Loopholes Archives - Page 4 of 5 - Think Outside the Tax Box

Loopholes

By Peter J Reilly CPA

Tax Days of Our Lives: CPA Firm Contentious Breakup Ends in Tax Court Decision

I am going to nominate the Clark Raymond opinion as the best tax story of the year. At least, it is the best one for CPAs. You have to tease it out of the opinion, but there is a kind of rollicking story of troubled partner relationships. I did 40 years in large local and regional public accounting with a little bit of national icing on the cake and never encountered so much apparent dysfunction. Other commentary on the case has concluded that the lesson is about doing a good job maintaining your capital accounts, but I think the real lessons may be a little different.

It is public record, but the guys in the conflict are still practicing so out of professional courtesy I will refer to them as Tom, Dick, and Harry. There is another partner who is part of the story that I will call Jane. Also, for simplicity, I will ignore the fact that they held their partnership interests through single member entities and in Tom’s case in an entity with his wife who did administrative work. And I will refer to the entity involved as “the firm.”

The story is every accountant’s nightmare (and would make for a great tax-themed soap opera). Partners disagree. Partners walk out. Clients follow exiting partners to their new business leaving the old partner with debt.

Here is the story.

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All About the Augusta Rule – One of the Tax Code’s Best and Easiest Income “Loopholes”

Do you have homes in destination spots? Places where people flock during specific times of the year? Mardi Gras? Spring break? Sports championships or events? Maybe you own a home in places commonly used as film locations? For example, Albuquerque, New Mexico, is often the site for movie and television productions, and it hosts the Albuquerque International Balloon Fiesta every year (excluding global pandemics, obviously). The 10-day long event hosts well over 100,000 visitors to the city each year. But this article isn’t about Albuquerque tourism, it’s about the easiest tax-free money you will ever make.

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Does the Cohan Rule Still Matter?

Looking to write off your favorite wine? Better yet, how about deducting it while lacking the receipts? For nearly a century, freewheeling salespeople, hobnobbers, and schmoozers alike have treated potential customers and employees to fine dining and entertaining all while seeking the maximum tax break in the process with minimal substantiation. While proving these expenses has certainly gotten easier with technology, smart planners have made use of the so-called Cohan rule to enjoy the deductions without the paperwork nightmare. Want to make use of it yourself? Read on to learn more.

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How to Get More Tax Write-offs for Your Rental Property

Question: Do I need to have my LLC hold the title to my rental property to get the tax benefits? Answer: If you’re like most investors, you probably purchased your rental property in your own name. While this doesn’t keep you from accessing all the special tax breaks available with owning real estate, it does expose you to some risky liabilities. Insurance can cover a lot of predictable liabilities like slip and falls, theft, and vandalism, but there are many other things that can happen putting not only the property at risk but also your personal assets. One way to protect against this risk is by using an LLC to hold your property. Most LLCs act like a corporation in providing limited liability protection against creditors for your personal assets and your other non-real estate business activities. Like most things in law, changing the deed can lead to a whole set of problems. So be sure to think twice before changing your deed. There are two key problems this action can cause you as the property’s owner. Keep reading to learn how to overcome them.

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Conservation Easements – Is This Winning?

Looking for lucrative deductions to reduce your taxable income? Many people are turning to Conservation Land Easements (CE), and the tax authorities are doing their best to deny these deductions. When a property meets the IRS criteria for a conservation easement, the owner may qualify to deduct thousands of dollars simply by acquiring the right kind of land an LLC holds. Often, these deductions are worth much more than the actual cost of getting the LLC interest. Sounds appealing doesn’t it? Under a conservation easement, a property’s owner gives up the right to make certain changes to that property to preserve it for future generations. Such an easement usually limits the usefulness of the property and lowers its value. But the tax deduction is not based just on the property’s reduction in value. The magnitude of the deduction comes into play when the deduction’s value is calculated by taking the difference between the appraised “highest and best use” of the property and its new reduced value. These best use appraisals often make assumptions about the property’s potential creating massive tax deductions, which, of course, leave taxpayers lining up to claim. But be careful! The IRS is cracking down on what it calls an “abusive tax deduction”; even going so far as to list the strategy on its Dirty Dozen list of tax scams. Yet even after spending billions of dollars, the service is not having much success. In fact, it’s losing key arguments on the strategy. Continue reading to learn how to participate safely.

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How to Do a Backdoor Roth IRA (Safely) and Avoid the IRA Aggregation Rule and Step Transaction Doctrine

The basic concept of the “backdoor Roth IRA contribution” is relatively straightforward. Contributing directly to a Roth IRA is restricted for higher-income individuals; once a married couple has an AGI in excess of $193,000 (or $131,000 for an individual), the maximum contribution limit to a Roth IRA reduces to zero. However, anyone with earned income can contribute to an IRA, regardless of how high their income is; at worst, higher income levels may limit the deductibility of that IRA contribution (for those who are an active participant in an employer retirement plan), but not the ability to make the IRA contribution. In addition, under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), there have been no income limits on Roth conversions of traditional IRAs since 2010. As a result, anyone who has funds in a traditional IRA, whether originally deductible or not, is eligible to do a Roth conversion. In other words, while income limits remain on Roth contributions, there are no income limits for a Roth conversion.

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Avoiding Passive Loss Limitations Through Short-term and Alternative Rentals

Short-term rentals like AirBnb are becoming increasingly popular with taxpayers who invest in real estate. For many taxpayers, the appeal of these properties is the flexibility and cash flow potential. However, there may be an overlooked third tax benefit. In many situations these short-term rentals may not qualify as a rental activity to the IRS, and that may offer a big tax break. While many rental activities generate losses, this can leave taxpayers facing the frustrations of not always getting to deduct those losses right away due to the passive activity limitations.

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