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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”).

Cost segregation breaks your real property into its components, some of which you can depreciate much faster than the typical 27.5 years for a residential rental or 39 years for nonresidential real estate.

When you buy real property, you typically break it into two assets for depreciation purposes:

• land, which is non-depreciable; and
• building (residential is 27.5-year property; nonresidential is 39-year property).

With a cost segregation study, you make your property much more than a building on land. Here’s what’s possible with a cost segregation study:

• land, which is non-depreciable
• 5-year property
• 7-year property
• 15-year property
• for the remainder, 27.5-year property or 39-year property, depending on building use

With a cost segregation study, you front-load your depreciation deductions and take them sooner, but you’ll take the same total depreciation amount over the lifetime of the property.

Tax reform under the Tax Cuts and Jobs Act boosted bonus depreciation from 50 percent to 100 percent, and this new law also allows bonus depreciation on qualifying used property. Cost segregation is made to take advantage of these new law changes.

And you can apply cost segregation to rentals and offices you have had for 10 years or that you are buying tomorrow.

However, if the passive activity loss rules affect your ability to take immediate rental losses, you’ll need to run the numbers to see if you can benefit, and also identify what you could do to benefit even more.

Tax reform in one of its “not beneficial to you” new law sections took away your ability to do a like-kind exchange for non-real property. Therefore, if you do a cost segregation and then later use a like-kind exchange on that property, you’ll have taxable gain attributable to everything that’s not land or 27.5-year or 39-year property.

We recently saw a cost study on a new $400,000 property purchased this year. The study enabled a speed-up of $50,000 of deductions to this year’s tax return. For this taxpayer, who was in a combined federal and state income tax bracket of 40 percent, this put $20,000 in his pocket this year.

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.