Have Fun - And Save Tax at the Same Time

Have Fun - And Save Tax at the Same Time: "Have Fun - And Save Tax at the Same Time


For the Summer, we thought it might be fun to have a quick run down of the various ways in which leisure and enjoyment can impact on tax – and provide opportunities for saving it!
Hobby or Business?
There are very few hobbies which are absolutely free, and it would be nice, wouldn’t it, if we could somehow get tax relief for what we spend on our leisure time activities? That might just be possible in some cases, because there are a lot of situations where a hobby merges into a business activity.
Take the example of someone whose hobby is restoring old furniture. It may start off being purely done for his own benefit, so as to be able to fill his house with beautiful things. But it can develop into something more, if a friend asks him to do something and insists on paying him for it. Immediately the cost of the tools, lathe etc in the garage, the purchase of French polish, even repairs to the workshop itself, become allowable expenses.
The most common example of the “grey area” between a hobby and a business, of course, is farming. So much so, that there is a whole set of rules devised by the Revenue to prevent individuals getting loss relief for “hobby farming”, which inevitably, of course, tends to show a loss every year.
But the fact that these rules are necessary for farming shows that it is by no means impossible for an activity that shows regular losses to be treated as a trade within the scope of taxation, and therefore available for relief. What you have to show is that there is a “reasonable expectation of profit”, but the Revenue’s own internal manuals make it clear that this need not be an expectation of profit this year: merely an expectatio"

Capital Gains Tax - The Wrinkles

Capital Gains Tax - The Wrinkles: "Capital Gains Tax - The Wrinkles

A Trumped Up Tax Charge

Our tax system delights in imposing tax charges on occasions where no-one’s received any profits.

In this year’s Budget they are adding another one, which is legislation to give statutory effect to the case law rule in “Sharkey v Wernher” which itself was a fine example of judicial dottiness dating from the 1950’s. The rule said that, if you had something which you held as trading stock (in the case itself it was racehorses), but you take that stock out of the trading business and put it in another business which you own, you have to pay tax as if you had sold the stock for its market value.

More and more tax commentators had been saying, in recent years, that this rule violates not just common sense and accounting practice, but the law as well, as developed in quite a few more recent cases.

Now the Revenue don’t like to see a chance for levying tax slip out of their grasp, and so they’ve quietly introduced this in the 2008 Budget as a statutory rule, which of course will always override common sense, case law etc.

This piece isn’t so much about the Sharkey v Wernher rule, though, as about the reverse situation. Where you hold a fixed asset but you put it into a trading business as stock, a rule which has existed for a very long time treats that as being a “capital gain”. Like many other imaginary gains, this is calculated as if you had sold the asset for market value."

Tax strategies for major business expenses.

Tax strategies for major business expenses.

By Joseph Anthony

In a simpler tax world that we can only imagine, the way small businesses write off major expenses would be, well, a lot simpler. You'd deduct the costs of all your major purchases in the same year you made them.

The tax laws passed by Congress in 2003 go a long way toward creating that world for most small businesses.

Here are four points to remember when trying to figure out how major purchases will affect your business's tax bottom line.

1. Up to $100,000 allowed in personal property write-offs. As a small business, you can expense, or write off, up to $100,000 of business personal property in 2004 and 2005. Business personal property is stuff like furniture, office equipment and computers. Writing off the full cost in one year is called a Section 179 election, and the election has to be made in the year of purchase. That means you cannot buy a computer this year and then try to expense it next year, or take the personal computer you bought for your home in 2003 and try to write off the full cost when using it in your business in 2004 or 2005.You have to use the property more than half the time for business to qualify for Section 179 treatment, and the deduction is proportionately reduced for anything not used solely for business. That means that if you buy a $2,000 computer and use it 75% for business, the maximum amount you can write off is $1,500.If you want to see how much small businesses love the Section 179 deduction, take a little time between Christmas and New Year's Day to peek inside any store that sells office furniture or equipment. Chances are you'll see lots of buyers racking up some year-end deductions.Note: The $100,000 maximum is reduced for businesses that buy more than $400,000 worth of personal property in a year. The reduction is dollar-for-dollar for amounts over $400,000. So, for example, if your business spends $410,000 on equipment,
the maximum Section 179 write-off is $90,000.

2. An office building is not personal property. You'll notice that this $100,000 deduction opportunity refers to "personal property."This is important to note: Real estate is not personal property. (My apologies to anyone who thinks that is obvious, but believe me, people have bought office condos thinking they could write off a big chunk of the cost in the first year.)Nonresidential real estate, such as office or industrial properties, has to be depreciated over 39 years. And only the building qualifies for depreciation (i.e., you cannot depreciate unimproved land). Add it all up, and it means that your first-year depreciation write-off on a business building is probably going to be less than 2% of the purchase price. Sorry.

3. Cars aren't personal property, either. The rule on deducting the cost of a business vehicle you own used to be simple, and onerous: The deduction in the year of purchase was limited to $3,060, plus business-related operating expenses.Now the rule is more liberal, but also more complicated. Automobiles purchased in 2003 or 2004 qualify for a special "bonus depreciation" of $7,650, on top of the $3,060 limit, for a total first-year depreciation deduction of up to $10,710.However, there are — surprise! — some exceptions to this rule for vehicles that are not considered ordinary passenger cars. Most significantly, you could get to apply the full Section 179 expense deduction (assuming you had no other business equipment purchases) against the purchase of a vehicle that qualifies as a truck. You could even deduct the entire purchase price of the vehicle in the year that you buy it.

4. Spent more than $100,000? You could still get a larger deduction. You could wind up with more than $100,000 in equipment deductions for 2004, even with the Section 179 limit in place.Here's how (it's also complicated). Let's say you're a physician, video producer or other professional who might have to spend $150,000 in a year on business equipment that qualifies for the Section 179 deduction. You could get a write-off of $100,000 in equipment under Section 179. You also could get the special bonus depreciation of 50% on the remaining balance, for a write-off of an additional $25,000.And then you'd still get your regular depreciation on the remaining $25,000 worth of equipment.

The overall result is that even if you spent as much as $150,000 on qualifying business equipment in one year, you could still take a first-year write-off of more than 85% of those costs.

Confused? See a tax pro

There are other rules and restrictions on writing off major business purchases. For example, farmers can get special treatment for certain single-purpose agricultural buildings such as greenhouses. Your Section 179 deductions can be limited by your overall taxable income from a trade or business; limitations also apply if you're reporting Section 179 expenses from multiple businesses. And these liberal deduction rules are expected to be tightened again after 2005.

Already, several states have acted to restrict the upfront deduction on 6,000-pound SUVs, which means that you could wind up having to keep track of different depreciation schedules and deductions for your state and federal income taxes.

Like I said, this stuff isn't simple. Talk with a tax pro before year-end if you need more help with your major purchases.

Article source: http://www.microsoft.com/smallbusiness/resources/finance/small-business-tax-advice.aspx#Taxstrategiesformajorbusinessexpenses