A Real Estate Course – And Dave

 

The case made me think of Dave, a friend from long ago – one of those relationships that sometimes surrenders to time, moving and distance.

Dave was going to become a real investor.

That was not his day job, of course. By day he was a sales rep for a medical technology company. And he was good at sales. He almost persuaded me to join his incipient real estate empire.

He had come across one of those real estate gurus – I cannot remember which one – who lectured about making money with other people’s money.

There was even a  3-ring binder or two which Dave gave me to read.

I was looking over a recent case decided by the Tax Court.

The case involved an engineer (Eason) and a nurse (Leisner).

At the start of 2016 they owned two residential properties. One was held for rent; the other was sold during 2016.

COMMENT: Seems to me they were already in the real estate business. It was not a primary gig, but it was a gig.

Eason lost his job during 2016.

A real estate course came to his attention, and he signed up – for the tidy amount of $41,934.

COMMENT: Say what?

In July 2016 the two formed Ashley & Makai Homes (Homes), an S corporation. Homes was formed to provide advice and guidance to real estate owners and investors.  They had business cards and stationary made and started attending some of those $40 grand-plus courses. Not too many, though, as the outfit that sponsored the courses went out of business.

COMMENT: This is my shocked face.

By 2018 Eason and Leisner abandoned whatever hopes they had for Homes. They never made a dime of income.

You know that $40 grand-plus showed up on the S corporation tax return.

The IRS disallowed the deduction.

And tacked on penalties for the affront.

This is the way, said the IRS.

And so we have a pro se case in the Tax Court.

Respondent advances various reasons why petitioners are not entitled to any deductions …”

The respondent will almost always be the IRS in these cases, as the it is the taxpayer who petitions the Court.

And we have discussed “pro se” many times. It generally means that a taxpayer is representing himself/herself, but that is not fully accurate. A taxpayer can be advised by a professional, but if that professional has not taken and passed the exam to practice before the Tax Court the matter is still considered pro se.

Back to the Court:

          … we need to focus on only one [reason].”

That reason is whether a business had started.

Neither Homes nor petitioners reported any income from a business activity related to the disputed deductions, presumably because none was earned.”

This is not necessarily fatal, though.

The absence of income, in and of itself, does not compel a finding that a business has not yet started if other activities show that it has.”

This seems a reasonably low bar to me: take steps to market the business, whatever those words mean in context. If the context is to acquire clients, then perhaps a website or targeted advertising in the local real estate association newsletter.

Here, however, the absence of income coupled with the absence of any activity that shows that services were offered or provided to clients or customers […] supports respondent’s position that the business had not yet started by the close of the year.”

Yeah, no. The Court noted that a business deduction requires a business. Since a business had not started, no business deduction was available.

The Court disagreed with any penalties, though. There was enough there that a reasonable person could have decided either way.

I agree with the Court, but I also think that just a slight change could have changed the outcome in the taxpayers’ favor.

How?

Here’s one:  remember that Eason and Leisner owned a rental property together?

What if they had broadened Homes’ principal activity to include real estate rental and transferred the property to the S corporation? Homes would have been in business at that point. The tax issue then would have been expansion of the business, not the start of one.

Our case this time was Eason and Leisner v Commissioner, T.C. Summary Opinion 2024-17.

Taxing A 5-Hour Energy Drink

 

I am skimming a decision from the Appeals Court for the District of Columbia. I am surprised that it is only 15 pages long, as it involves a gnarly intersection of partnership tax and the taxation of nonresident aliens.

Let’s talk about it.

In general, partnerships are not treated as a taxable entity. A partnership is a reporting entity; it reports income and expenses and then allocates the same to its partners for reporting on their tax returns. Mind you, this can get mind-numbing, as a partner in a partnership can itself be another partnership. Keep this going a few iterations and being a tax professional begins to lose its charm.

A partner will - again, in general - report the income as if the partner received the income directly rather than through the partnership. If it was ordinary income or capital gain to the partnership, it will likewise be ordinary income or capital gain to the partner.

Let’s introduce a nonresident alien partner.

We have another tranche of tax law to wade through.

A nonresident alien is fancy talk for someone who does not live in the United States. That person could still have U.S. income and U.S. tax, though.

How?

Well, through a partnership, for example.

Say the partnership operates exclusively in the United States. A nonresident alien generally pays tax on income received from sources within the United States. Let’s look at one type of income: business income. We will get to nonbusiness income in a moment.

The tax Code wants to know if that business income is “effectively connected” with a U.S. trade or business.

The business income in our example is effectively connected, as the partnership operates exclusively in the United States. One cannot be any more connected than that.

The partnership will issue Schedules K-1 to its partners, including its nonresident alien partner who will file a U.S. nonresident tax return (Form 1040-NR).

Question: Will any nonbusiness income on the K-1 be reportable on the nonresident?

The tax Code separates business and nonbusiness income because they might be taxed differently for nonresidents. Nonbusiness income can go from having 30% withholding at the source (think dividends) to not being taxed at all (think most types of interest income).

What if the Schedule K-1 reports capital gains?

I normally think of capital gains as nonbusiness income.

But they do not have to be.

There is a test:

If the income is derived from assets used or held for use in the conduct of an effectively connected business – and business activities were a material factor in generating the income  – then the income will taxable to a nonresident alien.

Think capital gain from the sale of farm assets. Held for use in farming? Check. Material factor in generating farm income? Check. This capital gain will be taxable to a nonresident.

Forget the K-1. Say that the nonresident alien sold his/her partnership interest altogether.

On first impression, I am not seeing capital gain from the sale of the partnership interest (rather than assets inside the partnership) as meeting the “held for use/material factor” test.

Problem: partnership taxation has something called the “hot asset” rule. The purpose is to disallow capital gains treatment to the extent any gain is attributable to certain no-no assets – that is, the “hot assets.”

An example of a hot asset is inventory.

The Code does not want the partnership to load up on inventory with substantial markup and then have a partner sell his/her partnership interest rather than wait for the partnership to sell the inventory. This would be a flip between ordinary and capital gain income, and the IRS is having none of it.

Question: have you ever had a 5-hour Energy drink?

That is the company we are talking about today.

Indu Rawat was a 29.2% partner in a Michigan partnership which sells 5-hour Energy. She sold her stake in 2008 for $438 million.

I can only wish.

At the time of sale, the company had inventory with a cost of $6.4 million and a sales price of $22.4 million. Her slice of the profit pending in that inventory was $6.5 million.

A hot asset.

The IRS wanted tax on the $6.5 million.

Mind you, Indu Rawat did not sell inventory. She sold a partnership interest in a business that owned inventory. That would be enough to catch you or me, but could the hot asset rule catch a nonresident alien?

The Tax Court agreed with the IRS that the hot asset gain was taxable to her.

That decision was appealed.

The Appeals Court reversed the Tax Court.

The Appeals Court noted that there had to be a taxable gain before the hot asset rule could kick in. The rule recharacterizes – but does not create – capital gain.

This capital gain does not appear to meet the “held for use/material factor test” we talked about above. You can recharacterize all you want, but when you start at zero, the amount recharacterized cannot be more than zero.

Indu Rawat won on Appeal.

By the way, tax law in this area has changed since Rawat’s sale. New law would tax Rawat on her share of effectively connected gain as if the partnership had sold all its assets at fair market value. Congress made a statement, and that statement was “no more.”

Our case this time was  Indu Rawat v Commissioner, No 23-1142 (D.C. Cir. July 23, 2024).

Gambling As A Trade Or Business

 

The question came up recently:

How does one convince the IRS that they are a professional gambler?

The answer: it is tough. But not impossible. Here is a quote from a landmark case on the topic:

If one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.” (Groetzinger)

First, one must establish that the gambling activity is an actual trade or business.  

Believe or not, the term “trade or business” is not precisely defined in the tax Code. This point drew attention when the Tax Cuts and Jobs Act of 2017 (TCJA) introduced the qualified business deduction for – you guessed it – a trade or business. Congress was stacking yet another Code section on top of one that remained undefined.

Court cases have defined a trade or business an activity conducted with the motive of making a profit and conducted with continuity and regularity.

That doesn’t really move the needle for me.

For example, I play fantasy football with the intention of winning the league. Does that mean that I have the requisite “profit motive?” I suppose one could reply that - even if there is a profit motive - there is no continuity or regularity as the league is not conducted year-round.

To which I would respond that it cannot be conducted year-round as the NFL is not played year-round. Compare it to a ski slope – which can only do business during the winter. There is no need for a ski slope during the summer. The slope does business during its natural business season, which is the best it can do. My fantasy football league does the same.

Perhaps you would switch arguments and say that playing in one league is not sufficient. Perhaps if I played in XX leagues, I could then argue that I was a fantasy football professional.

OK, IRS, what then is the number XX?

The tax nerds will recognize the IRS using that argument against stock traders to deny trade or business status. Unless your name rhymes with “Boldman Tacks,” the IRS is virtually predestined to deny you trade or business status. You trade 500 times a year? Not enough, says the IRS; maybe if you traded 1,000 times. The next guy trades 1,000 times. Not enough, says the IRS. Did we say 1,000?  We misspoke; we meant 2,000.

So the courts have gone to the Code section and cases for hobby losses. You may remember those: hobby losses are activities for which people try to deduct losses, arguing that they are in fact true-blue, pinky-swear, profit-seeking trades or businesses.

You want an example? I’ll give you one from Galactic Command: a wealthy person’s daughter is interested in horses and dressage. Mom and dad cannot refuse. At the end of the year, I am pulled into the daughter’s dressage activity because … well, you know why.

Here are additional factors to consider under the (Section 183) hobby loss rules:

1.  The activity is conducted in a business-like manner.
2.  The taxpayer’s expertise
3.  The taxpayer’s time and effort
4.  The expectation that any assets used in the activity will appreciate in value.
5.  The taxpayer’s history of success in other activities
6.  The taxpayer’s history of profitability
7.  The taxpayer’s financial status
8.  The presence of personal pleasure or recreation

I suspect factors (7) and (8) would pretty much shut down that dressage activity.

Let’s look at the Mercier case.

The Merciers lived in Nevada. During 2019 Mrs Mercier was an accountant at a charter school and Mr Mercier operated an appliance repair business. They played video poker almost exclusively, of which they had extensive knowledge. They gambled solely on days when they could earn extra players card points or receive some other advantage. They considered themselves professional gamblers.

Do you think they are?

I see (3), (7) and (8) as immediate concerns.

The Court never got past (1):

We find that although Petitioners are serious about gambling, they were not professional gamblers. Petitioners are both sophisticated in that they are an accountant and a previous business owner. Petitioner wife acknowledged that as an accountant, she would advise a taxpayer operating a business to keep records. Petitioner husband acknowledged that for his appliance repair business, he did keep records.”

COMMENT: In case you were wondering about the sentence structure, this was a bench opinion. The judge made a verbal rather than written decision.

Petitioners did not personally keep track of their gambling activity in 2019 choosing, instead, to rely on third-party information from casinos, even though they further acknowledged that the casino record may be incomplete, as only jackpot winnings, not smaller winnings, are reported. Petitioners also did not keep a separate bank account to manage gambling winnings and expenses, but used their personal account, which is further evidence of the casual nature of their gambling.”

My thoughts? The Merciers were not going to win. It was just a matter of where the Court was going to press on the hobby-loss checklist of factors. We have learned something, though. If you are arguing trade or business, you should – at a bare minimum – open a business account and have some kind of accounting system in place.  

Our case this time was Mercier v Commissioner, Tax Court docket number 7499-22S, June 6, 2023.

Donating Cryptocurrency

 

I was reading something recently, and it reminded me how muddled our tax Code is.

Let’s talk about cryptocurrency. I know that there is bad odor to this topic after Sam Bankman-Fried and FTX, but cryptocurrencies and their exchanges are likely a permanent fixture in the financial landscape.

I admit that I think of cryptos – at least the main ones such as Bitcoin, Ethereum or Binance Coin – as akin to publicly traded stock. You go to www.finance.yahoo.com , enter the ticker symbol and see Bitcoin’s trading price. If you want to buy Bitcoin, you will need around $23 grand as I write this.

Sounds a lot like buying stock to me.   

The IRS reinforced that perspective in 2014 when it explained that virtual currency is to be treated as property for federal income tax purposes. The key here is that crypto is NOT considered a currency. If you buy something at Lululemon, you do not have gain or loss from the transaction. Both parties are transacting in American dollars, and there is no gain or loss from exchanging the same currency.

COMMENT: Mind you, this is different from a business transaction involving different currencies. Say that my business buys from a Norwegian supplier, and the terms require payment in krone within 20 days. Next say that the dollar appreciates against the krone (meaning that it takes fewer dollars to purchase the same amount of krone). I bought something costing XX dollars. Had I paid for it then and there, the conversation is done. But I did not. I am paying 20 days later, and I pay XX minus Y dollars. That “Y” is a currency gain, and it is taxable.

So, what happens if crypto is considered property rather than currency?

It would be like selling Proctor and Gamble stock (or a piece of P&G stock) when I pay my Norwegian supplier. I would have gain or loss. The tax Code is not concerned with the use of cash from the sale.

Let’s substitute Bitcoin for P&G. You have a Bitcoin-denominated wallet. On your way to work you pick-up and pay for dry cleaning, a cup of coffee and donuts for the office. What have you done? You just racked up more taxable trades before 9 a.m. than most people will all day, that is what you have done.

Got it. We can analogize using crypto to trading stock.

Let’s set up a tax trap involving crypto.

I donate Bitcoin.

The tax Code requires a qualified appraisal when donating property worth over $5,000.

I go to www.marketwatch.com.

I enter BTC-USD.

I see that it closed at $22,987 on January 27, 2023. I print out the screen shot and attach it to my tax return as substantiation for my donation.

Where is the trap?

The IRS has previously said crypto is property, not cash.

A donation of property worth over $5 grand generally requires an appraisal. Not all property, though. Publicly-traded securities do not require an appraisal.

So is Bitcoin a publicly-traded security?

Let’s see. It trades. There is an organized market. We can look up daily prices and volumes.

Sounds publicly-traded.

Let’s look at Section 165(g)(2), however:

    (2)  Security defined.

For purposes of this subsection, the term "security" means-

(A)  a share of stock in a corporation;

(B)  a right to subscribe for, or to receive, a share of stock in a corporation; or

(C)  a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form.

The IRS Office of Chief Counsel looked at this and concluded that it could not see crypto fitting the above categories.

Crypto could therefore not be considered a security.

As property not a security, any donation over $5 grand would require a qualified appraisal.

There was no qualified appraisal in our example. All I did was take a screen shot and include it with the return.

That means no charitable deduction.

I have not done a historical dive on Section 165(g)(2), but I know top-of-mind that it has been in the Code since at least 1986.

Do you know what did not exist in 1986?

The obvious.

Time to update the law, me thinks.

This time we were discussing CCA 202302012.

Can A Business Start Before Having Revenue?

 

It is one of my least favorite issues: when does a business start?

The reason is that expenses incurred before the start-up date are considered either organizational or start-up expenses and cannot be immediately deducted. The IRS allows a small spot (of $5,000) and expenses over that amount are to be amortized over 15 years.

It used to be five years. The issue was less of a blood sport back then.

For many of us, the start-up date is easy: it is when you open your doors to customers or clients. Let’s say you are a chiropractor. Your start-up date is when the office opens. What if you do not have a patient that day? Same answer: it is the day you open the doors.

Let’s kick it up a notch.

Say you open a restaurant. When is your start date?

The day you have first serve customers, right?

Yes, with a twist. Many restaurants have a soft opening, which is a seating for a limited number of people (think family, friends and media critics) to test service and the kitchen. This might be days or weeks before the actual grand opening – that is, when doors open to the general public.  

Many tax accountants – me included – consider a restaurant’s soft opening to be the start date.

The reason we want an earlier rather than a later date is to start deducting expenses. If you are reaching into your pocket or borrowing money to pay rent, utilities, promotion and staff, you want a tax deduction now. You might consider me to be crazy man Michael were I to talk about deducting over 15 years.

Let’s kick it up another notch. Let’s talk about a web-based business.

Gregg Kellett graduated from college in 2002 and opened a website. He went corporate in 2007, and in 2011 he moved to Bloomberg, a publisher of legal and business information. While there he saw an opportunity to better aggregate and access online demographic, social and economic data. If he could pull it off, he could offer a more user-friendly interface and make a couple of bucks in the process.

So in 2013 he bought a website (vizala.com). He formed a company by the same name. He hired remote computer engineers to develop features he wanted in the website. They finished core work in March 2015 and resolved bugs through September 2015. An example of a “bug” was an interactive table that would not presently correctly in the Firefox browser.

Kellett figured to make money at least four ways:

(1)  Selling advertising space

(2)  Implementing a paywall

(3)  Selling personalized charts and other information

(4)  Licensing data

He did not pursue any of those strategies during 2015.

However, he did deduct approximately $26 grand on his 2015 return.

He also did not earn any revenue until 2019.

Sure enough, the IRS disallowed the $26 grand because Kellett was not in an “active” trade or business. They wanted him to deduct the expenses over (almost) the same period as putting a kid though grade school and then college.

Off to Tax Court.

If we pull back to the general rule – the date of first revenues – this is going to hurt.

But the website was available by September 2015. It wasn’t rocking like Netflix upon release of the 2022 season’s second half of Stranger Things, but it was available.

The Court wanted to know what happened between 2015 and 2019.

Kellett explained that maximizing his long-term profit potential required building trust among users. After that would come the advertisers. He started building trust by promoting the website to over a hundred universities and professional organizations. This was enough work that he hired a marketing professional to assist him. The work paid-off, as about 50% on the institutions added Vizala to their lists of research databases. 

The Court understood what he did. The website was available by September 2015. It was not all it could be as Kellett had plans for its long-term profitability, but that did not gainsay that the website was available. Considering that the business was the website, that meant that the business also started in September 2015. Expenses before that date were startup expenses. Expenses after that date were immediately deductible.

Revenues did not play into the decision, fortunately.

It was the website version of the chiropractor opening his/her office, albeit with no patients on the first day.

Kellett won, but it cost a visit to Tax Court.

Our case this time was Kellett v Commissioner, T.C. Memo 2022-62.

A Horse Activity And Owning A Horse

Her story has been out there for a while.

I did a quick search and found that she appeared before the Tax Court in 2013. She was back in 2015 and now again in 2019.

Her name is Denise Celeste McMillan (McMillan), and she has to do with horses.

In the tax world, horses have to do with hobby losses.

Let’s take a moment on what that term means.

Let’s say that you take on a side gig. It is arguable how serious you are about the gig, but there is no argument that you are losing money doing it.

And you keep losing money … year after year.

The first thing you or I would ask is: why? The second question would be: how are you affording to do this?

There you have the two issues at the heart of a hobby loss challenge:

(1) Are you running your gig as a business? If the gig is lagging, a business owner would do something: market more effectively, swap-out products offered for sale, move to another location with better traffic, maybe even close the business and try something else.

(2) How can you afford this? Maybe you sold your business for huge bucks and are now following your lifelong dream of collecting every Ukrainian comic title printed from the 1950s through the 1970s. It is not a lucrative business, but it has a loyal following. You can afford to live the dream because of that big-bucks thing.

McMillan definitely loves horses. She started riding at age four and started formal lessons at age nine. She won numerous awards. She started a specialized business, taking difficult horses on consignment. She would retrain them and later sell them at a profit.

Sounds interesting.

She normally kept between one and six horses.

The more the better, methinks.

She went through a difficult stretch (ten years) owning just own horse (Goldrush).  Goldrush had issues and did not compete, show or breed.

Not good.

In 2007 she sent Goldrush to Australia to stand at stud.

That should get the revenues going again, hopefully.

In 2008 and two months after arriving in Australia, Goldrush died.

Wow.

I guess she will have to get another horse or few and restart.

She did not.

What she did however is keep deducting horse-related expenses.

And now we have her third trip to Tax Court.

She says she has a business.

The IRS says she does not.

What do you think?

Here is the Court:

We believe Ms. McMillan when she says that she’s been continuously involved with horses since the 1970s. But her last horse died in 2008, at which point she hadn’t shown or bred in a decade. We therefore find that if her horse activity was ever a trade or business, that trade or business ended before 2010, and in that year she was at most looking at starting anew.”

The Court is being diplomatic here. It is saying that her previous activity had ended, but perhaps another had taken its place.

So the question is: had she started a new activity after the death of Goldrush?

Remember that in tax-speak, an activity requires “regular and continuous” involvement. It does not have to be a 24/7 thing, but it does have to be more than “someday isle” dreamweaving over beers with a friend.

Ms. McMillan’s ‘horse breeding/showing’ business hadn’t actually commenced or resumed by the end of 2010.”        

Guess not. The best she could get would be start-up expenses, to be deducted over time once that business in fact started.

The moral of story seems clear: if you want to say that you are in the horse business, you may want to own a horse.

The New Qualified Business Deduction

I spent a fair amount last week looking over the new IRS Regulations on the qualified business deduction. It was a breezy and compact 184 pages, although it reads longer than that.

I debated blogging on this topic. While one of the most significant tax changes in decades, the deduction is difficult to discuss without tear-invoking side riffs. 

But – if you are in business and you are not a “C” corporation (that is, the type that pays its own taxes) - you need to know about this new deduction.

Let’s swing the bat:

1.    This is a business deduction. It is 20% of something. We will get back to what that something is.

2.    There historically has been a spread between C-corporation tax rates and non-C-corporation tax rates. It is baked into the system, and tax advisors have gotten comfortable understanding its implications. The new tax law rattled the cage by reducing the C-corporation tax rate to 21%. Without some relief for non-C-corporation entities, lawyers and accountants would have had their clients folding their S corporation, partnership and LLC tents and moving them to C-corporation campgrounds.

3.    It is sometimes called a “passthrough” deduction, but that is a misnomer. It is more like a non-C-corporation deduction. A sole proprietorship can qualify, as well as rentals, farms and traditional passthroughs like S corporations, LLCs and partnerships. Heck even estates and trusts are in on the act.

4.    But not all businesses will qualify. There are two types of businesses that will not qualify:

a.     Believe it or not, in the tax world your W-2 job is considered a trade or business. It is the reason that you are allowed to deduct your business mileage (at least, before 2018 you were). Your W-2 however will not qualify for purposes of this deduction.

b.    Certain types of businesses are not invited to the party: think doctors, dentists, lawyers, accountants and similar. Think of them as the “not too cool” crowd.

                                                   i.There is however a HUGE exception.

5.   Congress wanted you to have skin in the game in order to get this 20% deduction. Skin initially meant employees, so to claim this deduction you needed Payroll. At the last moment Congress also allowed somebody with substantial Depreciable Property to qualify, as some businesses are simply not set-up with a substantial workforce in mind. If you do not have Payroll or Depreciable Property, however, you do not get to play.

a.     But just like (4)(b) above, there is a HUGE exception.

6.   Let’s set up the HUGE exception:

a.     If you do not have Payroll or Depreciable Property, you do not get to play.

b.    If you are one of “those businesses” - doctors, dentists, lawyers, accountants and similar - you do not get to play.

c.     Except …

                                                   i. … if your income is below certain limits, you still get to play.

                                                 ii. The limit is $157,500 for non-marrieds and $315,000 for marrieds.

                                              iii. Hit the limit and you provoke math:

1.    If you are non-married, there is a phase-out range of $50 grand. Get to $207,500 and you are asked to leave.

2.    If you are married, double the range to $100 grand; at $415,000 you too have to leave.

                                               iv. Let’s consider an easy example: A married dentist with household taxable income of less than $315,000 can claim the passthrough deduction, as long as the income is not from a W-2.

1.    At $415,000 that dentist cannot claim anything and has to leave.

                                                 v. Depending on the fact pattern, the mathematics are like time-travelling to a Led Zeppelin concert. The environment is familiar, but everything has a disorienting fog about it.

1.    Why?

a.     The not-too-cool crowd has to leave the party once they get to $207,500/$415,000.

b.    Simultaneously, the too-cool crowd has to ante-up either Payroll and/or Depreciable Property as they get to $207,500/$415,000. There is no more automatic invitation just because their income is below a certain level.

c.     And both (a) and (b) are going on at the same time.

                                                                                                               i.     While not Stairway to Heaven, the mathematics are … interesting.

7.    The $207,500/$415,000 entertainment finally shows up: Payroll and Depreciable Property. Queue the music.

a.     The deduction starts at 20% of the specific trade or business’s net profit.

b.    It can go down. Here is how:

                                                   i. You calculate half of your Payroll.

                                                 ii. You calculate one-quarter of your Payroll and add 2.5% of your Depreciable Assets.

                                              iii. You take the bigger number.

                                               iv. You are not done. You next take that number and compare it to the 20% number from (a).

                                                 v. Take the smaller number.

c.     You are not done yet.

                                                   i. Take your taxable income without the passthrough deduction, whatever that deduction may someday be. May we live long enough.

                                                 ii. If you have capital gains included in your taxable income, there is math. In short, take out the capital gain. Bad capital gain.

                                              iii. Take what’s left and multiply by 20%.

                                               iv. Compare that number to (7)(b)(v).

1.    Take the smaller number.

8.    Initially one was to do this calculation business by business.

a.     Tax advisors were not looking forward to this.

b.    The IRS last week issued Regulations allowing one to combine trades or businesses (within limits, of course).

                                                   i. And tax advisors breathed a collective sigh of relief.

c.     But not unsurprisingly, the IRS simultaneously took away some early planning ideas that tax advisors had come up with.

                                                   i. Like “cracking” a business between the too-cool and not-too-cool crowds.  

And there is a high-altitude look at the new qualified business deduction.

If you have a non-C-corporation business, hopefully you have heard from your tax advisor. If you have not, please call him/her. This new deduction really is a big deal.