Tips for the Upcoming Tax Season
The sole question the court had to address was whether Ellen could include her drive time from her home to the rentals as rental property time. Interestingly, she failed to include her travel time in her well-kept log and had to reconstruct that travel time for the court. The court ruled that her reconstruction of the travel time to and from the properties was adequate and decided that she and Richard could deduct her $69,531 in rental losses on their joint tax return. Tax reform made many good changes in the tax law for small-business owners. Unfortunately, the changes to the net operating loss (NOL) deduction rules do not fall in the "good changes" category. They are designed to hurt you and put money in the IRS’ pocket. If your business has a bad year, the new NOL rules are designed to stop you from using your business loss to find some immediate cash. You have an NOL when your business deductions exceed your business income in a taxable year. Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years. Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years. CHANGES TO NET OPERATING LOSSES AFTER TAX REFORM OLD NOL RULES
DRIVE TIME INCREASES ODDS OF DEDUCTING RENTAL PROPERTY LOSSES
Your rental properties provide a tax shelter when you can deduct your losses against your other income. To qualify, you must meet certain criteria, including passing the tax code’s 750- hour test. Keep an accurate log of the time you spend on your rentals (yes, we know this is a pain, but suffer a little and just do it). Including your drive times can help you log enough hours to meet this requirement. Mariam Trzeciak owned, managed, and rented 14 single-family homes in and near Columbus, Ohio. On their joint tax returns, she and her husband, Marc, claimed rental property losses of $126,376 and $151,884 in the two years that were subject to this IRS audit. The IRS revenue agent assigned to examine the Trzeciaks’ returns disallowed the losses as passive losses, claiming that Mariam did not qualify as a real estate professional because she could not count her drive time from her home near Dayton to Columbus, where the properties were. It took Mariam’s CPA and her lawyers almost three years to surface the home-office deduction as the savior. The IRS then allowed the drive time, which let Mariam deduct her rental property losses of $278,260. Clarence McDonald Leland traveled 13–16 hours from Mississippi to Texas and back several times each year to perform necessary work on his 1,276-acre farm in Turkey, Texas. The court noted that the IRS did not object to the inclusion of the travel time when determining Clarence’s participation in the farm and went on to say, “The facts of this case establish that petitioner’s [Clarence’s] travel time was integral to the operation of the farming activity rather than incidental.” The Leyh case involved Richard Leyh and Ellen O’Neill. Ellen owned 12 rental properties in Austin, Texas, about 26–30 miles from her home at a ranch in Dipping Springs, Texas. Ellen and Richard deducted a $69,531 loss from their rental operations. The IRS said no because Ellen, without inclusion of her drive time, failed the 750-hour test to establish herself as a real estate professional. TRZECIAK CASE LELAND CASE LEYH CASE
NEW NOL RULES
Tax reform made two key changes to the NOL rules:
1. You can no longer carry back the NOL (except for certain qualified farming losses).
2. Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.
The changes put more money in the IRS’ pocket by eliminating your ability to get an immediate tax benefit from your NOL carryback and delaying your ability to get tax benefits from future NOL carryforwards.
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