Tax Preparer Due Diligence

Your tax return was selected for audit.  The auditor reviewed your information and disallowed some of your deductions.  As a result, you owe additional taxes including penalties and interest.  How could this happen?  You been using a trusted CPA for years to prepare your tax returns.

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“For-Profit” Business or Hobby, Analysis of Factors 5 – 9

If the business does make a profit three out of five consecutive years (two out of seven for training, showing, breeding, or racing horses), then the facts and circumstances will be evaluated to determine if the business is “For-Profit” or hobby.  There are 9 factors that are evaluated.  In the previous blog we evaluated Factors 1 – 4 of the 9 factors.  This blog reviews Factors 5 – 9.
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For-Profit Business or Hobby, Facts and Circumstances

Generally, a business is considered “For Profit” if the business generates a profit in at least three out of five consecutive years.  For training, showing, breeding, or racing horses, then the business needs to generate a profit for two out of seven years.  What if the business does not meet this test?
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Are you a real estate professional?

If you own rental property, the rental activity is generally treated by the IRS as a “passive activity.”  This is important to understand because if you operated rental property and sustained a loss, the loss can be claimed against active income, such as wages.  This loss deduction is limited to $25,000 for the claimed tax year.  The $25,000 loss deduction may be further limited by Adjusted Gross Income (AGI).  However, if you are a bona fide real estate professional, the rental activity is treated as an “active activity.”  Therefore, there is no limit on the amount of losses that can be deducted. Continue reading…