Author: Howard Tax Prep LLC

*** ATTENTION LANDLORDS****** Are you buying new appliances for your rental? Make sure to keep the amount per appliance under $2,500, or under $5,000 (with applicable financial statements) so that you can use the de minimis safe harbor election. Using the De minimis safe harbor election allows you to deduct the cost of the appliances as an expense (aka immediate deduction), rather than having to capitalize (aka dragging the deduction out) the cost. Combining the De minimis safe harbor elections along with Section 179, & Section 168 will yield you great tax deductions and LOWER YOUR TAX LIABILITY.

Please note: There are RULES that need to be followed, so it is imperative that you work with a credentialed tax professional that can prepare your returns. You can also choose the DIY (do it yourself) method, and then pay a credentialed tax professional for tax resolution services. Tax resolution work pays more, so your professional will thank you.

Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put money in the IRS’s pocket.

Now, if you have a bad year in your business, the new NOL rules are designed to stop you from using your business loss to find some immediate cash. The new (let’s call them bad-for-you) rules certainly differ from the prior beneficial rules.

Old NOL Rules

You have an NOL when your business deductions exceed your business income in a taxable year. Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years.

Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years.

New NOL Rules

Tax reform made two key changes to the NOL rules:

1. You can no longer carry back the NOL (except for certain qualified farming losses).
2. Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.

The changes put more money in the IRS’s pocket by

• eliminating your ability to get an immediate tax benefit from your NOL carryback, and
• delaying your ability to get tax benefits from future NOL carryforwards.

We are bringing the NOL rules to your attention in case you need to do some planning with us. We likely have some strategies that can help you realize some immediate benefits from your business loss.

Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Taking a loss on any business hurts, no question—but at least you get that immediate tax deduction, right? Not necessarily. And the “not necessarily” is more true when you incur that business loss on your second or third business.

Here’s the culprit: When you operate a business, you have to materially participate to deduct the losses[1]. As you create more businesses, you can, and often do, reduce your chances of passing the material participation tests.

The material participation tests generally require that you spend a certain number of hours working in the business. Your primary business likely takes most of your time, meaning you have less or perhaps little time to devote to the second or third business. This article gives you several tactics that help you avoid the mistakes that can cost you loss deductions for your second and third businesses.

Multiple Businesses, Multiple Traps

Rev. Rul. 81-90 notes that you must file a separate small business Schedule C for each of your sole proprietorship businesses which includes home based businesses, and 1 member LLC’s. If you fail to file separate Schedule Cs for your small home based business, small business, or proprietorship businesses, you trigger possible penalties for negligence or intentional disregard of rules and regulations.[2]

The failure to file separate Schedule Cs for separate proprietorship’s also triggers possible penalties for your tax preparer.

The Passive Loss Trap

If you don’t pass one of the material participation tests for a business activity and that activity shows a tax loss, the tax code makes that loss a “passive loss,” and this means you can

• deduct the passive loss only against your passive income,
• carry forward any unused passive losses to future years, and
• claim the unused passive losses when you dispose of the entire business activity.

Special passive loss rules apply to rental properties. We don’t discuss the special rental property rules in this article because the focus of this article is on a second or third business. We’re also not talking hobbies, as they face a set of their own ugly rules.

Now to the businesses at hand: you need to “materially participate” in a business to deduct the business losses against your total income from all sources.

Proving Material Participation in a Second Business Activity

The IRS has seven tests for business material participation. In six of the seven tests, the IRS looks at the time you spend on the business activity. For the taxable year, you need to satisfy only one of the seven tests below to prove you materially participated in the business activity.[3]

• You participated for more than 500 hours.
• Your participation represents substantially all participation in the business.
• You participated for more than 100 hours, and your participation is equal to or greater than the participation of any other individual.
• The business activity is a significant participation activity, and your aggregate participation in all significant participation activities exceeded 500 hours.
• You materially participated in the business activity for any five (whether consecutive or not) of the 10 immediately preceding taxable years.
• The business activity is defined by tax law as a “personal service activity” in which you materially participated for any three taxable years (whether consecutive or not) prior to this year.
• Based on all the facts and circumstances, you participated in the business activity on a regular, continuous, and substantial basis during the year

“Participation” includes any time you spend working in connection with the business, except:[4]

• You can’t count time you spend as an investor (for example, reviewing financial statements or operations reports) unless you’re directly involved in the business’s day-to-day management or operations.
• You can’t count time you spend doing work that isn’t customarily done by the owner if one of your main reasons for doing the work is to avoid the passive loss rules.

Your spouse’s time counts too. You can count the time your spouse spends on the business as time you spend, even if he or she doesn’t have an ownership interest in the business.[5]

Time Log
What the IRS regulations say. You may establish your participation in a business by “any reasonable means.”[6] You aren’t required to have contemporaneous daily time logs if you can use your appointment books, calendars, or other narrative summaries to identify services performed over a period of time, including the approximate number of hours spent on those services.[7]

The real world. If there is going to be anything near a close call on the time needed for material participation, you need to keep a daily time log. Taxpayers without a daily time log consistently lose both to the IRS and in court.

Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

[1] IRC Section 469.

[2] Rev. Rul. 81-90.

[3] Reg. Section 1.469-5T(a).

[4] Reg. Section 1.469-5T(f)(2).

[5] Reg. Section 1.469-5T(f)(3).

[6] Reg. Section 1.469-5T(f)(4).

[7] Ibid.

Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put money in the IRS’s pocket.

Now, if you have a bad year in your business, the new NOL rules are designed to stop you from using your business loss to find some immediate cash. The new (let’s call them bad-for-you) rules certainly differ from the prior beneficial rules.

Old NOL Rules

You have an NOL when your business deductions exceed your business income in a taxable year. Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years.

Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years.

New NOL Rules

Tax reform made two key changes to the NOL rules:

1. You can no longer carry back the NOL (except for certain qualified farming losses).
2. Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.

The changes put more money in the IRS’s pocket by

• eliminating your ability to get an immediate tax benefit from your NOL carryback, and
• delaying your ability to get tax benefits from future NOL carryforwards.

We are bringing the NOL rules to your attention in case you need to do some planning with us. We likely have some strategies that can help you realize some immediate benefits from your business loss.

Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Ever had a lucky night at the casino and walked away with pockets full of cash? If so, that means the government had a lucky night, too—your gambling winnings are taxable income.

But, wait—what happens at the casino stays at the casino, right? Nope. Casinos and other payers are required to report gambler winnings that exceed a certain dollar amount. That means you can count on the government asking you for a token of your good fortune.

So, beat the government at its own game. Having a strategy and knowing the rules will help you not only at the casino, but also when it comes to navigating the taxes on your winnings. Depending on your status as a professional gambler or amateur, the government allows you to take deductions for certain gambling business expenses and gambling losses, which can offset some or all of the tax you would otherwise have to pay.

This article gives you clear guidance for professionals and amateurs on the deductions you are entitled to take and the strategies you need to follow to cut your taxes on gambling income to the maximum extent allowable.

Three Basic Rules
Rule 1: Your winnings are taxable. Your gambling income is taxable.*
And—just as important—it’s reportable.**

For example, when you win $1,200 or more from a slot machine, the casino must report your winnings on Form W2G and send a copy to you and the government. This is similar to the Form W-2 employers must send their employees each year to notify them of their salary and other tax information. With that kind of tool, it’s very easy for the government to know when you don’t report enough income on your tax return.

But what happens if your slot machine losses exceed your winnings? The casino may still be required to report your winnings—putting you in a situation where you have to prove your losses or face a tax bill despite having zero actual income.

Rule 2: Keep records of your losses. You can offset your gambling winnings with your gambling losses—but you have to keep good proof of those losses. The IRS and courts expect you to maintain a “contemporaneous gambling diary.”***

That’s much, much simpler than it sounds. “Contemporaneous gambling diary” is just a fancy way of saying “jotting down a few notes.” If you don’t have a player card that substitutes for an activity record, then keep an accurate diary or similar daily record. Support that diary with verifiable documentation. This “verifiable diary” produces acceptable evidence that proves time spent and your gambling winnings and losses. Overall, your diary should contain at least the following information:

• Date and type of specific wager or wagering activity
• Name of gambling establishment
• Address or location of gambling establishment
• Names of other persons, if any, present with you at the gambling establishment
• Amounts won or lost.

Rule 3: No net losses. If your gambling losses exceed your winnings, you get no deductions for your net loss. Further, the net loss does not carry forward. It simply disappears.

For example, let’s say you won $15,000 on a particularly good day at the casino, but over the course of the year you lost $20,000. You can report $15,000 of those losses (that is, up to the amount of your winnings). As for the
remaining $5,000 of losses, you can’t carry them forward or back. For tax purposes, they disappear.

What if you won that $15,000 on December 30 but didn’t rack up the $20,000 in losses until a few days later,on January 2 (that is, in the following year)? That’s not a good situation. You have to report the $15,000 in the year of your winnings, but the $20,000 can offset income only in the following year. You can’t carry the losses back. If you have no winnings to offset those losses, you’re simply out of luck for tax purposes.

Note that tax law allows a husband and wife to combine gambling winnings and losses on a joint return.You might benefit here in the event that you win when your spouse loses, or vice versa. Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

*     IRS Publication 525, Taxable and Nontaxable Income, dated Jan. 23, 2017.
**   Instructions for Forms W-2G and 5754, dated Apr. 27, 2017.
*** See, e.g., Ann M. LaPlante v Commr., T.C. Memo 2009-226 (“No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log”).