June 2012
Tax Tips
IRS Rethinks Position on Passive Loss Rules
For years, the IRS treated owners of limited liability companies (LLCs) and limited liability partnerships (LLPs) as limited partners under the passive activity loss (PAL) rules, regardless of their management participation. This had significant tax implications, because a limited partner’s losses are presumed to be passive losses, which can’t be deducted from salaries and other “nonpassive” income.
Recently, several court rulings treated LLC and LLP owners as general partners, making it easier for them to deduct losses (provided they satisfy “material participation” standards). In response to those rulings, the IRS is narrowing its definition of a limited partnership for PAL purposes. Under proposed regulations, an interest in an entity would be considered a limited partnership interest only if:
1. The entity was classified as a partnership for federal tax purposes, and
2. The interest holder lacked management rights at all times during the tax year.
This is good news for LLC and LLP owners. It may soon be possible for them to avoid the PAL restrictions if they hold management rights and meet material participation standards.
Tax breaks for hiring heroes
The recently enacted VOW to Hire Heroes Act enhanced the Work Opportunity tax credit for employers that hire unemployed military veterans through the end of 2012. The maximum credit is $5,600 for veterans who have been unemployed for six months or more in the preceding year and $9,600 for veterans with a service-related disability. Smaller credits may be available in other situations.
You must apply for the credit before you hire someone, so check a prospective employee’s eligibility before you make a job offer.
Mixing business and pleasure
Squeezing a few days of rest and recreation into a business trip can be a great way to take a low-cost vacation. But review the rules so you don’t inadvertently lose valuable tax deductions.
Generally, the cost of travel to and from a destination (for you, but not for any nonemployee traveling companions) is deductible, provided the primary purpose of your trip is business. Once you’re there, carefully document your business vs. personal expenses.
Whether your trip is primarily for business depends in part on the number of days spent on business vs. pleasure, but that’s not the only factor. For example, the IRS may treat “standby days” as business days, even if you’re doing something else while you wait. And it may be possible to deduct certain expenses on personal days if tacking a few days onto your trip reduces the overall cost. Special rules apply to travel outside the United States.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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