Income tax thread 3.0

[1962siia]

Yes you will!

Be sure to keep in mind the rules around mixed use (personal and business) property; for example, a vehicle that you use personally and in your business. This is also known as "listed" property. All the off the shelf software I've ever used will guide you through these rules.

Use schedule C to report your income and deductions as a sole proprietor. You will probably need to make estimated payments if you are profitable and don't forget to budget for "self employment" tax (i.e., the employer portion of social security, medicare, and certain state payroll taxes).

That what I thought! Thanks. How long can I run that schedule c at a loss before I start setting off irs red flags? Thanks again!

Daniel

 

[Owensdad]

That what I thought! Thanks. How long can I run that schedule c at a loss before I start setting off irs red flags? Thanks again!

Daniel

Good follow up question and my original response was incomplete...

To deduct losses from your instructor business against other earned income you generally need to be profitable 3 out of 5 years (2 out of 7 for race horse breeding, thank the equine lobby for that gem).

The policy reason is that "hobby" losses should not offset other income.

 

[Holeshot]

In Hobby Loss, is that any 3/ 5 year period?

 

[Poxy]

I've been using TurboTax, and think I've found a flaw:

I am a 33% owner of a property that I rent out, but receive 100% of the rental income. TurboTax asks "What is your income from the rental property?" then asks "What percentage owner are you in this property?"

When I enter $x for my rental income, and then enter 33% for the percentage, TT seems to calculate that I owe taxes on 1/3 of my total rental income. It's as if they didn't take into account that a person could receive 100% of the income while only owning 33% of the property. It's as if there should be a third question, "What percentage of this income did you receive?"

This works out great for me, since according to TT I get 2/3 of the rental income tax free, but I'm one of those weirdos that doesn't cheat on my taxes....that being said I take every opportunity to legally avoid them.

So the question is: Is TT making a mistake, or is this a lucky loophole for me? I assume the former.

 

[Owensdad]

I've been using TurboTax, and think I've found a flaw:

I am a 33% owner of a property that I rent out, but receive 100% of the rental income. TurboTax asks "What is your income from the rental property?" then asks "What percentage owner are you in this property?"

When I enter $x for my rental income, and then enter 33% for the percentage, TT seems to calculate that I owe taxes on 1/3 of my total rental income. It's as if they didn't take into account that a person could receive 100% of the income while only owning 33% of the property. It's as if there should be a third question, "What percentage of this income did you receive?"

This works out great for me, since according to TT I get 2/3 of the rental income tax free, but I'm one of those weirdos that doesn't cheat on my taxes....that being said I take every opportunity to legally avoid them.

So the question is: Is TT making a mistake, or is this a lucky loophole for me? I assume the former.

Going to need more details.

The key question is how is it that your 33% ownership in the property entitles you to a 100% interest in the income it generates?

What do the other owner own, the underlying property? Do you own this interest through a partnership where you receive a special allocation? If so, do your partnership allocations have "substantial economic effect"? Do you get a K-1 for this interest?

In a partnership context, items of income, expense, deduction and credit, etc., can be specially allocated to a specific partner, but these special allocations must have economic effect (meaning the partner to whom they are allocated must also bear the actual economic benefits and burdens, such as increased tax liability) or they will be disregarded.

In general, if you are entitled to 100% of the income stream, your *taxable* share of the income is almost certainly 100%.

 

[Owensdad]

In Hobby Loss, is that any 3/ 5 year period?

This is the safe harbor rule. An activity is assumed to be "for profit" if it realized a profit in 3 out of the last 5 years.

For new businesses that do not have sufficient experience to meet the safe harbor test, you can elect to have this test applied after 5 years, or you can assert that the activity is factually for profit, a qualitative test that is subject to IRS challenge.

Making the election will automatically extend the statute of limitations on each year in the 5 year period until 2 years after the due date of the return for the last year in the 5 year period.

 

[Poxy]

In general, if you are entitled to 100% of the income stream, your *taxable* share of the income is almost certainly 100%.

That's what I thought.

Thanks!

 

[Owensdad]

That's what I thought.

Thanks!

It's a cold comfort, but this seemes intuitively correct, agree?

That said, there may be planning opportunities in your fact pattern.

 

[Poxy]

It's a cold comfort, but this seemes intuitively correct, agree?

That said, there may be planning opportunities in your fact pattern.

Yes, I knew there was something wrong with that. I do in fact have a strategy, but it's a long boring story.

Thanks for confirming!

 

[Holeshot]

Thanks Sam!

 

[Owensdad]

Yes, I knew there was something wrong with that. I do in fact have a strategy, but it's a long boring story.

Thanks for confirming!

Oddly, I'm riveted by tax planning strategies so boring they bring tears. :laughing

Last comment... I'd be wary of using off the shelf software to implement any tax advantaged plan, especially where interests in property (usually determined under state law) are in play.

The best planning in the world is worthless if it doesn't hit the return correctly.

Happy to help/muddy the waters.

 

[kpke]

Thanks for doing this.

My son is off to college next fall.

Can we write off 2013 expenses for SAT, college application fees, other related "educational" stuff that makes you go broke?

I know, we still have to pay the big $$$$$ for tuition but every little bit helps.

I think I know the answer:thumbdown

 

[Cycle61]

How to recapture losses in overseas investments, potentially purchased with cash?

 

[Owensdad]

Thanks for doing this.

My son is off to college next fall.

Can we write off 2013 expenses for SAT, college application fees, other related "educational" stuff that makes you go broke?

I know, we still have to pay the big $$$$$ for tuition but every little bit helps.

I think I know the answer:thumbdown

Expenses required to *enroll* in an eligible educational institution are typically not deductible.

However, once enrolled, deductible expenses include tuition, fees and other expenses (books, lab fees, etc.).

Room/board, transportation, and living expenses generally do not qualify. Also, qualified expenses paid with tax-free (certain tax free grants and scholarships, for example) are also not deductible.

There are limits on the deductible amount and qualified expenses must be paid by you (or your spouse if MFJ), a student that is your dependent, or a qualified third party (e.g. a relative).

 

[Owensdad]

How to recapture losses in overseas investments, potentially purchased with cash?

Hmmm... need a few more details here. What do you mean by "recapture losses"? In the tax community, "recapture" usually means recognizing additional income for a previously deducted loss upon a subsequent event.

In the personal context, there is generally no recapture for a recognized foreign loss. For example, a capital loss on a foreign investment is still a capital loss, subject to the normal capital loss limitations.

In the corporate context, there are many recapture provisions for such losses. These often involve "dual consolidated losses", "gain recognition triggers", "outbound" tax free reorganizations, organizations, and sales of business property.

Can you add additional "hypothetical" facts?

 

[Cycle61]

Cool, we'll call it capital losses. Invested modestly in Bitcoin, and my hypothetical account was with a company that has ceased operations and will almost certainly not be returning investors assets.

 

[Owensdad]

Cool, we'll call it capital losses. Invested modestly in Bitcoin, and my hypothetical account was with a company that has ceased operations and will almost certainly not be returning investors assets.

HEADLINE EDIT: The IRS announced this week in Notice 2014-21 that they consider virtual currency to be property, subject to all the normal property gain/loss rules.

Your challenge will be proving that this an "investment" that is actually worthless.

Depending on your theory of the treatment and holding period, it seems reasonable that you should be able to recognize a long or short term capital loss.

Adequate documentation will be important and perhaps difficult.

EDIT: Notice 2014-21 released this week, confirms Bitcoin losses as property losses.

 

[kpke]

Thank you for the response below.

On a related note, there are 2 high school kids and

1. We pay the school around $500 for sports activities. The school seems to call it a "contribution". Is this deductible?

2. There are other things we "contribute" $$ to the high school such as math dept donation, science dept donation, video productions donation, etc. Are these deductible?

Again, thank you!!!

Expenses required to *enroll* in an eligible educational institution are typically not deductible.

However, once enrolled, deductible expenses include tuition, fees and other expenses (books, lab fees, etc.).

Room/board, transportation, and living expenses generally do not qualify. Also, qualified expenses paid with tax-free (certain tax free grants and scholarships, for example) are also not deductible.

There are limits on the deductible amount and qualified expenses must be paid by you (or your spouse if MFJ), a student that is your dependent, or a qualified third party (e.g. a relative).

 

[Owensdad]

treatment of bitcoin loss is really interesting (because it can be handled in multiple ways). thanks.

EDIT: original post edited in the face of new IRS guidance establishing that cyber currency gains and losses will be treated by the Service as property gains and losses.

 

[Owensdad]

Thank you for the response below.

On a related note, there are 2 high school kids and

1. We pay the school around $500 for sports activities. The school seems to call it a "contribution". Is this deductible?

2. There are other things we "contribute" $$ to the high school such as math dept donation, science dept donation, video productions donation, etc. Are these deductible?

Again, thank you!!!

The fees for sports activities are almost certainly not deductible.

The donations *might* be if structured properly (I.e., made to a qualified 501c3).

Did you receive a written acknowledgement of these contributions? If so, that acknowledgement should identify the amount considered a deductible donation. If not, it would be a worthwhile suggestion that the school set up a qualified non profit to receive and disburse these amounts. But that probably wouldn't be useful to you this year.