starting_a_business_1_notes

starting_a_business_1_notes - 1 TAX 6845 Tax Planning &...

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1 TAX 6845 – Tax Planning & Consulting (September 13) Topic: Beginning a business: Formation, periods & methods updated: August 24, 2011 I. A taxpayer may engage in a number of different types activities – business, investment, and personal – that are treated very differently in the tax code. One of the first challenges faced by tax professional is trying to distinguish trade or business activities from investment-related activities from personal activities (e.g., a hobby) A. First, why is this important? 1. Most business expenses (and losses) are deductible under Sec. 162. 2. Business deductions generally are subject to fewer limitations. 3. Business deductions generally are subject to fewer disallowance possibilities. 4. Business deductions are FOR AGI deductions (exception – a C corporation which is a separate tax-paying entity), because all feed into the individual taxpayer’s Form 1040: Schedule C profit or (loss) on line 12 (from sole proprietorships), and Schedule E profit or (loss) on line 17 (from partnerships, S- corporations, and rental activities). B. In other words, deductions from both investment-related activities (deductible under Sec. 212) & hobby activities (deductible under Sec. 183) are: 1. subject to many more limitations, 2. many more disallowance possibilities, and 3. are often FROM AGI deductions (itemized deductions may be subject to further limitations including the 2% miscellaneous floor, phase-outs, and the standard deduction).
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2 C. What is a trade or business? 1. Here is one common definition provided by the IRS: Trade or Business Activities (defined) : A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business. 2. Two important characteristics that help determine whether an activity is a trade or business are: the regularity and continuity of activities and transactions, and the existence of a profit motive 3. You do not need to actually make a profit to be in a trade or business as long as you have a “profit motive”. 4. Furthermore, the taxpayer must spend a substantial amount of time in the activity. If not, the taxpayer may be involved in a passive activity and the deductibility of losses may be limited. 5. You do need, however, to make ongoing efforts to further the interests of your business. You must devote significant time & effort to the activity and have the necessary expertise (or make efforts to acquire the necessary expertise). 6. The specific “facts and circumstances” of each case determine whether
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This note was uploaded on 09/09/2011 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.

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starting_a_business_1_notes - 1 TAX 6845 Tax Planning &...

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