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New!  comer Week 5

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Rodney appears to be quite the entrepreneur since he is the owner of multiple businesses as a sole proprietor, at least that is my assumption based on the information given.  A sole proprietor would fill out a Schedule C Form for each business activity and the result of this form would be reported on the individual’s Form 1040 (Spilker et al., 2015).  Rodney should fill out a Schedule C IRS form for each business and this form documents each business’s income and expenses as well as overall profit or loss (Spilker et al., 2015).  The profit or loss is entered onto line 12 of the form 1040 so it can be included in the individual’s overall tax return (Spilker et al., 2015). 

Another concern is whether these activities are profit motivated activities or personal objective motivated.  Based on the description of the activities all four appear to be profit motivated even though the clothing store had an overall loss this year.  Profit motivated activities are normally classified as a business or as an investment.  The determinant is based on how much involvement someone has in the activity (Spilker et al., 2015).  For example, an individual who owns a stock really has very little involvement in the outcome of the stock’s value so it is considered an investment whereas an individual who owns a business who makes day to day decisions and has ongoing involvement is normally able to classify the activity as a business for tax purposes.  Looking at Rodney’s activities it is apparent that his office building in Atlanta clearly meets the definition of a business since he is the day to day manager and normally occupies the office at the building.  He spends quite a bit less time at the other three activities which makes me think they may not qualify as a business for tax purposes.  The Schedule C, the required IRS form for businesses, requires you to certify that you “materially participate” in the operations of the business to document that the activity qualifies as a business for tax purposes.  So, what does “materially participate” mean?  It means that an individual must participate in the activity on a continuous, regular, and spend a substantial amount of time towards operations associated with the business (“No PAL Deduction,” 2012).  A more quantifiable metric to describe this is that the individual should participate in running the activity for at least 500 hours per year (“No PAL Deduction,” 2012).  In addition, if a manager is onsite and paid to manage the business, it normally prevents the owner from claiming the activity as a business, instead this venture is viewed as an investment (“No PAL Deduction,” 2012).  So, in my opinion, the office building is the only activity that qualifies as a business since he is the day to day manager and spends most of his time at that office.  He spends a significant amount of time at the golf course, 30 weekends per year, but that is not enough time to meet the 500-hour rule and he also spends a significant amount of time golfing when he is there so time would not qualify.  He spends even less time at the other two activities and he has an on-site manager at the sports bar so those two would not qualify either.  Other than the office building, Rodney should treat these activities under the passive activity rules since he does not materially participate (Spilker et al., 2015).  The Form 8582 is used to document passive income and losses (“Topic Number 425”, 2018).

My advice to Rodney is to consider spreading his time amongst his business such that he spends 500 hours on each business, so he can take advantage of business deductions.  Deductions for passive income are limited and an overall passive loss cannot be used to offset ordinary income.  If he were to spend about ¼ of his time at each business, he would spend about 500 hours towards each business and be able to take advantage of the business tax advantages. 

References

No PAL Deduction for Ranch Owner Who Failed to Materially Participate. (2012).  Federal Tax

Course Letter,  26(3), 13–15. Retrieved from http://ezproxy.apus.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&AuthType=ip&db=bth&AN=72067037&site=ehost-live&scope=site

Spilker, B.C., Ayers, B.C., Outslay, E, Weaver, C. D., Barrick, J. A., Robinson, J. R., &   Worsham, R. (2015).  Taxation of individuals and business  entities. New York, NY:         McGraw Hill Education.

Topic Number 425. (2018).  www.IRS.gov .  Retrieved from https://www.irs.gov/taxtopics/tc425

New!  Re: comer Week 5 

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Rodney,

Thanks for your reply..  It does sound like each goes on it's own schedule C.  But, if he doesn't actively participate in one or more of them is a loss going to be disallowed based on the Passive Loss rules?

Could he get away with adding all of them together and putting it on one schedule C?

New!  Re: comer Week 5 

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Sir,

I think that only the office building qualifies as an active business so that is the one that needs to be documented on a schedule C.  The other three are passive activities or investment activities since Rodney does not materially contribute in the day to day operations nor spend in excess of 500 hours per year managing the activities.  

Thank You,

Brett

New!  Personal property and Real property

Diego Rugel(Oct 30, 2018 10:04 PM)- Read by: 3

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Most businesses make investments in property, plants and equipment that is expected to provide its services for a certain amount of year, also known as the “expected life” of the asset. When businesses report their financial status and file tax returns, they must capitalize these assets for a number of years of more than one on the balance sheet rather than reporting the cost all at once. This process can be accomplished through the cost recovery method and the depreciation method (Spilker, 2015). Businesses must pick the accounting methods for the assets acquired during the year.

As for this week’s scenario, Rodney owns 4 business that are considered to be “ Real property” which, includes buildings and land (nondepreciable) and during the recovery method must be depreciated throughout its expected life.

Many businesses calculate their tax depreciation using the Modified Accelerated Cost Recovery System (MACRS), also known as “makers” by tax accountants. Using the MACRS is quietly simple when compared to financial depreciation. In order to compute a depreciation of an asset using MACRS, a business must know the original cost, the applicable depreciation method, the asset’s recovery period (depreciation life) and the applicable depreciation convention (the amount of depreciation deductible in the year of acquisition and the year of disposition) The method, recovery, period, and convention depend on whether the asset is personal property or real property (Spilker, 2015).

For Activity A and B, Rodney should use the personal property depreciation method because these refers to the depreciation of tangible assets such as computers, furniture and equipment that was required in order to make these businesses operational. MACRS provides three acceptable methods for depreciation of personal property: 200 percent (double) declining balance (DB), 150 percent declining balance, and the straight-line (Spilker, 2015). Rodney should file IRS form 1040A because taxable income is less than $100,000 (NerdWallet, 2018).

For Activity C and D, Rodney should use the real property depreciation method because these refers to the depreciation of land, residential property, or nonresidential property, and always remember that land is nondepreciable. Residential property is made out of dwelling units such as condominiums, houses and apartment units with a 28.5 recovery period, while nonresidential property consists of office buildings, manufacturing facilities, shopping malls etc. with a 39-year recovery period if placed in service on or after May 13, 1993. And after December 31, 1986 and before May 13, 1993 has a 31.5-year recovery. Depreciation of real property can be accomplished using the straight-line method. Rodney should file IRS form 1040 because taxable income is more than $100,000 (NerdWallet, 2018)

References

Spilker, B. (2015).  Taxation of Individuals and Business Entities Edition 6thMcGraw-Hill.  

            NerdWallet (2018).  IRS Form 1040: What it is and which one to Use in 2080. Retrieved from  https://www.nerdwallet.com/blog/taxes/1040ez-1040a-1040-deciding-tax-form/    

New!  Re: Personal property and Real property 

William Whitley(Oct 31, 2018 1:59 PM)- Read by: 1

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Thanks Diego.  Is he going to file that like it is one business or like each are separate businesses?   What would you do if you were doing a return for a taxpayer who has more than one rental  house or office building that he or she rents to others?