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Are You Actively Involved in Your Investments? What it Means for Your Taxes

Posted on 01/22/16

As many of you are aware, at the beginning of 2013 the additional Medicare tax of 3.8% on investment income for high income taxpayers became effective.  Investment income includes income from activities in which you are an owner but do not participate in the operations.  These activities would include rentals of property and other trade or business that you may hold either directly or through an LLC or a corporation.  In tax terms, these are called passive activities.  This tax does not impact income from those businesses in which you have a degree of participation that the IRS deems to be “material.”  So, it is important to understand what the IRS deems material.  What do you have to do to meet that IRS’s test?  There are seven criteria.  You can meet any one of these conditions.

  1. You must have 500 hours worked in the business.
  2. You perform more than 100 hours in the business and more than anyone else in the business.
  3. You perform substantially all work for the business.
  4. You have more than 100 hours in the business, but less than 500 hours and in combination with other business meeting this same test, you have over 500 hours.
  5. You materially participated in any five of the last ten years for this business.
  6. The activity is a personal service business, and you had material participation for any three tax years (whether or not consecutive) preceding the current year.
  7. Facts and circumstances.

If your spouse meets any of these tests, you have, by attribution, met the test. Participation should be documented if it is not obvious so that it can be proven in any IRS audit.  We will need this information in preparation of your tax return.

If you do not meet any of these tests for a business, you may still be able to get material participation by grouping activities together.  That will be addressed in our next newsletter.  In the mean time, if you have questions or would like more information, please contact your Kerkering Barberio representative at 941-365-4617.

About the Author

Beth C. Ebersole

Kerkering, Barberio & Co.
1990 Main Street, Suite 801
Sarasota, FL 34236
(941) 365-4617
bebersole@kbgrp.com

Ms Ebersole’s practice focus includes Business Valuation, Individual and Business Tax Consulting and International Tax. She is the tax partner in charge and heads the firm’s tax segment.

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