Before you read this blog, I want to remind you it is a provocative blog.
Despite the President’s strong words, Congress will have no part of a preemptive strike. Article One of the U.S. Constitution gives this power to Congress.
Today, I was listening to CNN interview with Hawaii’s head of disaster planning. Hawaii’s plan is a siren alarm with about a ten-minute warning before impact. To protect yourself, Hawaii is telling its citizens to cover their eyes.
But wait! Hawaii can’t afford the siren and needs Congress to appropriate the funds. Congress is gone for the summer and will be back in about a month.
The U.S. Defense Department acknowledges that N. Korea has many ballistic missiles and the miniature warheads. Landing anywhere in the 20,000 square miles of the Los Angeles basin is a success for North Korea.
So, what to do if you live outside of California to save taxes?
Table of Contents
During the Great Recession, businesses were not ready to reap the maximum tax savings.
The biggest challenge is understanding the complex math equation. The tax law is a two-part computation. One part is your non-business income reduced by your non-business expense (usually your itemized deductions).
The other part is computing your business losses. This is easy unless you own real estate. Not all rental actives are a business. It depends on the lease term. Often a net lease is not business income (which makes it non-business income).
Once you compute these amounts, you adjust your taxable income (for the loss year). You reduce your taxable income by the reduction of nonbusiness income and all of the business loss. This amount is you net operating loss.
The IRS has a special tax form to compute the net operating loss. The form is on this link. Use pages 3-5.
This is important. The At Risk Tax Law hurt many small businesses during the Great Recession. Business owners transferred money from a profitable company directly to the unprofitable company cover the losses.
However, inter-company loans do not qualify as an “At Risk” investment.
The At Risk tax law prevents the deduction of legitimate losses on your tax return.
For example, Bob has an S-corporation and a single member LLC. The S-corporation has plenty of money; but the LLC is losing money. Bob has the S-corporation loan money directly to the LLC to pay for the losses. The losses paid by this loan are not deductible on Bob’s tax return.
If instead, the S-corporation had distributed the money to Bob and he placed the money in the LLC, then the losses are deductible. You can find more information on this topic on this link.
Privately owned businesses (versus those on a stock market) are either an LLC, S-corporation or a partnership. Thus, the tax planning is on the owner’s return. You may want to wait until year end because timing your types of income is the key.
The tax law is called a net operating loss carryback. Assume in early 2018; a few N. Korean missiles land on L.A. and San Diego wiping out the ports, the population, and economy. America will immediately go into another Great Recession. The loss that occurs in 2018 can be used to get you a refund for 2017 and 2016.
On the individual tax return, you must carefully plan your nonbusiness income to be reduced by non-business expenses. For example, if you have investment income of $10,000 then you want itemized deduction of $10,000…not $8,000 or $12,000. You want exactly $10,000. This will increase the amount of your net operating loss deduction.
Nonbusiness income includes IRS and 401K distributions. If you have $12,000 of itemized deductions, then consider taking $2,000 from your qualified retirement plan.
On the business side, you want to time your income to fall into 2018. You want to time your expenses to fall into 2017.
Tax planning for capital assets is tricky because they tend to drop during a recession. The last type of loss you want is a capital loss because it is deductible only against capital gains.
The IRS has a worksheet that is used for these complex calculations. The worksheet is also complex and I suggest that you work on the worksheet with your CPA. Here is the link to the IRS worksheet. Use pages 3-5.