October 30, 2013
If you own a Limited Liability Company (LLC) that you are not actively managing, but you claim tax deductions, this blog post will be of interest to you. Close to 30 years ago, the IRS passive activity loss (PAL) rules (I.R.C. Section 469) were enacted to limit the degree to which money-losing LLCs could be used as tax shelters by their owners claiming losses—such as depreciation, interest, and other deductions. These rules created the passive income or loss category and they apply to all business activities, including real estate rental activity.
There are two types of passive income or losses including income earned from:
Essentially, the PAL rules are intended to prevent individuals from deducting passive losses (such as from rental activities) from their non-passive income. However, if you own or co-own an LLC on a part-time basis or have someone else manage it on your behalf, as long as you are active in the business you can claim any related losses against your non-passive income, if you meet the IRS definition of "material participation." The IRS defines “material participation” as being “involved in the operations of the activity on a basis which is regular, continuous, and substantial.” There are several tests that the IRS uses to define material participation in a business, based on your activity and the amount of time you spend working. Read about it in detail here.
Another point to keep in mind—the PAL rules state that passive losses from a business activity can only be used to offset passive income from other passive activities. Passive losses in excess of your passive income for the year are capped, but they can be carried forward and deducted in future years when and if you have passive income or if you sell or dispose of the activity that generated the suspended losses. For additional information about PAL tax regulations, please visit IRS.gov.
It’s hard to believe that we are already into July. Even with the deadline for filing your return and making a payment (if you owe) being extended to July 15, 2020, it still seemed like it came upon us fast. With only a few weeks left, be sure to get any final documents to us and answer any outstanding communications immediately.
New gardeners have come out of the woodwork this year, looking to create a sustainable food supply in their own backyards. Of course, not everyone has the space or the time to create a full-on outdoor garden. So, why not start small…and indoors?
It’s safe to say that most people are laser focused on money right now—specifically on how to make it last longer. To help you do just that, we compiled the following list of tips for spending less in 2020: