Is your Schedule C business a Hobby in the Eyes of the IRS?

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by April Thiel, CPA, Senior Manager at Gordon Advisors, P.C.

 

 

Many small businesses are organized as a sole proprietorship and file a Schedule C on the owner’s personal 1040. What happens when your expenses exceed your income and you incur losses? Can you still claim those tax deductions? The answer is; you can deduct them if you can show that you are truly running a business and not merely engaging in a hobby.
Taxpayers are allowed to deduct ordinary and necessary business expenses. In order for the IRS allow the deduction as a business expense, you need to make sure the activity or business is considered “engaged in for profit”. You need to make a profit in at least three of the last five tax years in order for your business to be considered for profit and not merely a hobby. In addition to that requirement, here are a few (not all inclusive) factors to consider:

Do you depend on the income from the activity?
Do you conduct business in a professional way? (A website, business cards, letterhead, etc.)
Does the time and effort you put into the activity indicate your intention of this being a business?
Do you expect to make a profit?
Do you have the necessary knowledge to be successful in the business?
Do you treat it as a business?

The IRS is trying to ensure that you are not merely turning what is a hobby, into a deductible loss. Here are a few ways you can help substantiate your legitimate business expenses: keeping good records, hiring some professionals, write a business plan, keep business and personal expenses separate & ensure your income and expenses are matched properly. The IRS scrutinizes this area intensely and will audit and disallow your expenses if they believe you are not truly in business. Contact a Gordon Advisors tax advisor today to discuss.

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Understanding Your Fiduciary Responsibilities Under A Group Health Plan

_MHP0267  by Jill S. Knop, CPA, Gordon Advisors, P.C.

With the October 15th deadline approaching, which is the extended due date for filing of Form 5500, it is a good time to go over the filing requirement of that form.

 

Health and welfare plans, which include health insurance, life insurance, long and short term disability insurance may have a filing requirement with the Department of Labor.

Below is an excerpt from the DOL’s publication entitled Understanding Your Fiduciary Responsibilities Under a Group Health Plan:

Plan administrators generally are required to file a Form 5500 Annual Return/Report with the Federal Government.  The Form 5500 reports information about the plan, its finances, and its operation.  This information is used by the U.S. Department of Labor, the Internal Revenue Service (IRS), other government agencies, organizations, and the public.  Participants and beneficiaries can receive a copy of the Form 5500 upon request from the plan.  Depending on the number of participants covered and plan design, there my be exemptions from the full filing requirements.  A group health plan with fewer than 100 participants that is either fully insured or self-funded (or a combination of both) does not need to file an annual report.  Plans will 100 or more participants that are fully insured or self- funded (or a combination) can file a limited report.  

If you have questions about your filing requirements, please give Certified Public Accountant, Jill S. Knop a call at 248 952 0200.

Manufacturing Companies: Planning an Equipment Purchase?

One of the best tax breaks available to manufacturers is the Section 179 deduction, which allows you take a current deduction on equipment and business vehicles, rather than depreciating it over many years.

The maximum amount for 2013 is $500,000 (*see below for 2014). In order to qualify for the tax break, you must use the equipment more than 50 percent of the time for business.

Tip: Many business owners are involved in more than one venture. In the case of pass-through entities (partnerships, LLCs, and S corporations), the dollar limitation rules for the Section 179 deduction apply at both the entity level and the owner level. (IRS Regulation 1.179-2)

Therefore, advance planning may be necessary to maximize Section 179 deductions at the owner level, which is where the write-offs really count. Your tax adviser can provide all the details.

*Unless Congress acts to renew this at a higher level, this important provision has dropped in 2014 to only $25,000 spending allowance (down from $500,000 in 2013) with an overall threshold of only $200,000 (down from $2,000,000 in 2013).

There are restrictions. Contact us to ensure that you get the maximum equipment deduction allowed in your company’s situation.
© Copyright 2014. Thompson Reuters.  All rights reserved. Brought to you by: Gordon Advisors, P.C.

What Qualifies as a Medical Deduction?

In 2014 there is a higher itemized medical deduction threshold, raising to 10 percent of your adjusted gross income (AGI) from 7.5 percent in 2013.  Once you hit that threshold, there are many medical and dental expenses that do qualify for the deduction.  You can deduct costs related to diagnosis, treatment and prevention of disease.  Long term care insurance qualifies as well as the cost of your prescriptions.

Here are some other examples of costs you can deduct:

– Auto costs of outfitting a car with special controls needed by a handicapped or disabled person

– Acupuncture or chiropractor fees

– Prescription eye wear, including contact lenses, eye glasses, cleaning drops and wetting drops

– Hearing Aids

– Childbirth Preparation Classes for the mother

– Home improvements that are for medical purposes and do not add to the value of your home

– Removing lead-based paint from a surface in poor repair that is within the reach of a child

– Meals while in a hospital or similar facility

– Smoking Cessation programs

– Weight loss programs for specific disease or condition such as obesity (does not include cost of food)

 

If you have specific questions about your situation please give us a call at 248 952 0200 and speak to one of our tax professionals.

Real Estate Losses and Homeowners this Tax Season

Many of us in Michigan have experienced the pain of seeing our home values go up and down within the past decade.  If you are a homeowner who recently sold real estate at a loss, you may be wondering if you can count the real estate loss as a write off on your taxes.  Under tax law, residence is considered personal property so for the most part the answer is no.

Losses from real estate can generally only be used to offset income from “passive activities” which could be from any rental activity OR any business in which the taxpayer does not materially participate, it can not be used to offset their “non passive” activities which would include businesses in which the taxpayer works on a regular and continuous basis.   Any remaining losses must be carried forward, unless you are a real estate professional.  Real estate professionals also must pass a “material participation” test in order to use passive losses to offset non-passive income.  If you are not a real estate professional, you can qualify for an extra tax break if you actively participate in rental real estate and meet certain income requirements.

For more information please contact our CPAs in the Real Estate Sector at 248 952 0200.

 

 

 

 

 

© Copyright 2013. Thompson Reuters.  All rights reserved.
Brought to you by: Gordon Advisors, P.C.