Tax Newsletters

Basis of Stock in an S Corporation

In a C corporation, a shareholder's basis in his or her stock is generally its cost. However, in an S corporation, items of income taxed to shareholders increase their basis, while distributions decrease their basis.

Work-Related Education Expenses

If you are an employee, you may be able to deduct the costs of qualifying work-related education, but only if you itemize instead of taking a standard deduction. The deduction allowed would be the amount by which your work-related education costs plus other job and certain miscellaneous expenses exceed two percent of your adjusted gross income. If they don't exceed this floor, no deduction is allowed. If you are self-employed, you may deduct the costs of work-related education directly from your self-employment income.

Evidence

Under a new provision of the Internal Revenue Code, the general burden of proof is on the Internal Revenuw Service with respect to factual issues in certain situations. Under the statute, if the taxpayer is generally law-abiding, it is the responsibility of the IRS to show that the taxpayer's determination of his own liability was not correct. The burden is on the IRS if the taxpayer can show that he has complied with all the substantiation requirements, has maintained all records required by the Code, has cooperated with all IRS reasonable requests for witnesses, information, documents, meetings, and interviews, and meets certain net worth requirements.

Drilling and Exploration Costs

The costs of developing oil, gas, or geothermal wells include wages, fuel, repairs, hauling, and supplies incident to and necessary for the preparation of the wells. A taxpayer who is developing these wells in the United States has the choice of treating the costs as capital expenditures and recovering them through depreciation or depletion or deducting the costs as current business expenses. If the costs of determining the existence, location, extent, or quality of any mineral deposit lead to the development of a mine, they are usually treated as capital expenditures and recovered through depletion as the mineral is removed from the ground. However, the taxpayer can choose to deduct exploration costs in the United States paid or incurred before the development stage began. This rule does not apply to oil, gas, or geothermal wells.

Cancellation of Certain Student Loans

The general rule is that if you are responsible for making loan payments and the loan is forgiven, you are required to include the amount of the cancelled loan in your gross income for federal income tax purposes. However, under certain circumstances, a forgiven student loan may be entitled to tax-free treatment.