Monthly Archives: November, 2016

Trump Tax Plan

November 9th, 2016 Posted by Tax No Comment yet

By now, you have hTrumpeard the news that Donald J. Trump is the President-Elect of the United States.  As such, he will have a tremendous amount of input on federal tax law.  So, what has he proposed?

Individual Income Taxes

Currently, there are 7 ordinary income tax brackets ranging from a 10% tax rate to 39.6% tax rate.  Donald Trump has proposed reducing this to only 3 ordinary income tax brackets ranging from a 12% tax rate to a top rate of 33%.

Donald Trump has proposed keeping the capital gains rates the same.  Under his proposal, individuals in the 12% ordinary income tax bracket would pay 0% on their capital gains.  Individuals in the 25% ordinary income tax bracket would pay 15% on their capital gains.  Individuals in the 33% ordinary income tax bracket would pay 20% on their capital gains.

In addition, high-income Americans are currently subject to a 3.8% Net Investment Income Tax.  Donald Trump has proposed eliminating this surtax along with the rest of the Affordable Care Act.

In terms of deductions, the Trump plan increases the standard deduction.  For married joint filers, the standard deduction would increase from $12,600 to $30,000.  However, this comes at the cost of the personal and dependency exemptions which would be eliminated.

Finally, Donald Trump’s proposal puts a cap on the amount of itemized deductions that can be claimed.  This cap is $100,000 for single individuals, and $200,000 for married couples filing jointly.

Business Income Taxes

The Trump tax plan calls for massive changes for businesses.

Currently, the only type of business entity that pays “business taxes” are c-corporations.  All other business entities (S-corporations, partnership, and Limited Liability Companies (LLCs)) are “pass through” entities.  That means that income from those entities pass through to the individual owners, and taxes on that income are paid by the individual owners at their ordinary income rates.

The Trump proposal instead reduces the business tax rate from a maximum of 35% to 15%, and creates a unified business rate.  Instead of pass through entities paying ordinary income tax rates, they would instead pay the same 15% rate that c-corporations would pay.

Another significant change would be the treatment of capitalized assets.  Currently, certain assets such as machinery and equipment must be capitalized and the acquisition cost is depreciated (expensed) over a number of years.  Donald Trump’s proposal would allow the full cost of these assets to be expensed in the year of acquisition.

Finally, businesses would no longer be able to take a deduction for many expenditures under this proposal.

Estate Taxes

Under current law, estates with more than $5.45 million of assets ($10.9 million if married and electing to utilize the portability election), adjusted annually for inflation, are subject to a 40% estate tax.  The beneficiaries of the estate then receive a “step-up” in value for the assets they inherit.

The Trump tax proposal eliminates the estate tax, and along with the the “step-up” in value beneficiaries would receive, but only for beneficiaries of an estate worth more than $10 million.

 

Is Your Business a Hobby?

November 9th, 2016 Posted by Tax No Comment yet

Are you living your dream?  Are you passionate about your business?  Can you not wait to get back to your business everyday?

The IRS might think that you love your business so much that it is really a hobby.

What is the difference between a business and a hobby?

With a business, you are entitled to deduct all ordinary and necessary expenses.  With a hobby, however, you can only deduct the expenses to the extent you have income.

The IRS uses 9 factors to determine whether a taxpayer is engaged in a business or a hobby.

hobby

  1. Was the activity conducted in a business-like manner?
    The rationale behind this factor is that you will act differently if you are conducting a business rather than simply engaging in a hobby.  For example, someone in the business of being in a band might schedule a number of performances, and have a plan on how to increase attendance.  Someone in the hobby of being in a band might have performances on an ad hoc basis.  Some elements that may be considered are: whether there is a business plan; if you maintain financial records; if there is a separate bank account; and whether you acted as a prudent business person.
  2. The taxpayer’s expertise or that of his/her advisers.
    Whether you have sufficient expertise to demonstrate that you know how to make the activity profitable is another important factor.
  3. The time and effort expended in the activity.
    The more time you dedicate to the activity, the more likely it is that the activity will be consider a business.
  4. Do you expect the activity’s assets to increase in value?
    If the activity involves accumulating assets, such as coins, you must show that you expected the value of the assets to increase.  That would indicate that you had the intention to sell them for a profit, which is an important factor to be considered a business.
  5. The taxpayer’s success in similar activities.
    If you have been successful with related activities, it is more likely to be considered a business.  On the other hand, if all of your similar activities have lost money then it is more likely to be considered a hobby.
  6. The taxpayer’s history of income or loss.
    This is similar to the prior factor, except that it looks only at this one activity.  If this activity consistently makes money, then it is likely to be considered a business.  If it consistently loses money or only occasionally makes a profit, it is likely a hobby.
  7. The amount of occasional profits.
    If you make a lot of money, then it is more likely to be considered a business.  If the activity only makes a minimal amount of money, it is more likely to be considered a hobby.
  8. The taxpayer’s financial status.
    If most of your income is derived from other sources, then this activity will look like a hobby.  On the other hand, if most of your income comes from this activity it looks like a business.
  9. The personal pleasure the taxpayer derives from the activity.
    This is a subjective factor.  You can love what you do, but if it looks like that is a greater motivation for you than money it will likely be deemed a hobby.

Outside of these factors, there is a safe harbor available to taxpayers.  If the activity has been profitable for 3 out of the last 5 tax years, including the current year, then the IRS will presume that the activity is carried on for profit (i.e., that it is a business).  If you breed, show, train, or race horses, you only have to be profitable for 2 out of the past 7 years in order to qualify for this safe harbor.