Get Started on Your 2015 Tax Planning
Check the Tax Issues in Family Loans
To Grow or Not To Grow? That's a Business Question
Did Your Business Have a Net Operating Loss in 2014?
Before you put your 2014 federal income tax return in the virtual or physical file drawer, check for items that can affect your 2015 planning. Here are three.
Capital Loss Carryovers.
If your capital losses exceeded your capital gains in 2014, you may be able to carry any unused loss to future years. For planning purposes, remember you can apply the loss against 2015 capital gains as well as up to $3,000 of other income a benefit to remember when you're rebalancing your portfolio this year.
Tip: Keep track of your capital loss carryforward for alternative minimum tax planning and projections. In some cases, this amount can be different from the carryforward calculated for your regular income tax. Charitable contribution carryovers. Was your charitable donation deduction limited for 2014 or prior years? You may have a carryover that you can use if you're going to itemize on your 2015 tax return.
Charitable Contribution Carryovers
Was your charitable donation deduction limited for 2014 or prior years? You may have a carryover that you can use if you're going to itemize on your 2015 tax return.
Tip: Take this carryover into consideration when planning your 2015 donations so you don't lose the benefit of older unused amounts. Charitable contribution carryforwards have a five-year life.
Net Operating Loss Carryover
If your business had a loss in 2014, you had to make an election if you wanted to carry the entire loss forward to 2015. Otherwise, the general rule of carrying the net operating loss back two years applies, with the remainder carried forward 20 years.
Tip: If you did not make the carryforward election with your 2014 return, you may be able to file an amended return to do so. Generally you have six months from the due date of your return to make the election.
Give us a call to schedule a tax planning appointment. We're ready to help you get the most benefit from these and other carryovers, such as investment interest, tax credits, and passive activity losses.
Lending to family members probably dates back to the invention of money. The IRS entered the mix a great deal later, but it now looms large in the equation. Tax problems can arise when you first lend money, as you're being repaid, or if you're not repaid. The issues usually involve imputed income, gift tax, or bad debts.
• Imputed income. Imputed income is revenue presumed earned but neither recognized nor received by the alleged recipient. The IRS may impute interest on a loan at the "applicable federal rate" (AFR) when a lower rate (or no interest) is charged. The agency then assesses tax on the excess of the imputed interest over the amount required by the terms of the loan.
• Gift tax issue. When the IRS imputes phantom interest, it also creates phantom taxable gifts. The imputed interest is treated as though the borrower actually paid it to the lender, whereupon the lender returned it to the borrower as a gift. Since the lender "constructively received" the additional interest, he or she owes income tax on it. Since the lender then presumably gave the interest back to the borrower, he or she also owes gift tax on it, unless an exclusion or credit applies.
• Bad debt deduction. Normally, a loan that goes bad is deductible, either against ordinary income (if made for a business purpose) or as a short-term capital loss. However, when the defaulting party is related, the IRS may demand clear and convincing evidence that the original loan was not actually a gift. Once a loan is recharacterized as a gift, no bad debt deduction will be allowed if the loan isn't repaid, and the lender also may owe gift tax on the principal unless an exclusion or credit applies.
Interest need not be charged and will not be imputed on a family loan of $10,000 or less unless the loan directly relates to purchasing or carrying income-producing assets. Without a written document imposing interest at the applicable federal rate (AFR) or higher, the loan probably will be considered a gift and thus will not be deductible if not repaid.
Interest will be imputed on a family loan over $10,000 if the stated rate is below the AFR. However, unless the principal exceeds $100,000, imputed interest will be limited to the borrower's annual net investment income, and no interest will be imputed if that income is $1,000 or less.
Obviously, lending to relatives can create unintended tax consequences. You should always have a written loan agreement on family loans to document the transaction for the IRS. Please contact us for guidance before you make any family loans.
To grow or not to grow is a decision most successful small businesses face at some point. There can be opportunity and profit in growth, but there can be perils and risks as well. What should you as a business owner consider when you are faced with this important decision?
BENEFITS. First, analyze the potential benefits of expanding your business.
• The business can often achieve attractive economies of scale from increased buying power and operational efficiency. This can often reduce your cost structure and improve your margins. Growing your margins at a faster rate than your sales growth can achieve remarkable financial results.
• Growing organizations can often attract more skilled employees who prefer larger organizations with more opportunities for promotion and development.
• Growing organizations generally have a greater opportunity to go public.
RISKS. Next, take a look at the risks your business faces if you expand operations.
• Larger organizations typically require more elaborate systems and tend to be less personal than smaller companies. As it grows, the business will probably have a more rigid management structure.
• Increased complexity can result as operational issues tend to expand faster than anticipated. Operating remote locations can be very challenging.
• Loss of control may be a consequence of expanded operations. Growing companies face significant integration changes, and developing capable managers can be difficult.
For help in analyzing your company's situation, please talk to us. We can help you weigh the benefits and risks of expanding your business.
If you reported more business expenses than income on your 2014 tax return, you may have a net operating loss. That means you have the opportunity to apply your loss to past and future tax years to generate a refund or reduce your tax liability.
Unless you elected to carry the entire loss to future years, the general rule is you can use it to offset income in the two prior years, then carry the remainder, if any, forward for the next 20 years. Here's how it works. Your 2014 operating loss will first reduce the income you reported on your 2012 and 2013 federal income tax returns, potentially generating refunds for those years. Any remaining 2014 operating loss can be used to offset income on future tax returns, beginning with the one you'll file next April for 2015.
You claim the carryback on "Form 1045, Application for Tentative Refund," or "Form 1040X, Amended U.S. Individual Income Tax Return." Using Form 1045 will result in a faster refund, but you must file the return within a year of the "loss year" that is, by December 2015 for an operating loss reported on your calendar year 2014 tax return. If you choose to file Form 1040X, you have up to three years from the due date of your 2014 return to amend prior-year forms. Either way, the IRS will pay interest after 45 days if the return is not processed in that time.
You'll report any operating loss remaining after the carryback on Form 1040 in future years as a negative number on the line for "other income." You will need to attach a statement showing how you calculated the amount.
Give us a call to discuss other rules and tax planning moves for net operating losses. We're here to help.
