Income Tax Situation
Memo to File
Date: February 09, 2012
Re: Reducing Dr. Kevorkian’s tax liability from passive investments before year’s end.
Facts: In 2010 Dr. Kevorkian had the following transactions:
He has active income, from medical practice of $150,000 (active income). He expects to receive $10,000 in interest and dividends (portfolio income). He invests $100,000 in Limited, a limited partnership (passive income). Limited lost money and Dr. Kevorkian’s share of the loss is $15,000. In 2011 Dr. Kevorkian has the following:
He has been informed that his share of Limited’s losses will be $10,000.
In January of 2011 he opens his own laboratory which will generate $30,000 of income, and he spends 320 hours managing the lab.
Issues:
1. How to reduce Dr. Kevorkian’s tax liability?
2. Should Dr. Kevorkian invest more time in the laboratory, making that an active income activity?
Analysis:
§ 465 Deductions limited to amount at risk.
Dr. Kevorkian invested $100,000 in Limited, a passive activity; in 2010 but he is not a material participant; should he invest more time in the laboratory that he set up for himself it would change the definition from passive income to active income. Therefore, his at-risk amount of $100,000 invested in Limited could not be reduced if he chooses to invest more time in his laboratory. Based on the participation level now both activities are labeled to be passive if he should invest more time he could change that definition. The lab is generating income of $30,000, if he should invest more time in the laboratory, then he could not take advantage of his losses from Limited $15,000 in 2010 and $10,000 in 2011. His at-risk amount was $100,000, now it could be down to $100,000 - $15,000 (Limited’s loss in 2010) = $85,000; $85,000 - $10,000 (Limited’s loss in 2011) = $75,000.
He should report a passive activity credit of $5,000 ($75,000 + $30,000 = $105,000 - $100,000 = $5,000)
§469 Passive activity losses and credits limited.
Date: February 09, 2012
Re: Reducing Dr. Kevorkian’s tax liability from passive investments before year’s end.
Facts: In 2010 Dr. Kevorkian had the following transactions:
He has active income, from medical practice of $150,000 (active income). He expects to receive $10,000 in interest and dividends (portfolio income). He invests $100,000 in Limited, a limited partnership (passive income). Limited lost money and Dr. Kevorkian’s share of the loss is $15,000. In 2011 Dr. Kevorkian has the following:
He has been informed that his share of Limited’s losses will be $10,000.
In January of 2011 he opens his own laboratory which will generate $30,000 of income, and he spends 320 hours managing the lab.
Issues:
1. How to reduce Dr. Kevorkian’s tax liability?
2. Should Dr. Kevorkian invest more time in the laboratory, making that an active income activity?
Analysis:
§ 465 Deductions limited to amount at risk.
Dr. Kevorkian invested $100,000 in Limited, a passive activity; in 2010 but he is not a material participant; should he invest more time in the laboratory that he set up for himself it would change the definition from passive income to active income. Therefore, his at-risk amount of $100,000 invested in Limited could not be reduced if he chooses to invest more time in his laboratory. Based on the participation level now both activities are labeled to be passive if he should invest more time he could change that definition. The lab is generating income of $30,000, if he should invest more time in the laboratory, then he could not take advantage of his losses from Limited $15,000 in 2010 and $10,000 in 2011. His at-risk amount was $100,000, now it could be down to $100,000 - $15,000 (Limited’s loss in 2010) = $85,000; $85,000 - $10,000 (Limited’s loss in 2011) = $75,000.
He should report a passive activity credit of $5,000 ($75,000 + $30,000 = $105,000 - $100,000 = $5,000)
§469 Passive activity losses and credits limited.