Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Life's losers can win some tax benefits

- by Alan Duvall 

Published in Dayton Daily News  March 18, 2007 

“Gimme – An agreement between two losers who can’t putt.” Jim Bishop 

Life losers often look to the IRS for some degree of compensation for monies foregone.  However, they often find a deductible field laced with hidden land mines. 

Sales of personal assets cannot generate deductible losses.  However, if the personal assets are converted to business or investment assets before the sale, they can be counted as deductible losses. 

Business losses are fully deductible to the extent of an owner's investment, a calculation which can be a daunting task.

The owner’s investment may include capital or loan infusions, as well as a share of company debts if the company is taxed as a partnership.   

Business losses may also evaporate if the IRS deems the venture to be a hobby.  Typically, if the activity earns a positive profit in at least 2 out of 5 consecutive years it's presumed to be a business.  

Rental losses may be considered “passive” and thus subject to deduction limitations.  Business owners may be startled to discover that even real estate rented to their own businesses may generate passive losses subject to deductibility timing issues.  Solution – just make sure related party rent is sufficient to create a positive net income.  

Losses incurred from a transaction entered into for profit, such as investment activities, may be deductible subject to capital loss timing limitations.  In addition, expensing of interest incurred to acquire such assets may be limited to offsets against other investment income. 

The deductibility of any loss due to a sale to a related party is always in question.  Related parties may include family members, business partners or commonly owned businesses. 

Casualty and theft losses are itemize deductible subject to a vast array of limitations.  Such expenses have been recently enhanced due to the Katrina hurricane season. 

Most who gamble may only offset annual losses against same-year gambling income.  Since the gambling losses are itemize deducted, many taxpayers subsequently owe large state taxes on gross gambling winnings. 

“Beautiful loser, where you gonna fall?  You realize you just can’t have it all.”  Bob Seger  

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.