When accounting goes unaccounted for
C’mon, guys. No one is willing to scrape together $700k to help this girl out?
Robert Snell’s latest scoop has Ms Pressly owing California $57k in addition to the $95k lien he reported on last month. The IRS is asking for a bit more – $542,069 to be exact. Maybe a couple partners could team up on this? Seems like a small price to pay to be a hero to Joy Turner.
If there’s one thing the economy offers to businesses nowadays, it’s opportunities to lose money. As unpleasant as that is, it at least will reduce your taxes, right?
Maybe.
Even tax loss parties have their poopers, and the “At-risk rules” of Code Sec. 465 are as poopy as can be. Drafted to fight the first generation of retail tax shelters in the 1970s, these rules have faded into obscurity, but remain available for annoyingly competent IRS agents to wield against your loss deductions. The rules are supposed to defer losses when it’s really the lender on the hook for them, rather than the nominal owner of the money-losing activity. The losses carry forward to offset future income on the activity, or gain on a sale someday.
These rules pooped all over the tax loss of CTI Leasing, an LLC owned by Kieth Roberts, an Indiana man, to lease trucks to his trucking company. He loanded the LLC $425,000 to buy a “Vantare H3-45 Super S2” RV. The Tax Court says “Vantare RVs are custom-built, fully furnished, luxury coach RVs known for their ‘yacht quality fit and finish.'”
The leasing business cranked out tax losses. The IRS disallowed $425,000 of them on the grounds that the $425,000 loan didn’t give the LLC owner “at-risk” basis in his leasing activity. The Tax Court said the taxpayer failed to show that the land yacht was used in the truck leasing business or was owned by it, so the $425,000 wasn’t “at-risk” in the leasing activity.
Not every business can afford a nice land yacht, but they all can lose money. Some pointers to help keep you from trippng over the at-risk rules:
• If your loan is “non-recourse” — if you don’t pay, all the lender can do is repossess the property — that’s an at-risk rule red flag.
• Limited partners and LLC members are likely to face at-risk issues; the whole point of a “limited liability company” is to limit owner liability, after all.
• Be careful of loans from related parties. If you borrow from the wrong person, the tax law will treat the loan as not “at-risk,” even if you borrow from a business partner who might leave you under an end-zone somewhere if you don’t pay up.
• If you are in the real-estate business, “qualified” non-recourse debt – generally third-party commercial loans – are O.K. under the at-risk rules.
If you trip over the at-risk rules, your losses may not be gone forever. Form 6198 tracks your deferred losses, and you can lose them if your activity generates income someday.
Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.
Yesterday, the Supreme Court gathered to decide an issue that had drawn the attention of […]
Every state, municipality, township and hamlet is desperate to close their budget gaps. With such desperation comes a flood of bad ideas that include taxes on everything from juggling to hot air balloon rides.
The Philadelphia City Paper ran a story last week about the $300 Business Privilege Tax that the city is imposing on bloggers, freelancers and other contractors since they are engaged in the activity for profit. Seemingly, another stupid idea.
The City Paper speaks to a couple of bloggers – clearly doing it as a hobby – that are technically engaged in a for-profit activity because they have ads on their blogs. They were notified by the city that they owed the $300 for a lifetime business privilege license (you can also opt for a $50 annual license). The Philadelphia Department of Revenue argues that “simply choosing the option to make money from ads — regardless of how much or little money is actually generated — qualifies a blog as a business.”
Supposedly, changes to the city’s law are in the works to be introduced next month that would exempt the first $100k of a business’s profit.
However, there is a far simpler solution to this problem that is mentioned by Christina Warren over at Mashable which is, quit running ads on your blog. Maybe the city’s tax is excessive, annoying, desperate for reform or just plain stupid but if you don’t run ads on your blog – that wasn’t designed to make money – you avoid the business privilege license altogether. It’s as simple as clicking a mouse and the government is out of your life (at least this respect).
Or continue to be stubborn and fight the bureaucracy of the Philly City government. Your choice.
Pay Up [Philadelphia City Paper]
Philadelphia Tax Code Sparks Big Controversy with Small Bloggers [Mashable]