Client Alert
I Won! Now What? What Is the Tax Price of Success?
Lucky and talented folks win all sorts of prizes and awards. Often, the winnings have nothing to do with the winner’s business or profession, but sometimes there’s a professional or business connection. You might view your career arcs as a series of applications, interviews, hirings, promotions with one or multiple employers. But some career paths – musicians (both instrumental and vocal), songwriters, and composers come to mind – involve frequent auditions with a healthy dose of competition. The renown and visibility afforded to competition winners often open doors to career advancement – more and better engagements, management contracts, and media/recording opportunities. Competition prizes and awards are taxable. But these winnings might also be subject to self-employment tax that can be up to 15.3 percent on the taxable amount. While most professional musicians are in the business of being musicians, very few consider themselves in the business of being competition participants. The distinction is important and allows for tax planning and savings opportunities. To learn which is better for tax planning, keep reading.
Read MoreAvoiding Self-Employment Tax with a Limited Partner Interest
The best tax planning will often be found where both the form and substance of a transaction align in the client’s interest. One such planning activity focuses on reducing self-employment tax, and while the attempt is admirable, the substance of the transaction might be stronger than its form. Generally, if you’re a partner in a partnership, your distributive share of income is subject to Self Employment Contributions Act (SECA) tax, also known as self-employment tax. This can be up to an additional 15.3 percent on your earnings, unless an exception applies. Many tax pros attempt to mitigate this tax by simply making the spouse of the main business partner a limited partner in the entity. The thought is that an exclusion applies for SECA tax when there is a “limited partner’s” share of partnership income. But be careful! When the underlying substance overrides the form of a transaction, the taxpayer generally will lose. The IRS recently highlighted such a problem with form in its draft partnership tax instructions by saying “For purposes of self-employment tax, however, status as a limited partner is determined under Section 1402(a)(13); whether a partner is a limited partner under state limited partnership law is not determinative.” Simply calling a partner “limited” is not enough. The limited partner exception from self-employment tax creates a significant benefit when applied, but rulings focused on the substance of the partner’s interest have narrowed this exception. Let’s review how to properly qualify as a limited partner in light of the IRS’s recent emphasis in this area. In the process, we will also look at the specifics of how particular forms should still win the day by avoiding SE tax. Keep reading for more.
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Intentionally Filing a Defective Tax Return
Creativity on a tax return is a natural tendency. Many strategies and behaviors we know are wrong, e.g. not reporting all income. However, is it ever okay to disregard some deductions and pay more tax? At first glance, it would seem that the IRS should like the idea of more reported income and a higher tax liability attached to the additional income. The IRS does not.
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Side Hustles and Tax Tussles: Tax in the Gig and Share Economy Part Two
The gig economy involves more than one-off and part-time jobs. It also includes when you share your property in exchange for money. This can be a residential property, a vacation home, or even a vehicle. The gig economy has connected those who need rides and places to stay with owners via online platforms. We refer to this part of the gig economy as the share economy.
Accessing these accommodations is easy with the online platforms. But how the people participating should report their income isn’t quite as straightforward. Last time we looked at how your clients should report gig income, just like any other income made as a sole proprietor.
But making money from renting your property out is different, right? If you have clients with rental properties, you report their income on Schedule E (1040), Supplemental Income and Loss. We know from last time that we report gig economy income on Schedule C (1040), Profit or Loss from Business. So, how does rental income derived from the share economy get reported on a tax return? Every taxpayer’s favorite answer, it depends.
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Loose Change in Your Couch and Maybe a Tax Break at Your Kitchen Table
A 2023 Tax Court decision upheld what many small business owners and tax practitioners have wondered about for some time. The court found that shareholders of an S corporation could exclude rental income paid to them by their S corporation for holding planning meetings in their homes. While the IRS and court found that the amounts charged by the shareholders were excessive, the court found the arrangement itself within the bounds of the law.
This article examines this case and underlying law and when and how this is a planning idea worth pursuing, the limitations and unknowns involved, and the policy implications of this long standing exclusion. The case is Sinopoli, TC Memo 2023-105 involving the exclusion at IRC Section 280A(g).