case is resolved.
Q20. Are sole prop required to file FinCEN?
Q21. If the sole proprietor is an LLC then once this issue has been sorted Is a sole proprietorship a reporting company?
A21. No, unless a sole proprietorship was created (or, if a foreign sole proprietorship, registered to do business) in the United States by filing a document with a secretary of state or similar office. An entity is a reporting company only if it was created (or, if a foreign company, registered to do business) in the United States by filing such a document. Filing a document with a government agency to obtain (1) an IRS employer identification number, (2) a fictitious business name, or (3) a professional or occupational license does not create a new entity, and therefore does not make a sole proprietorship filing such a document as a reporting company.
Q22. Client filed BOI but left off partner on original report, they said it only went to two owners there were three. Should they correct now or wait until the court case gets resolved?
A22. File now – between the class and today December 14, 2024, the injunction has been overturned – for now- I would file as soon as you can with the additional information. See in red at the beginning of this section.
Q23. Do HOA need to file?
A23. Generally YES, bit it depends. Homeowners associations (HOAs) can take different forms. As with any entity, if an HOA was not created by the filing of a document with a secretary of state or similar office, then it is not a domestic reporting company.
An incorporated HOA or other HOA that was created by such a filing also may qualify for an exemption from the reporting requirements. For example, HOAs recognized by the IRS as § 501(c)(4) social welfare organizations (or that claim such status and meet the requirements) may qualify for the tax-exempt entity exemption.
An incorporated HOA that is not a § 501(c)(4) organization, however, may fall within the reporting company definition and therefore be required to report BOI to FinCEN.”
Unless the HOA is very small, meaning only four homeowners if any such HOAs even exist, the individual homeowners will not have to be disclosed as beneficial owners since they will typically not own 25% of the HOA which is the minimum ownership floor.
Q24. I missed how long tax preparers keep tax returns. I am keeping 7 years. Is that too long?
A24. 7 years is good – that way you are covered for any State statute you may not be aware of. This time frame is more that recommended or required by IRS – but remember there are other agencies where a longer time frame may be needed.
Digital Assets
Q1. So, for each individual virtual currency such as bitcoin or ethereum is there just a single blockchain for each one? There’s a separate bitcoin blockchain and a separate ethereum blockchain, but there is only one bitcoin blockchain? Or I guess what you are saying is that it’s basically one spreadsheet with multiple tabs on it for each virtual currency, so all are essentially on the same blockchain?
A1. That is correct. Bitcoin is designed to provide an alternative to physical or fiat currency; Ethereum is intended for complex smart contracts and decentralized applications, which are believed to be part of the emerging (and theoretical) infrastructure of the future of the internet known as Web3. There are four main types of blockchain networks: public blockchains, private blockchains, consortium blockchains and hybrid blockchains. Blockchain technology is an advanced database mechanism that allows transparent information sharing within a business network. A blockchain database stores data in blocks that are linked together in a chain.
Q2. My firm actually provides a crypto/digital currency questionnaire that must be answered by each and every one of our clients before we prepare their returns. It is required by our firm. I have used it for over 6 years now and it puts the burden on the client – not us.
A2. This is an excellent best practice.
Q3. Will this extend to NFT’s and any new versions of digital assets that are created into the future?
A3. Yes
Q4. Since the DA’s are property would the income be required to be reported as Barter Trading within the tax return?
A4. NO – If bartering, than ordinary income
Q5. If he does a large number of referrals, does he risk shifting the nature of his rewards from “Ordinary Income” to some sort of SE income or Royalties?
A5. Possible.
Secure Act 1.0 and 2.0
Q1. Not sure of the issue here but am posting Michael’s answer. This does not agree with the law. The 5-year rule never required annual distributions. Since Congress took away the life expectancy rule, the payoff was that you could wait 10 years. I believe the IRS did not follow the law in these regulations – they wrote a new law. I expect litigation in this area. Once again, a regulatory agency is making its own rules. I am a little surprised you agree with the IRS interpretation because it clearly goes against the law as written.
A1. Unfortunately Deborah I do not agree with your conclusion here. The final regulations follow the Congressional intent of IRC §401(a)(9). I have heard several noted experts in the retirement planning area believe that Treasury and IRS got the right legislative result in the final regulations. Also, Congress had every opportunity to correct or clarify this issue in SECURE 2.0 Act and they did not. I believe any litigation in this area will be fruitless. Michael PS … My opinion, but so far, I have not been wrong on this issue since the release of the proposed regulations in February 2022.
Q2. For the inherit IRA does the beneficiary or the owner need to be 70.5 in age for the QCD? Do both need to be 70.5?
A2. You apply the 70.5 rule to each individual.
Q3. The QDC is for people born after June 15, 1954? Right?
A3. They must be age 70 1/2 when the QCD is made … no exception!
Q4. Please confirm – you can do a QCD from an inherited IRA?
A4. Yes, as long as age limit of 70.5 has been attained.
Q5. Will the RMD’s required by William be based on his own life or his father’s life expectancy?
A5. William’s Life Expectancy. Please refer to the example in the slides.
Q6. Should we be prepared to have IRS letters to our clients or reviews, audits for large amounts of virtual/digital currency?
A6. We include in our engagement letter to make everyone aware. IRS will be auditing issues related to digital currency as we move forward.
Q7. Can an individual withdraw all of the contributions he made over the years from one account, or does he have to withdraw the contribution amount from each of the accounts (Vanguard, Invesco, Fidelity) where he deposited funds? (Has been held for 5 years)
A7. With a Roth IRA, you can withdraw all of your contributions from any single account, regardless of where you originally deposited them, as long as it’s a Roth IRA; you don’t need to withdraw specific contribution amounts from each individual account at Vanguard, Invesco, or Fidelity – you can simply withdraw the total amount of your contributions from whichever account is most convenient for you. You can always withdraw contributions from a Roth IRA with no penalty or tax at any age. At age 59½, you can withdraw both contributions and earnings with no penalty, provided that your Roth IRA has been open for at least five tax years.
Q8. The wife inherited IRA from parents and was grandfathered to old stretch rules. She died and husband now inherited. Can he stretch or does he have to take over 10 years?
A8. Depends on the required beginning date, we would need more info to address. Usually once the distribution starts it cannot be stopped – husband would be a successor beneficiary.
Q9. If a trust is a beneficiary of an IRA whose life is used to compute RMD?
A9. Based on the decedent.
Q10. So, will this be our responsibility to figure RMD’s for our clients?
A10. No, it is the responsibility of the retirement plan. But you need to be aware of any questions the client may have. The client may have received a letter with the amount of RMD but failed to follow through. Planning for when to take additional distributions from the retirement plan is based on the facts and circumstances of the client.
Q11. Can you skip a year for the 10-year rule? As long as taken in the 10 years.
A11. Not if you are required to take RMD. Hence, if decedent died after RBD Beneficiary must take RMD.
Q12. What are the RMD rules if a participant dies before his RBD?
A12. If the owner dies before his or her required beginning date (or at any age, for Roth IRA owners), RMDs to the surviving spouse can be postponed until the later of (1) the year following the owner’s death, or (2) the year of the owner’s required beginning date for RMDs.
Pass Through Entity Tax (PTET)
Q1. Should a PTET election be made prior to year end (via GovConnect Iowa) whether cash or accrual, in order for the entity to deduct the 2024 PTET payments on their federal and state 2024 returns.
A1. Based on cash payments for deductible in year paid. The election was made by due date of return, 4/30 for Iowa.
The Department has modified the Pass-Through Entity Tax (PTET) election deadline for tax year 2023 or later. Detailed guidance is available on the Department’s website at revenue.iowa.gov/pass-through-entity-tax.
PTET election deadline for tax year 2023 or later. The Department has modified the deadline to make a PTET election for tax year 2023 or later. As a result, for any tax year beginning on or after January 1, 2023, the PTET election deadline is the date which is six months after the original due date of a pass-through entity’s IA 1065 or IA 1120S income tax return. Additional information can be found at the Department’s Pass-Through Entity Tax guidance page under Making a PTET Election – “What is the deadline for making a PTET election?”
Pass-through entities that already made a PTET election for tax year 2023 or later. The Department is reviewing all PTET elections for tax year 2023 or later in light of the modified PTET election deadline. No new action is required by any pass-through entity that has already made a PTET election.
Pass-through entities that did not make PTET election for tax year 2023 (or short tax year 2024) – temporary relief. The Department is providing a limited period of time for a pass-through entity to make a PTET election after the deadline for the tax year 2023 (or short tax year 2024) under certain circumstances. Additional information can be found at the Department’s Pass-Through Entity Tax guidance page under Making a PTET Election – “If you did not make a PTET election for tax year 2023 (or short tax year 2024) by the deadline, can you make it after the deadline?”
Penalties and interest. This modification of the PTET election deadline described above does not change the application of penalties and interest. Under Iowa law for tax year 2023 or later, an electing pass-through entity’s IA 1065 or IA 1120S tax return and PTET liability must be filed and paid by the last day of the fourth month following the close of the entity’s tax year (i.e. the “original due date”). Failure to file by the original due date subjects the electing pass-through entity to a 5 percent late file penalty. Failure to pay by the original due date subjects the electing pass-through entity to a 5 percent late pay penalty, plus interest. If the electing pass-through entity pays at least 90 percent of its tax liability by the original due date, the electing pass-through entity will be eligible for an automatic six-month extension to file its return without incurring a late filing penalty, and no late payment penalties will be imposed. Interest will accrue on any amount of PTET not paid by the original due date of the IA 1065 or IA 1120S tax return.
Electronic Filing
Q1. Is the Form 943 able to electronically file if the amended is?
A1. If you file Form 943 electronically, you can e-file and use EFW to pay the balance due in a single step using tax preparation software or through a tax professional. However, don’t use EFW to make federal tax deposits.
Use Form 943X to correct errors you made on Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees. Use a separate Form 943-X for each year that needs correction. Type or print within the boxes. You MUST complete all five pages.
Password Questions
Q1. What are your thoughts on using a password manager such as BitWarden?
A1. We are not familiar with that program, sorry.
WISP/Security
Q1. When using Multi-Factor Identification (MFA) would you use this for just the tax program, or would you use it for other applications, software, or computer access?
A1. We use MFA for computer access, but you could use it for other applications. In addition, MFA should be used to secure client information on a tax pro’s computer or network, but it should also be used to access client information stored within their tax preparation software. MFA is required by law for all companies – not just tax professionals. The size of the company does not matter.
Q2. How do you do a WISP if you are a sole proprietor?
A2. If you are the only person, the process will be simplified- just fill out the basics- do not reinvent the wheel- make it simple.
Form 1099 Issues
Q1. What is the source of the changing in 1099 reporting from $600 to $5,000?
Q2. Do the clients receive a 1099 for real estate sales for these properties that are reported on Schedule C?
A2. Normally they receive a Form 1099-S.
Penalty Abatement
Q1. What is the alternative to first time abatement?
A1. Reasonable Cause
Q2. First time penalty abatement applicable to Form 5472, 5471 and 8865 late filings?
A2. Unknown at this time.
Q3. Since IRS is behind on answering penalty abatement requests, how do you suggest responding to IRS notice CP504 with the intent to levy?
A3. You can call the Practitioner Priory Service and get a hold onto the account. They will only hold for a 30-day day period. Then check the IRS web on “time frames” for correspondence as demonstrated in the webinar.
Irs.gov, then click on Tax Pros in upper right-hand corner, scroll to bottom of page and look for IRS operation Status. This will give you information to advise you client if time frames. https://www.irs.gov/tax-professionals
Q4. I have had IRS not allow First Time? Do I go back and find another person there? ‘
A4. Yes, what was the reason, File form 843 and request!!!! I would try again, the IRS looks at the last 3 years in all accounts to make sure First Time Abatement has not been granted. That is why I also state applying for FTA but I also ask for “reasonable cause” if the client does not qualify for first time abatement. That is just how Kristy does it. Looks like you will need to send a second request – good luck.
Q5. If someone had filed in the prior year and owed a small amount and the IRS assessed a penalty, and we did not use the first time to abate it as it was too small, can we not still use that in a future year?
A5. You can try.
Bipartisan Budget Act (BBA)
Q1. What does BBA stand for?
A1. The IRS notifies the partnership at each stage of a Bipartisan Budget Act (BBA) audit, also called an examination. The partnership, partnership representative, or both will receive notices by mail.
Marijuana – Rescheduling
Q1. What is a Schedule 1 drug?
A1. I assume you are referring to Drug Schedules … Schedule I
Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Some examples of Schedule I drugs are: heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote.
House Flipping
Q1. What is carrying cost?
A1. Real estate taxes, mortgage interest and insurance associated with flipped property.
Q2. Please verify that the Flippers cannot use the new credit for builders of new energy efficient homes
A2. Flipping does not result in a New Home – Therefore credit would not apply.
What type of residence qualifies for these credits? For example, are the credits available for improvements made to a second home or to a home rented by the taxpayer? The credits are available only for certain improvements made to second homes, and the credits are never available when the improvements are made to homes not used as a residence by the taxpayer. For example, landlords can never use these credits for improvements made to any homes they rent out but do not use as a residence themselves. However, if a taxpayer is renting a home as their principal residence and makes eligible improvements, a tax credit may be available to such a tenant. For the Energy Efficient Home Improvement Credit, the following requirements apply:
Can a taxpayer claim the credits for expenditures incurred for an existing home? What about a newly constructed home?
The rules vary by credit.
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- Under the Energy Efficient Home Improvement Credit: a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home or for an addition to or renovation of an existing home, and not for a newly constructed home.
- Under the Residential Clean Energy Property Credit: a taxpayer can claim the credit for qualifying expenditures incurred for either an existing home or a newly constructed home.
Q3. A taxpayer flipping a single house and spends more than one year fixing it up is still eligible for CG on the sale, correct?
A3. Depends on the “intent”. If the intent was an investment, then capital gain treatment would apply. But we must look at intent and whether this is a regular and continuous practice of buying a home, fixing it up and selling. They may flip every two years. We must also look at the length of time, how often they flip homes, etc.
Q4. What is the key difference between a flipper and an investor?
A4. Investors purchase to hold- flippers purchase to fix up and turn into cash.
CPE Credits
Q1. Being from and in Ohio will I get any credit for ethics? I am an Enrolled Agent.
A1. Yes, we are approved for Ethics by the IRS AND in Accountancy Board of Ohio.
Q2. How many Ethics hours does today give us?
A2. 1 hour
Q3. How would mileage figure into Rental Flipping? Assuming 10 different properties are regularly being renovated. If a Dealer would 100% of mileage from principal residence to properties be deductible assuming only 1 property visited on a particular day. Or is this non-deductible commuting? Different if a Dealer vs Investor?
A3. If you are a Schedule C (dealer) I would keep track on a property-by-property basis and capitalize the mileage by property. Does he have Business Use of Home? BUH would make a difference in tracking mileage.
Expiration of the Tax Cuts and Jobs Act (TCJA)
Q1. Do you think the $2,000 child tax credit will be extended?
A1. Unknown at this time, but it is under discussion.
Employee Retention Credit
Q1. Have you heard any update to the IRS enforcement of going after those that filed questionable ERC claims?
A1. The IRS is slowly working through 400,000 claims.
Q2. I’m wondering if you could give some insight on how you’re reporting the ERC credit on amended 1120S returns. We’re finding conflicting information about this that has left us very confused. Multiple sources have said after reducing wage expense by the amount of credit, it also gets reported on K1, line 13G, other credits. We feel like this would basically create a wash for the TP which seems odd. Is this how you’re handling your 1120S amended ERC returns?
A2. Wages paid to an S corporation’s majority shareholder will generally not qualify for the ERC. However, minority shareholders owning 50% or less of the shares may qualify. To be considered eligible for the ERC, the business must pay the minority shareholder as an employee. No one has any experience with this issue, sorry
Q3. I have one client still with penalty removal not approved due to ERC. We went through taxpayers advocate who got us nowhere and then sent complete packet of prior communication and etc. Is there anything else we can do? They forced them to a payment plan 2 years ago and still no movement. Any suggestions??
They received the ERC payment successfully. Our office prepared and filed amended 2021 and original 2022 with this ERC consideration. IRS received and then contacted client, threatened lien, and forced payment plan. They finally removed the penalty in 2022, but made me to go taxpayer advocate who then simply proceeded to make the IRS department to make a determination to which they denied our reasonable cause to abatement penalty, Then I sent to tax court all backup of correspondence. This is 2 years now. And just now I heard from IRS saying they’ll get back to us, almost 6 months just to get that. They qualify, I verified and helped people who filed which was a completely different story.
A3. IRS is moving slow with these types of audits, so a wait and see is best we can do now, unless you want to go to the Local Senator or House member to look into the case. IRS seems to have made the decision they did not qualify so you can ask them to look at the case. You can also request a audit reconsideration look at Publication 3598.
So, I interpret this correctly, you are saying the penalty is not being removed on their personal filing because their business is under audit for their filed, approved and paid ERTC?
The above statement may be the issue. I would go to my Congressional Senator or House Representative and have them look at the case. Advocate MUST take a case from a Congressional Member and work on it.
Dependent and the New PTIN Procedure
Q1. What if the first return accepted with the dependent on it had their own IP-PIN?
A1. The Internal Revenue Service is making it easier for taxpayers to protect their information and avoid refund delays by accepting certain e-filed tax returns that claim dependents who have already been claimed on another taxpayer’s return. This change will benefit filers claiming important tax credits like the Earned Income Tax Credit and Child Tax Credit.
Beginning in the 2025 filing season, the IRS will accept Forms 1040, 1040-NR and 1040-SS even if a dependent has already been claimed on a previously filed return as long as the primary taxpayer on the second return includes a valid Identity Protection Personal Identification Number (IP PIN). This change will reduce the time for the agency to receive the tax return and accelerate the issuance of tax refunds for those with duplicate dependent returns. In previous years, the second tax return had to be filed by paper.
Using an IP PIN is a way for taxpayers to help protect themselves against identity theft. With the new changes being made by the IRS, the IP PIN will also help protect taxpayers when someone fraudulently claims a taxpayer’s dependent. The IRS encourages taxpayers who plan to file early in 2025 to sign up for an IP PIN before Nov. 23, 2024. After that date, the IP PIN system will be offline for annual maintenance until early January 2025.
Signing up now ensures taxpayers are ready to file electronically at the start of the 2025 tax season with an additional safeguard against identity theft and helps avoid issues involving dependents being claimed on multiple tax returns.
The IP PIN will have greater value during the upcoming filing season. That’s because the IRS will continue to reject e-filed returns claiming dependents who appear on a previously filed tax return unless a valid IP PIN is provided.
In this scenario where the dependent has already been claimed on another tax return, the IP PIN provides an important new option. The taxpayer listed first on an e-filed tax return claiming dependents can provide their current year IP PIN when they file. If they do, the return will still be accepted. The spouse (if married filing jointly) and the dependents on the tax return don’t need to provide an IP PIN if they don’t have one.
Taxpayers who do not have IP PINs will have their e-filed returns rejected if one of their dependents has already been claimed by another taxpayer. However, if the taxpayer obtains an IP PIN and e-files again with the IP PIN entered on the return, the IRS will accept the return assuming there are no other issues with it. Taxpayers will also still have the option to paper file returns with duplicate claims for dependents. An IP PIN will be required when claiming duplicate dependents or children on Forms 1040, 1040-NR and 1040- SS. It will also be required on Forms 2441, 8863 and Schedule EIC that are attached to Tax Type Form 1040.
Tax returns claiming duplicate dependents for prior years (Tax Years 2023 and 2022) must still be filed by mail if the dependents have been claimed on another return.
Anyone who has an SSN or Individual Taxpayer Identification Number (ITIN) and is able to verify his/her identity is eligible to enroll into the IP PIN program.
Q2. IP PIN overrides a Form 8332?
A2. We have no information on this issue. IRS will need to address.
Q3. If I cannot validate my identity or access my Online Account, how else can I participate in the IP PIN Program?
A3. There are two alternative methods to receive an IP PIN:
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- If your adjusted gross income is below $84,000 for individuals or $168,000 for married filing joint, you can file Form 15227, Application for an Identity Protection Personal Identification Number
- If you are ineligible to file Form 15227, you may schedule a visit at a Taxpayer Assistance Center to request an IP PIN. You can find the TAC office closest to you with our Taxpayer Assistance Locator tool or call 844-545-5640 to schedule an appointment.
Do I include my dependent’s IRS issued IP PIN on my federal tax return?
This is determined by how you file.
E-file return
If you claim one or more dependents that have an IP PIN, you must enter their IP PIN on the following e-file tax forms:
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- Form 1040, Individual Income Tax Return, series
- Form 2441, Child and Dependent Care Expenses
- Schedule Earned Income Credit
Your e-file return will be rejected if you fail to enter a dependent’s IP PIN.
Note: If someone can claim you on their tax return as a dependent and you have an IP PIN, you must share your IP PIN with them if they e-file.
Paper return
You don’t need to enter an IP PIN for your dependent(s) when filing a paper tax return.
Note: There is a place on the tax form for IP Pin for a dependent. For a time limited who could get an IP PIN to certain states that had high incidents in ID theft. Now it is open nationwide. Form 15227.
Q4. If the IPPIN over-rides SSN duplication how will the IRS regulate that since they have been of the opinion for several years that they won’t adjudicate those disputes.
A4. We will have to wait and see how IRS will administer the program.
Miscellaneous Questions
Q1. Taxpayer started a sailboat racing business three years ago, with the goal to be a professional racer with sponsors. He has used go fund me to underwrite his business and as a result has generated a loss three years in a row. He was in the marine Corp reserve during this time. Can he continue to take a loss?
A1. First what type of entity? This could be considered a hobby. The go fund me amounts received would be income, did that get picked up? The burden of proof is on the client to be considered a business. The IRS states there must be a profit motive and the business benchmark used by the IRS is the “3-out-of-5-years” rule. According to this rule, a business activity is presumed to be for-profit if it has made a profit in at least three of the last five tax years. For horse breeding, training, showing, or racing, this period extends to two out of seven years. More than likely, I would look more closely at the facts and circumstances and check out the 9 rules for hobby income. If he is a hobby he cannot take the loss.
Q2. The client has a sole owner, LLC and two Sub S accounts. None have earned any income or had expenses for several years but we have continued to file returns with the IRS with zero’s as client does not want to lost his status or his federal IDs. Is it necessary to continue to file this way or is it required indefinitely?
A2. The instructions are not totally clear- Who Must File
A corporation or other entity must file Form 1120-S if (a) it elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. After filing Form 2553, you should have received confirmation that Form 2553 was accepted. If you didn’t receive notification of acceptance or nonacceptance of the election within 2 months of filing Form 2553 (5 months if you checked box Q1 to ask for a letter ruling), please follow up by calling 800-829-4933. Don’t file Form 1120-S for any tax year before the year the election takes effect.
A corporation or other entity must file Form 1120-S if (a) it is elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. After filing Form 2553, you should have received confirmation that Form 2553 was accepted. If you didn’t receive notification of acceptance or nonacceptance of the election within 2 months of filing Form 2553 (5 months if you checked box Q1 to ask for a letter ruling), please follow up by calling 800-829-4933. Don’t file Form 1120-S for any tax year before the year the election takes effect. The instructions imply to me that we must file every year. As long as the IRS records show a filing requirement, I would continue to file annually. CTA would also be a filing requirement.
Q3. If you are an investor and the property is not a rental, why would there depreciation?
A3. We would not depreciate it if it is not rental.
Q4. Multiple attorneys are setting up intentionally defective grantor trusts and arguing that the step up still occurs upon death. Also, they have attorneys setting up partnerships with taxpayer and their adult children and transferring the taxpayers investment accounts and residence into the partnership. Again, arguing they get step up upon death.
A4. This issue was referred to Michael for further private discussion with whom posted question. The IRS recently published Rev. Rul. 2023-2, which publicly announced that the Service will be challenging a basis step-up for assets in intentionally defective grantor trusts (IDGTs). The ruling concludes that if the assets of an IDGT are not included in the grantor’s gross estate upon his or her death, those assets do not get a basis step-up. There is clearly no authority for the step-up basis.
The slide you are referring to with respect is CCA 202352018? In this CCA IRS ruled that trustee’s modification with beneficiaries’ consent of irrevocable trust, to add tax reimbursement clause providing trustee discretionary power to make distributions of income or principal in amount sufficient to reimburse grantor for income tax attributable to inclusion of trust’s income in grantor’s taxable income, would constitute taxable gift by beneficiaries. This relates to intentionally defective irrevocable trust. The purpose of such a trust is to make highly leveraged transfers to beneficiaries.
Q5. If an LLC has a rental that turned into personal use only and that is the only property in the LLC, are they still required to file a 1065 since it is now personal? LLC is still in existence but has no income, do we have to file a return?
A5. Until they file a final return the 1065 will be open, if no income it will be a 0 return, but do not forget to adjust basis upon conversion reducing the basis of home by depreciation. IRS may still be expecting a return to be filed as they do not know the LLC is closed.
Q6. We are looking more for a discussion related to Rev Rul 2023-2 and the many attempts by attorneys to create Medicaid protection trusts and still get step up in basis up on death.
A6. I am unsure of the application of Rev Rul 2023-2’s to Medicaid protection trusts. My experience with this trust relates to the use of intentionally defective grantor trusts, often used by super high wealth taxpayers. This is beyond our discussion today.
Q7. I am not an enrolled agent; I had a Form 8821 on file with the IRS. Called in regarding a client tax issue. IRS agent said they couldn’t talk to me without a Form 2848. Is there an option you would recommend?
A7. My first question is whether you are licensed. You stated in an addition message you were a Registered Tax Return Preparer. I assume you have kept the registered tax return preparer and have kept up with the required CPE. If so, look at Form 2848 Section “h” below. You would use this form for representation.
Limited representation rights.
Unenrolled return preparers may only represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the Internal Revenue Service (including the Taxpayer Advocate Service) during an examination of the tax period covered by the tax return they prepared and signed (or prepared if there is no signature space on the form).
Unenrolled return preparers cannot represent taxpayers, regardless of the circumstances requiring representation, before appeals officers, revenue officers, attorneys from the Office of Chief Counsel, or similar officers or employees of the Internal Revenue Service or the Department of the Treasury.
Unenrolled return preparers cannot execute closing agreements, extend the statutory period for tax assessments or collection of tax, execute waivers, execute claims for refund, or sign any document on behalf of a taxpayer.
Unenrolled return preparers must possess a valid and active Preparer Tax Identification Number (PTIN) to represent a taxpayer before the IRS, and must have been eligible to sign the return or claim for refund under examination.
For returns prepared and signed after December 31, 2015, the unenrolled return preparer must also possess (1) a valid Annual Filing Season Program Record of Completion for the calendar year in which the tax return or claim for refund was prepared and signed, and (2) a valid Annual Filing Season Program Record of Completion for the year or years in which the representation occurs. (An Annual Filing Season Program Record of Completion is not required for returns prepared and signed before January 1, 2016.)
If an unenrolled return preparer does not meet all of the representation requirements, you may authorize the unenrolled return preparer to inspect and/or receive your tax information by filing Form 8821. Filing Form 8821 will not authorize the unenrolled return preparer to represent you.
I passed the Registered Tax Return Preparer test. What about me?
Those who passed the Registered Tax Return Preparer test and certain other recognized national and state tests are exempt from the six-hour federal tax law refresher course with test. You need 15 hours of continuing education each year to obtain an Annual Filing Season Program – Record of Completion.
Note: Exempt individuals (including former registered tax return preparers) must also consent to the Circular 230 obligations to officially participate in the Annual Filing Season Program.
Q8. I need a PTIN for my office manager who is not a tax preparer but needs a PTIN for power attorney can you help we tried online?
A8. Use the paper Form W-12.
Q9. What was the time from for refunds of deceased taxpayer’s spousal returns? You mentioned this earlier.
A9. About 12 months.
Q10. Are energy efficient roofing included in residential energy credit?
A10. No, roofing is no longer eligible for energy credits.
Q11. Concerning the residency energy credit…If someone received FEMA money must they reduce the cost of the windows, doors and/or furnace to use the credit? Or can we take the full cost?
A11. The question is to generic – generally FEMA money is not taxable and is for specific purpose FEMA assistance is not intended to replace the full value of damaged items or restore a home to its pre-disaster condition. The amount of FEMA assistance you receive is based on the damage observed during a FEMA inspection. Rebates, subsidies and state efficiency incentives – if you look at FAQ it depends on the facts and circumstances. The money was free and not taxable, my gut says no double dipping, as it did not really cost them at all unless the amount granted did not cover the full cost.
Q12. Question off the present topic: Can a husband and spouse have both a HRA and HSA?
A12. The answer is yes, you can under specific circumstances. Per IRS regulations, four special-purpose HRAs are compatible with simultaneous HSA ownership. To better understand how the accounts can work together, let’s look at the basics, compatible plan types, and the advantages of simultaneous enrollment.
Can I use my HSA, HRA and FSA together?
Using your HSA, HRA or FSA in combination may or may not be possible depending on your circumstances. There’s no easy or “right” answer. It gets tricky due to the possibility of double-dipping. Let’s go over how it works.
Using an FSA + HRA together
You can use an FSA and HRA together. If you have an FSA, expenses typically come from that account first. Funds from the HRA are then used to cover other medical expenses.
Using an FSA + HSA together
It’s uncommon to have an FSA and HSA at the same time, but not impossible. One exception to this rule is pairing an HSA with a limited-purpose FSA (also called an HSA-compatible FSA, or post-deductible FSA). In this case, you can use your limited-purpose FSA only for certain expenses, like dental or vision care, until you reach your health plan’s deductible. By tapping into your limited-purpose FSA first, you can save more of your HSA dollars for future expenses.
Using an HRA + HSA together
You can use an HRA and an HSA at the same time if you are enrolled in a high deductible health plan (HDHP), but the IRS has specific rules as to how they work together. For example, you can’t use HSA funds to cover medical expenses that were reimbursed by your employer in an HRA. You can also use them together if you opt out of your HRA reimbursement of qualified medical expenses (you can keep reimbursement for premiums)
Key – No double dipping.
Q13. Rather than providing a loan to your own Sub S Corporation, you provide a gift – no repayment needed. Can this happen? Is this legal – providing more to basis? Just a thought. In addition, what kind of documentation – a statement at a board meeting – could this do it?
A13. As I read this, I would suggest you consult an attorney to make sure there are no state issues related to this.
Yes, you can provide a “gift” of money to your own S corporation, meaning you do not expect repayment, but it’s important to clearly document the transaction as a gift to avoid potential issues with the IRS, as they might reclassify it as a loan if proper documentation isn’t present.
Consulting the board that it would be a start – but I would get some sort of notarized document that you do not expect repayment.
Q14. How long do you retain Form 8879’s? We shred in 5 years.
A14. Retain the completed Form 8879 for 3 years from the return due date or IRS received date, whichever is later.
Q15. Do we think that §274 meals will be allowed at 50% in 2026?
A15. Meals will remain at the pre 2018 amounts at 50% as of now – but only Congress knows what they intent in the future. Over the Road truckers 80%.
As for Employee Business expense, with the sunset of TCJA it will revert to Sch A Itemized Deduction.
Q16. Do we strive to make certain income active? Is rental always passive for NIT?
A16. In most scenarios, the IRS classifies rental income as passive income, but there are exceptions. If the rental property owner qualifies as a real estate professional by dedicating at least 750 hours yearly to real estate work, with over 50% of their overall work in real estate.
Nice writeup by Tax adviser.
Q17. Ag issue. Residual Soil Nutrients. Comments on cash rent vs crop share? You bought the land. § 180 says some things can be amortized.
Good reference.
Q18. Can I 1031 one hog confinement for another. Issues maybe 1245 vs 1250. Special purpose facility.
A18. 1245 does not qualify
Q19. Is there somewhere that we can send clients to in order for them to verify dealers are registered?
A19. Unfortunately, none that I am aware of at this time.
Q20. Mechanically what happens to the retained earnings and loans when the C Corporation is converted to the S Corporations? How does the owner get the money out after 5 years? In addition, mechanically how do you do this for a 50/50 husband and wife Corporation if H dies. Is the k-1 with the gain on the 1041 and the subsequent loss on liquidation also on the 1041 and they offset – or do you need it to flow through on the 1040 by making wife the owner of H’s 50%?
A20. This is an accounting question, and a tax question. Not enough information to address.
Q21. Is the Form 15400 form required for any of the vehicle credits? Is that used vehicles too?
A21. Yes, as far as I currently know.
Q22. If you have an S Corporation and the owner is selling all the assets and closing the corporation down, does he have to take a wage during this time? I have a client that does not want to do this.
A22. The S Corporation is required to pay wages for services provided that are reasonable for the business. No wages, IRS does look at but depends on the facts and circumstances.
Q23. If in this S Corporation that is closing, the partner wants to keep one asset, but it is totally depreciated out, does this have a value when distributed out if the basis is zero? In your example with the A/B above and the 20K FMV of an asset, I have a partnership with 3 members and all assets fully written off. If they split the assets between them accordingly, is this considered a sale to them at the FMV too? At the last seminar, they said this is just a transfer to the partner at the basis the partnership had?
A23. When appreciated property (property that has an FMV in excess of its adjusted basis) is distributed, gain is recognized in the same manner as if the S corporation had sold the property to the shareholders at its FMV (§ 311(b) via § 1371(a)). The gain passes through to the shareholders and increases their basis in their stock. No loss is allowed, however, if the distributed property has an FMV that is less than the corporation’s tax basis in such property. (§ 336, a loss can be recognized if the distribution is in liquidation of the corporation.) The shareholder’s basis in the distributed property is its FMV (§ 301(d)).
Example 1: A and B each own 50% of A&B Inc.’s stock. Each shareholder wants to receive a distribution of $20,000, but the corporation does not have the cash available to make the distributions. A suggests that A&B distribute $20,000 cash to him and a fully depreciated piece of equipment worth $20,000 to B. (The equipment originally cost $50,000.) A&B has been an S corporation, and A and B have been shareholders, for 12 years. A&B has not previously merged with another corporation.
If the equipment is distributed to B, a gain of $20,000 (FMV of $20,000 less basis of zero) will be recognized at the corporate level. All of the gain will be subject to tax as ordinary income due to depreciation recapture (Sec. 1245). It will be passed through so that A and B each will report $10,000 of income from the deemed sale. B will be considered to have received a $20,000 distribution, and the tax attributes of the distribution will be determined as if the distribution had been made in cash. B’s basis in the equipment will be its $20,000 FMV, so if she sold it for $20,000, she would recognize no gain or loss from the sale (§ 301(d)).
Partnership assets are transferred and then when sold by partner, sale recorded by partner using basis from 1065. NO gain until sold.
Q24. I have an LLC that changed into an S Corporation for 2024, he has written off all assets each year, thus the assets moving into the S Corporation have zero basis. Is this a situation where you file a 743 b? Do the assets get entered in at fair market value and the difference is added to the stock contributed?
A24. This is not a 743(b) issue.
Q25. Has the IRS made any statement about the payments that got frozen for over a year and the need to go back and amend returns that may have had their 3-year statute “Expire” before payments were received.
A25. Review §§ 6501 and7405(b).
Q26. I have a client who owned 40 rental properties. Had a stroke and put properties from his name into LLC, then LLC into Trust and then Trust into son & daughter before he died. Reported on 1065. I am thinking step up is lost and the attorney involved should call his carrier.
A26. Kristy is correct in her statement on this Depending Revocable or Irrevocable and how funded. Whether trust beneficiaries receive a stepped-up basis at death depends on the type of trust and how the assets are structured:
Revocable Trusts
Assets in a revocable trust are always eligible for a stepped-up basis at the grantor’s death. This means that the assets are transferred to the beneficiaries at their current market value.
Irrevocable Trusts
Assets in an irrevocable trust are not eligible for a stepped-up basis unless they are included in the grantor’s gross estate at death. This can happen if the trust has certain provisions or is of a certain type.
Q27. What did you do for land value for a Condo if anything?
A27. I look at the counties property records. They value the Condo and the land separately. Using those figures, I can back into an amount for the land.
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