It seems like the left and the right have entered into a competition as to which side can make the silliest tax observation. The New York Times came out strong for the left as its team of reporters was handed fragments of Trump’s 1995 tax filings. They proceeded to “explain” flow-through entities and net operating losses, fairly mundane tax concepts, as if they were tools of Satan. It did not take long for the right to strike back at least as imprudently.

Pedants will argue that you shouldn’t refer to Code Section 183 – Activities not Engaged in For Profit as the “hobby loss rule”, because the word hobby appears nowhere in the statute. The pedants scored a point in 2021, but I will still be sticking with the term. It looked like a slow year for hobby loss developments, but we finished with two major cases including a big taxpayer win. Let’s take a look.

Question: How can my rental real estate property qualify for the 199A QBI deduction?

Answer: The age-old CPA answer of “it depends” certainly applies here. To qualify for the 20 percent deduction, your enterprise has to, as a threshold, be a trade or a business. So whether a real estate rental is a trade or a business is a thing that matters like… Can analysis be worthwhile?

Real estate management companies that want to distinguish themselves should be looking at IRS Notice 2019-07. That is the main lesson of today’s post, but it also applies to tax preparers and self-sufficient owners. There is something new to keep track of, and it is a lot easier if you do it as you go rather than after the fact.

I’ve got something here for preparers and property managers, when acting sooner rather than later will be helpful. It’s theory is it is easier to collect information actively when it is fresh, rather than a year or more later as often happens in tax work.

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The flurry of tax provisions, meant to alleviate the economic dislocation of the Covid plague, have made many tax practitioners sensitive to the possibility of Married Filing Separately yielding a lower tax for a couple. Back in the day, it was rare enough that many felt they could safely ignore it. Lindsay Starrett of Baker Starrett in Grinnell, Iowa, gave me an example of saving taxpayers $3,500.

I am not going to try to parse the details of that or other examples. I will just refer you to Reilly’s Sixth Law of Tax Planning: Don’t do the math in your head. Have good software and code income items as taxpayer, spouse, or joint. You may need to run multiple computations moving the dependent’s around. Also be aware, the IRS may not be as cooperative as it should be in allocating estimated tax payments. One of my old friends wrote me:

“In 2020, we did MFS returns for the $10,200 unemployment exclusion and learned the IRS is unable to …”

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I have always thought of separate filing as something that filers should seriously consider for the final year of marriage or in circumstances where you think your spouse has significant audit exposure that you don’t want to share. The circumstances in which two married filing separate returns would yield a lower aggregate tax than a joint return were so rare that everyone I knew entirely discounted it. Things are different in 2021 (Also in 2020, but that is water under the bridge). What is driving the phenomenon are recovery rebate credits (which many received as economic income payments) and child tax credits.

Be sure and read this before sending those electronic returns before the 18th. You may just have some savings there. Click here to keep reading.

Reilly’s Fourth Law of Tax: “Execution isn’t everything, but it’s a lot” might be amended when it comes to charitable deduction of property, because there you have an area where execution is almost everything. It is also an area that dramatically illustrates the Seventh Law: “Read the instructions.”

In January, we received guidance from the IRS on the reporting requirements for charitable contributions of crypto currency . If you have followed IRS guidance on crypto and know something about charitable donation reporting requirements, the result shouldn’t surprise you , but maybe it will.

The most disturbing part of the story is that the IRS may be asking for something we can’t provide…

If you own real estate, you’re no doubt familiar with that wonderful paper loss called depreciation. But you may not be entirely aware that land cannot depreciate. Alas, you must delete part of the price you paid for your real estate land from your original purchase price to generate your tax deduction.

A cost segregation study might be the answer. The study, done by an engineer, can accurately allocate the cost between building and land. This price of the allocation can be cost-justified; after all, it can save you tax.

But at lower depreciation amounts, the benefits might not outweigh the cost, or, if you’re a tax pro, your client might not believe it does. You’ve still got a tax return to do. Regulation 1.167(a)-5 tells us that we have to do something:

In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump sum, as for example, buildings and land, the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time.

It doesn’t really give us much guidance. But you may have seen online or heard somewhere about the old 80/20 rule. That’s right, the tax law says 80 percent of cost gets allocated to the building with the remaining going to land. Only, hold on a second, I can’t find a citation for that one. Is it possible there is no such rule? Then again, Reilly’s 19th Law of Tax Planning says that Reilly uses sarcasm when discussing tax.

For the truth about this rule, continue reading here.

Frequent flyer miles and similar programs for other forms of consumption like grocery shopping raise a host of tax issues. There are the concerns of the recipients of the “rewards” and also of the issuers of the various sorts of points. A recent Tax Court decision brought the taxability of rewards into focus again and the opinion encourages the IRS to provide more guidance. Here is where we seem to be now.
This is the first of two articles discussing the tax strategies available to boat owners. Part 1 focuses on using a boat as a residence, but if that doesn’t meet your needs, stay tuned because Part 2 will cover boats for business use (including as a home office). Why not consider both options and see how your tax savings can help fund your floating condo? Keep reading to learn more.