Dear friends of RC Jones & Associates
An important new Tax Court case could provide valuable tax savings for owners of limited liability corporations (LLCs) and partners in limited liability partnerships (LLPs). The decision permits a couple to use a loss from an LLC or LLP to offset highly taxed income. Previously, it was presumed that such losses could only be used to offset income from other "passive" activities.
Background: New forms of business ownership featuring limited liability are growing in popularity. In particular, the LLC setup is advantageous for its owners (called "members"). As with other pass-through entities, like S corporations and partnerships, items of income and loss of an LLC are passed through to the members. There's only one level of tax as opposed to double taxation for C corporations.
However, the IRS has long presumed that the passive activity loss (PAL) rules automatically apply to LLCs. If a business activity is characterized as a passive activity, the loss may only be used to offset income from other passive activities. Therefore, you can't use a PAL to offset income from wages or other highly taxed income. Any excess loss is suspended and is carried forward to future years.
A passive activity is defined as a trade or business in which you do not “materially participate.” The IRS has established several tests for determining material participation. But certain activities, such as rental real estate and limited partnership interests, are treated as passive activities right from the start.
In the new case, a couple's losses from several LLCs and LLPS were disallowed by the IRS. But the Tax Court disagreed with the IRS' presumption. Unlike a limited partner in a limited partnership, LLC and LLP owners do not compromise their limited liability under state law by participating in management. Therefore, the taxpayers should not automatically be treated as passive investors. If they qualify as material participants, they can deduct the losses against other income.
This new decision may have particular significance for many LLC members. Based on the new Tax Court case, some LLC members may be entitled to refunds for prior years. Call us at (816) 792-9966 to see if it affects your situation.
Very truly yours,
Robert C. Jones
Thursday, August 20, 2009
DONATE IRA FUNDS TO CHARITY
Dear friends of RC Jones & Associates
Time is running out on a unique tax break for older taxpayers with charitable intentions. If you donate funds directly from your IRA to a qualified charity of your choice, you can avoid tax on the distribution.
The 2006 pension law created a two-year window for these tax-free distributions. This provision was extended through 2009 by last year's bailout law, so there are just a few months left to cash in on this tax break.
Here are more details: If you are age 70 ½ or older, you can exclude from tax “qualified charitable distributions” of up to $100,000 that would otherwise be taxable as IRA distributions. A qualified charitable distribution isn’t reported as taxable income or claimed as a charitable deduction. The distribution also will not increase your adjusted gross income (AGI) for other tax purposes.
For example, if you have unreimbursed medical expenses this year, the IRA distribution to charity may help you qualify for a medical expense deduction. Similarly, you might be able to reduce the tax due on Social Security benefits through such a gift.
Note that your contribution must otherwise qualify as a charitable donation. Also, contributions must be made directly by an IRA trustee to the charitable organization.
We can help you determine if this technique is appropriate for your particular circumstances. Remember this tax break expires on Dec. 31. Call us at (816) 792-9966 to arrange a one-on-one
Very truly yours,
Robert C. Jones
Time is running out on a unique tax break for older taxpayers with charitable intentions. If you donate funds directly from your IRA to a qualified charity of your choice, you can avoid tax on the distribution.
The 2006 pension law created a two-year window for these tax-free distributions. This provision was extended through 2009 by last year's bailout law, so there are just a few months left to cash in on this tax break.
Here are more details: If you are age 70 ½ or older, you can exclude from tax “qualified charitable distributions” of up to $100,000 that would otherwise be taxable as IRA distributions. A qualified charitable distribution isn’t reported as taxable income or claimed as a charitable deduction. The distribution also will not increase your adjusted gross income (AGI) for other tax purposes.
For example, if you have unreimbursed medical expenses this year, the IRA distribution to charity may help you qualify for a medical expense deduction. Similarly, you might be able to reduce the tax due on Social Security benefits through such a gift.
Note that your contribution must otherwise qualify as a charitable donation. Also, contributions must be made directly by an IRA trustee to the charitable organization.
We can help you determine if this technique is appropriate for your particular circumstances. Remember this tax break expires on Dec. 31. Call us at (816) 792-9966 to arrange a one-on-one
Very truly yours,
Robert C. Jones
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