This is the year that business owners have been dreading. Oh, wait, successful business owners dread it. Because if your taxable (not GROSS) income exceeds $ 200K ($250K for married couples or $ 125K for those employing married filing separately [MFS] status), then you can be subject to the new ‘investment’ tax.
This 3.8% surtax is levied on dividends, capital gains, or investments, if your income exceeds those levels above. And, if your business is a Schedule S entity or a partnership (LLC or other legal partnership), then the net profits of your business flow to you as a dividend. And, that could be subject not just to income tax, but to the 3.8% surtax.
Unless you are taking an active role in your business. Oh, don’t tell me, “Of course, I am actively involved in my business!”. If you have another job, then the odds are the IRS will discern this business is not an active effort. If you have an S entity and are not paying a reasonable salary to yourself, then you will not be considered actively involved in the business.
There are several hoops through which you will have to jump. The first one is how many hours are you truly involved in this entity. If it is not 500 hours, you do not pass go. If you are the sole participant and have no other employment, then you won’t have to document the 500 hours. If you have other employment and it is verifiably only part-time, then you are probably OK.
But, what if this business is rental real estate? (That covers about 15% of my client base, by the way.) The old rule was that you needed to be a real estate professional; one who spends some 750 hours a year devoted to the business. That exceeds the 500 hour requirement. But, if you don’t meet that requirement, your Schedule E (the form for rental real estate business- but not always) will be limited as a passive involvement- and the 3.8% surcharge will also apply. That’s a double whammy to your net income.
So, now you not only have to document the business miles on your car, but your business hours. If you are among our clients, we have a smartphone app that will let you track both of them with ease. If not, we suggest you find one that makes this accounting easier to complete.
Or, be prepared to pay more taxes. A lot more.
The app sounds like a good solution. Or at least one of those little spiral notebooks for the old-schoolers…
Carolina HeartStringshttps://www.adjuvancy.com/wordpress/index.php?social_controller=auth&social_action=authorize&key=facebook&post_id=16313 recently posted..STRAWBERRY DROP SCONES
We thought it was pretty good, Alessa. That’s why we offer it to our clients. (It also helps us, since their data is well organized.)
As if taxes couldn’t get any more complicated!
OH, these rules aren’t so bad, Suerae. If you want to see some of those, let me know 🙂