In The SwingBy Clive2012I would love to start by telling you I am writing this first article of 2012 from some exotic, warm, golf location such as Durbin, South Africa. But I am not. In fact, as I write, I am wondering if the snow plough will have blocked my car with snow by the time I finish for the day and make the drive home on slippery winter roads. It is nice to dream, however.What I can
Year End Checklist
1. Get together all of your receipts. Organize them by type of expense - feed and grain, farrier, etc. Compare them against your checking and credit card accounts to make sure that you haven't missed any deductible expenses.
2. Balance your checkbook. There might be checks or deposits that cleared the bank that you have omitted from your checkbook.
3. Are there any customers that owe you money at year end? How old are the balances? Are they still collectible? Contact the customer and remind them of any overdue balances. Negotiate for partial or periodic payments if possible.
4. If you purchased anything using a loan, be sure to include the basic loan information in the documents you give to your tax preparer.
5. Are there any bills that you owe that aren't recorded?
6. When you have your preliminary financials ready, compare them to 2010 for reasonableness. Do they make sense, knowing what you know about your business?
7. Have there been any major changes to your life in 2011 - gotten married, had a baby, lost a job? Will there be any major changes for you in 2012? Be sure to share that information with your tax preparer.
8. Make a list now of topics that you want to discuss when you speak with your tax preparer - retirement planning, funds for your child's education, paying off your mortgage, etc.
Preparing your return is something you have to have done every year. Use it as an opportunity to know and grow your business. During the year, you are "in the trenches" day after day. But getting ready for your tax return gives you a chance to step back and give your business a more objective, global examination. Maybe you'll need to make changes, maybe things are great as is. But by taking a long, hard look, you'll know.
2. Balance your checkbook. There might be checks or deposits that cleared the bank that you have omitted from your checkbook.
3. Are there any customers that owe you money at year end? How old are the balances? Are they still collectible? Contact the customer and remind them of any overdue balances. Negotiate for partial or periodic payments if possible.
4. If you purchased anything using a loan, be sure to include the basic loan information in the documents you give to your tax preparer.
5. Are there any bills that you owe that aren't recorded?
6. When you have your preliminary financials ready, compare them to 2010 for reasonableness. Do they make sense, knowing what you know about your business?
7. Have there been any major changes to your life in 2011 - gotten married, had a baby, lost a job? Will there be any major changes for you in 2012? Be sure to share that information with your tax preparer.
8. Make a list now of topics that you want to discuss when you speak with your tax preparer - retirement planning, funds for your child's education, paying off your mortgage, etc.
Preparing your return is something you have to have done every year. Use it as an opportunity to know and grow your business. During the year, you are "in the trenches" day after day. But getting ready for your tax return gives you a chance to step back and give your business a more objective, global examination. Maybe you'll need to make changes, maybe things are great as is. But by taking a long, hard look, you'll know.
Are you a Material Girl/Guy?
I'm never sure when I listen to Madonna sing "Material Girl" if she thinks that being a material girl is a good thing or a bad one. But being a material girl/guy in relation to your business is definitely a good thing when you are dealing with IRS matters.
If you own a business and that business incurs a loss, the amount of the loss that is deductible for tax purposes may be limited by several factors. One factor is whether you materially participate in the business. Material participation only becomes an issue if your business is organized as a pass-through type entity (sole proprietorship, partnership, S Corporation or LLC for tax purposes treated as a sole proprietorship or partnership).
Before I discuss what factors the IRS uses to determine material participation, a little necessary background info. about pass-through entities. In pass-through entities, the profit or loss is calculated for the business as an entity and the information is submitted to the IRS but no tax is due at the entity level. The profit or loss is "passed through" to the owner(s) and included on their personal return. If a loss is passed through, it can generally be applied against other types of income such as wages, interest and dividends. That makes a loss valuable to the taxpayer because it can decrease the total amount of tax due on the return. However, if an individual does not materially participate in her business, losses are treated as "passive" losses, which mean they generally are only deductible against passive income such as rent, royalties or other businesses with passive income. Not so useful now, right?
What factors does the IRS use to determine material participation? Generally, for an individual to be considered to materially participate in a business, she must be involved in its operation on a "regular, continuous and substantial basis". More specifically, there are seven tests that the IRS uses to determine material participation and a business owner must satisfy at least ONE of the tests:
* 500 Hours: individual participates in the business for more than 500 hours during the tax year.
* Substantially All of the Work: the individual's participation constitutes substantially all of the participation in the business compared to all individuals involved in the business.
* More than Anyone Else: the individual participates in the business for more than 100 hours during the tax year and that time is not less than any other individuals involved in the business.
* Significant Participation Activity: The activity is a "significant participation activity" (SPA) and the sum of SPAs in which the individual works 100-500 hours per year exceeds 500 hours for the year.
* 5 Out of 10 Years: The individual materially participated in the activity for any five tax years during the prior ten tax years.
* Personal Service Business: If the individual materially participated in the activity for any three tax years preceding the current tax year and the activity is a personal service activity, the loss will be treated as non-passive. A personal service business is one in which capital is not a material income-producing factor. Examples of PSBs are accountants, lawyers and doctors and in the equine world, free-lance instructors and equine chiropractors.
* Facts and Circumstances: The facts and circumstances test may apply if none of the other tests are met. This test does not apply unless the individual worked more than 100 hours a year. Also, the taxpayer's time spent managing will not count if:o A paid manager participates in the business, ando Any person spent more hours than the taxpayer managing the activity.
Material participation is determined on an annual basis so you may be considered to materially participate in your business one year and not another.
Material participation is only one factor that can limit the amount of loss available to the business owner. Other factors include limitations due to basis, amounts at risk and hobby loss rules. So be sure to consult with a qualified tax advisor to understand all of the factors affecting your situation.
If you own a business and that business incurs a loss, the amount of the loss that is deductible for tax purposes may be limited by several factors. One factor is whether you materially participate in the business. Material participation only becomes an issue if your business is organized as a pass-through type entity (sole proprietorship, partnership, S Corporation or LLC for tax purposes treated as a sole proprietorship or partnership).
Before I discuss what factors the IRS uses to determine material participation, a little necessary background info. about pass-through entities. In pass-through entities, the profit or loss is calculated for the business as an entity and the information is submitted to the IRS but no tax is due at the entity level. The profit or loss is "passed through" to the owner(s) and included on their personal return. If a loss is passed through, it can generally be applied against other types of income such as wages, interest and dividends. That makes a loss valuable to the taxpayer because it can decrease the total amount of tax due on the return. However, if an individual does not materially participate in her business, losses are treated as "passive" losses, which mean they generally are only deductible against passive income such as rent, royalties or other businesses with passive income. Not so useful now, right?
What factors does the IRS use to determine material participation? Generally, for an individual to be considered to materially participate in a business, she must be involved in its operation on a "regular, continuous and substantial basis". More specifically, there are seven tests that the IRS uses to determine material participation and a business owner must satisfy at least ONE of the tests:
* 500 Hours: individual participates in the business for more than 500 hours during the tax year.
* Substantially All of the Work: the individual's participation constitutes substantially all of the participation in the business compared to all individuals involved in the business.
* More than Anyone Else: the individual participates in the business for more than 100 hours during the tax year and that time is not less than any other individuals involved in the business.
* Significant Participation Activity: The activity is a "significant participation activity" (SPA) and the sum of SPAs in which the individual works 100-500 hours per year exceeds 500 hours for the year.
* 5 Out of 10 Years: The individual materially participated in the activity for any five tax years during the prior ten tax years.
* Personal Service Business: If the individual materially participated in the activity for any three tax years preceding the current tax year and the activity is a personal service activity, the loss will be treated as non-passive. A personal service business is one in which capital is not a material income-producing factor. Examples of PSBs are accountants, lawyers and doctors and in the equine world, free-lance instructors and equine chiropractors.
* Facts and Circumstances: The facts and circumstances test may apply if none of the other tests are met. This test does not apply unless the individual worked more than 100 hours a year. Also, the taxpayer's time spent managing will not count if:o A paid manager participates in the business, ando Any person spent more hours than the taxpayer managing the activity.
Material participation is determined on an annual basis so you may be considered to materially participate in your business one year and not another.
Material participation is only one factor that can limit the amount of loss available to the business owner. Other factors include limitations due to basis, amounts at risk and hobby loss rules. So be sure to consult with a qualified tax advisor to understand all of the factors affecting your situation.
In The SwingBy CliveWrap UpAs the holiday season starts to amp up, golf in many ways wraps up for a short time, especially in my part of the world, the North Pole. Okay, Canada. This is my last column for 2011 and as I look forward to a potentially exciting golf year in 2012, I will leave you with some random thoughts, particularly as they relate to recent developments in the golf world.Last week
Subscribe to:
Posts (Atom)