Category Archives: Business

Will Government Regulating Compensation for Big Business Affect Your Small Business?

A proposed rule under the Dodd-Frank Act would require Wall Street firms with $250 billion or more in assets to defer bonuses to top executives for four years (instead of the current three years). The rule is meant to curb risk-taking. Political rhetoric by some presidential candidates has also taken aim at Wall Street compensation. Why should small business owners on Main Street care what happens to executive compensation for those on Wall Street?

aw42qgqs

Does Small Business Need More Government Regulations?

Here’s the Reason I Care: It comes down to government regulation. If the government can tell certain companies how much they can pay, and when, the government can also tell small business owners what they can reap from their companies. There are already various rules impacting what businesses can pay, and most of these rules already impact small businesses.

Here’s a summary:

Tax limits on compensation. Only reasonable compensation is tax deductible. The issue only comes up for owners and other top management, primarily in connection with C corporations. There’s no dollar amount for it; it depends on facts and circumstances (what would a hypothetical independent investor in the business pay for compensation to owners and top management?). Compensation to S corporation owner-employees must also be reasonable so that it’s not low-balled to avoid employment taxes.

No tax deduction can be claimed by a firm that pays reasonable compensation if it exceeds a set amount in certain situations: up to $1 million ($500,000 for the top 5 executives in medical insurance companies and companies directly assisted by the government under the Emergency Stabilization Act) and up to $500,000 for compensation to service providers covered by a Covered Health Insurance Provider (CHIP).

DOL minimum compensation rules. The Department of Labor, states, and some municipalities have minimum wage rules that require employers to pay workers at least a minimum hourly rate. By executive order, there’s a special federal minimum wage rule that applies to federal contractors, including small businesses that do work for the government. What’s more, a pending rule that is expected to take effect shortly would hike the compensation limit for employees subject to overtime pay rules.

Bottom Line

Small businesses are hypersensitive to the marketplace. If competitors raise their compensation, most others try to follow suit in order to attract and retain good employees. In other words, the marketplace sets the level of compensation.

Does this mean I oppose minimum wage rates? Not necessarily; they’ve been in place since 1938 (the hourly rate was fixed at that time at 25¢ per hour, which if adjusted for inflation would be $4.22 in 2016). I’m just a little leery of the government setting a rate that will work for all. If the rate is too high, small businesses will be forced to cut the number of workers, reduce hours, or find non-labor solutions (e.g., robotics).

So, let’s all be cautious of government action regarding compensation.

What do you think?

___________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Do You Have A Business or Do You Have A Hobby? Does It Make a Difference?

Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Business or a Hobby and Taxes!

I Don’t Know if I Have a Business or a Hobby. How Will Each Affect my Taxes?

Definition of a Hobby vs. a Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

Is Your Hobby Actually a Business?

If you’re not sure whether you’re running a business or simply enjoying a hobby, here are nine factors you should consider:

  1. Whether you carry on the activity in a businesslike manner.
  2. Whether the time and effort you put into the activity indicate you intend to make it profitable.
  3. Whether you depend on income from the activity for your livelihood.
  4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  5. Whether you change your methods of operation in an attempt to improve profitability.
  6. Whether you, or your advisers, have the knowledge needed to carry on the activity as a successful business.
  7. Whether you were successful in making a profit in similar activities in the past.
  8. Whether the activity makes a profit in some years, and how much profit it makes.
  9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it’s a business or a hobby. (It should be noted that this list is not all-inclusive.)

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

What Are Allowable Hobby Deductions?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Note: The Internal Revenue Code limits deductions that can be claimed when an activity is not engaged in for profit.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only
to the extent stated in each of three categories:

  • Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.

Still wondering whether your hobby is actually a business? Give us a call and we’ll help you figure it out.

We can be reached at (845) 344-1040 (year-round).

Or, visit our web site at: SolidTaxSolutions.com.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Tax Rules for Piggyback Businesses!

No, this term has nothing to do with farms or state fairs. It refers to small business owners who carry their businesses on their backs. They work from Starbucks or mobile homes.

Piggyback ride

I couldn’t find any statistics on piggyback businesses, but I know a number of them. From a tax perspective, what does this mean?

Mobile Homes:

Some piggybackers want to deduct the cost of operating from a mobile home. This has come under IRS scrutiny, and here are some of the results from the Tax Court:

  • An insurance agent who sold policies at recreational vehicle (RV) rallies could not deduct his own RV expenses. While use of the RV has a substantial business purpose, the Tax Court said that they could not take a home office deduction because they used the RV for personal purposes for more than 14 days in the year. Any personal use, including watching TV in the RV, makes the entire day a personal day.
  • A consultant who used his motor home for business was allowed to deduct interest on the loan to buy it as home mortgage interest. However, much of the claimed business expenses for travel in the home was disallowed for lack of substantiation.
  • An orthopedic surgeon who used his motor home to facilitate his response to “stat” pages from hospital in which he worked, and to avoid the need to rent an office and pay for accommodations while on call, could not write off all that he claimed. He had argued that the Navigator was used as a “mobile office” 85% in one year and 100% in the next despite his mileage logs suggesting a much smaller percentage of business use. The court adopted the IRS’s percentages of business use (19.42% and 22.23% respectively).

Home Office:

Working outside of a home does not prevent a business owner from taking a home office deduction. As long as there is no other fixed location for the business and the home is used for substantial administrative or managerial activities of the business, it can qualify as the principal place of business and allow for a home office deduction. The space must be used regularly and exclusively for this purpose, and not occasionally, or also for personal reasons.

Use Apps:

It’s up to the business owner to maintain records needed to support write-offs related to piggybacking activities, such as travel. Use apps on your smartphone or tablet to facilitate recordkeeping for tax purposes.

 

If any of these, or similar, situations apply to you give Solid Tax Solutions a call: (845) 344-1040.

______________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).