In watching the testimony during the Manafort case, the prosecution seems to be attempting to make the case that Mr. Manafort defrauded banks by calling his rental property as a second home?
If you rent out your beach house 1 day a year, on your tax return you have to allocate your expenses between Schedule A (home mortgage) and Schedule E (rental property) based upon usage.
For example let’s say that you rent out your beach house through AirBnB for 100 days per year and the rest of the year either you use it or its sits available for you to use. Is it a vacation home or a rental property. The IRS would view it as both and in fact vigorously make sure that you properly allocated as many deductions as you could to Schedule E (rental property expense) where deductions are limited.
Under Banking Regulations, the lines blur to some degree. Some lenders don’t want their purchasers to rent out the property at all. Others look to the primary intent, does the debtor intend to reside in this property periodically or to use it to make money. But generally, if you reside in it periodically after you get the loan, it should qualify as a second home.
Section 512 amendment Much Ado about Nothing
Some tax practitioners have alerted churches and other non-profits of the risks of allowing employees to park on church property as a fringe benefit. This in the language of the act could create unrelated business income where none exists and create a tax to the church. Many are asking for a legislative fix. The amendment to Section 512 is specifically targeted to qualified transportation benefits and qualified parking. The Act refers to Section 132 (the section which provides exclusion for fringe benefits). Section 132 is a laundry list of exclusions from income for benefits given to employees. Among them are “no cost added” benefits (which are not unrelated business income). Specifically listed in the regulation are transportation benefits (free air fare for airline employees who fly stand-by). Reg. 1.132-2T. The other problem is that the Section 132 analysis speaks to the value of the qualified parking. Except for urban churches (who rent out their parking lots on weekdays), most churches have free open parking lots used by commuters on rainy days when they catch a bus, parking to talk on a cell phone or to eat lunch, smooching with your love on a dark evening, drinking Ripple so mom and dad don’t see you. In other words the value of the parking is zero. Further, it’s also a “no cost added” fringe benefit in that the parking lot is not used. Additionally with most suburban churches, the cost of street parking is free as well. So, you are not saving anyone anything by allowing them to park there.
So, this section applies only to churches that essentially already have unrelated business income from charging for their parking or who pay the parking of their employees or pay their bus fare and the like. It does not apply in my view to churches that simply have acres of parking which are never filled to capacity and never rented.
Wayfair v. South Dakota
The Supreme Court ruled that states can now collect sales taxes on internet sales. So, how is a small business person with an internet business going to survive?
45 states have a sales tax regime. 24 of them have passed legislation to opt into the Streamlined Sales and Use Tax Agreement. See, http://www.streamlinedsalestax.org/. Some states have exemptions for small sales. Some states have exemptions for “occasional sales” but when you look at the definition of occasional sales, the exemption invariably only applies to charity sales, garage sales, and bulk sales of business inventory.
So, small internet businesses have to now make a few tough choices. (1) They can limit states they sell to (for example only those state who have signed the streamlined sales tax agreement); (2) They can apply to pay sales tax in each jurisdiction; or (3) lobby hard with Congress to write a law. The problem for small internet businesses is that there are small brick and mortar businesses which are also lobbying Congress to make sure these internet businesses pay taxes. Stay tuned for more as events occur.
Brother can you spare a dime?
Some people lend money to other people and do so often. How you structure that investment could make a difference. For example, if you set up a single member LLC and have it loan money to others, the interest income could be income from lending. The rub is that it would also be earned income incurring a self-employment tax. However, if your other earned income is in excess of the social security threshhold, $128,700, then only about .5% of it is taxed for self employment tax. By calling income earned in lieu of investment or interest income, you qualify for the 20% reduction in income from small business activities. So, if you have a side set of investments which includes loaning money to third parties, or selling tangible personal property, you too can benefit from this use. Even if your earned income does not exceed $127,800, you’re still about 13% to the good if you use this.
Deductibility of Investment Advisory Fees by Estates and Trusts
In the 2017 Tax Act, Miscellaneous itemized deductions were denied for years 2018 through 2025. This impacts Trusts and Estates in that investment expenses are miscellaneous itemized deductions under Section 67(e) of the Internal Revenue Code. Thus, they are no longer deductible. This creates phantom income to the Trust upon which the Trust will pay tax. The Supreme Court in Knight v. Commissioner (2008) ruled that these fees are miscellaneous itemized deductions. Thus, the new law makes them non-deductible. You may want to discuss with your investment advisor/broker about moving back to old commission based system. At least commissions are added to basis for the purpose of computing capital gains whereas investment advisory fees will be lost.