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Is Trader Tax Status Worth It?

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As we navigate a world with COVID-19, large swings in the stock market have become the norm. Many buy and hold-style investors are more actively managing their portfolios to take advantage of these swings. The IRS has a special trader status for taxpayers who frequently engage in trading. This status includes a special accounting method, not available to the average investor, that can come with substantial tax savings. The status allows an investor to make special deductions and opens the door to a wide range of tax reduction strategies unavailable to the casual investor. However, with potential savings also come risks that could end up costing the taxpayer/trader more than the average investor. Weighing the pros and cons of this status is crucial in minimizing tax liability. The big question for tax planning is this — does obtaining trader tax status result in less tax?

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When a 1031 Exchange Should Be Used for Tax Savings

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If you made money on your real estate investment, congratulations! You’re now in the same club that more than 90 percent of the world’s millionaires do to create wealth. Now it’s time for tax on that profit.

A large tax bill generally means you made a large profit. But avoiding the tax can be like having your cake and eating it too. A 1031 Exchange is an incredibly powerful tool for you to defer the tax when used in the right circumstances.

Many real estate investors and landlords look to the 1031 Like-Kind Exchange (LKE) as an excellent method of selling investment real estate without paying tax at the time of sale. This gives you more use of the cash you get at the sale and more time to use it.

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Get Automatic, No Questions Asked Penalty Relief

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The IRS loves to issue penalties to taxpayers. In fiscal year 2019, the IRS imposed a whopping $40.5 billion in civil penalties.1

If a taxpayer wants to contest an IRS penalty, it usually takes a really good explanation plus a lot of time and effort.

However, there is a little-known IRS policy that allows a taxpayer to get penalty relief with no explanations required.

Taxpayers who file returns late can quickly rack up huge penalty bills.

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Bob Dylan Shows How to Beat an Imminent Tax Increase

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Timing might be one of the oldest, most valuable tax strategies known. Essentially, a timing strategy allows a taxpayer to pay tax when rates are generally lower rather than when in a higher tax bracket or when facing increasing tax rates. Given this, 2020 may have been an optimal time to sell capital assets if tax rates rise under the new administration.

President-elect Joe Biden has suggested taxing capital gains as ordinary income for high-income taxpayers (more than $400,000), as well as raising the top tax rate from 37% to 39.6%. Here’s how to cash in on the lower rates and, more importantly, when. While tax law changes seldom pass quickly, we often see changes made retroactive to the beginning of the year they are voted into law.

Based on a recent story in The New York Times, Bob Dylan may have anticipated the increase when he sold the copyrights to his catalog of more than 600 songs for $300 million. Not to fret if you found yourself missing the beat of Dylan’s lead, there are many things a taxpayer can do to reduce capital gains tax, especially for self-created works of art. Here’s how.

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Why Can’t I Deduct PPP Payroll Expenses?

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Question: Given the recent passing of the stimulus law (CAA 2021) permitting a business to deduct payroll expenses paid with Paycheck Protection Program (PPP) funds, how does an S corporation or Partnership basis negatively impact this? I’m hearing that even though the law allows the deduction, some businesses will have suspended losses due to PPP funds. Which is true? Can a business deduct losses from PPP payroll or not?

Why Can’t I Deduct PPP Payroll Expenses? Read More »

PPP Loan Forgiveness: Now What?

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It’s finally here! After much political wrangling, Congress and President Trump signed the Consolidated Appropriations Act, 2021 (HR 133) into law on December 27, 2020. Attached to this omnibus spending bill were a number of unrelated pieces of legislation, including the latest COVID-19 relief and stimulus measures. The law puts much needed cash in the hands of business owners and individuals alike, while Congress thumbs its collective nose at the IRS by including an override of the recent notice disallowing the deduction of expenses paid for using PPP funds.

Several more key provisions in the new legislation’s Division N include process simplification and forgiveness for PPP borrowers, which will make life easier for everybody. To find out how to qualify for new rounds of stimulus, automatic forgiveness, and how to get both tax credits and free money, keep reading.

PPP Loan Forgiveness: Now What? Read More »

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