April 15th is upon us. Here are some tax reminders:
If 2 or more people operate a business that is not a corporation or LLC then they are likely considered to be Partners operating a Partnership for Income Tax purposes. If so, a Partnership Income Tax Return (Form 1065) may have to be filed. There are exceptions including where there are only 2 people and those 2 people are “DOMA Qualified” spouses (i.e. 1 man and 1 woman).
Illinois Civil Union Arbitrage:
Speaking of DOMA, people who are in an Illinois Civil Union are not allowed to file as Married under the Federal Income Tax Laws. However, they are required to file as Married (Married Filing Jointly or Married Filing Separately) under Illinois Income Tax Laws.
Among other things, this means that affected people may have to prepare 3 Federal Form 1040’s:
- 1 Federal Form 1040 for each person separately to be filed with the IRS.
- If they elect to file as Married Filing Jointly (as opposed to Married Filing Separately) 1 Federal Form 1040 for both jointly in order to determine the proper amounts for their Illinois Form IL-1040. This Federal Form 1040 would not get filed with the IRS.
Real Estate Rental Activities:
LLC’s and Partnerships that are taxed as a Partnership report real estate rental activities on IRS Form 8825. They are not reported on Page 1 of Form 1065. Don’t forget the Passive Loss Rules or IRS Form 8582.
Basis and At-Risk Basis:
The IRS does not want you to deduct losses that you have not “paid for”. If you have losses flowing to you from an entity taxed as either a Partnership or S-Corporation then you may not be allowed to deduct those losses. Instead, they may have to be carried forward until you do have Basis and At-Risk Basis. You must have both “Basis” and IRC Section 465 “At-Risk Basis” in order to deduct the loss.
In order to determine this you must:
- For Basis: Prepare a Basis Schedule to determine whether you have sufficient Basis. Basis changes over time and year to year. If you have not been maintaining this Basis Schedule starting in the first year of that activity then things get complicated. If you do not know what your Basis is, and you have a loss this year, you could not know whether you are allowed to deduct the loss. If you sell your interest in the activity you could not know whether you have a gain or a loss.
You will have to go back to each year and re-create the Basis Schedule. Otherwise, you could not possibly know what your Basis is now.
- For At-Risk Basis: Prepare IRS Form 6198 (At-Risk Limitations) and attach it to your Form 1040 to determine whether you have sufficient At-Risk Basis. Most of the same issues discussed above about maintaining a Basis Schedule also applies to maintaining an At-Risk Basis Schedule.
By the way, if you think your Basis fell below $0 you may be wrong. Instead, you might have to report the “Negative Basis” as a Capital Gain.
Self Employment Tax:
The Self-Employment Tax is essentially Social Security and Medicare Tax for people with Self-Employment Income. If you receive Self-Employment Income you may be subject to a Self-Employment Tax. If so, you must prepare and attach IRS Schedule SE to your Form 1040 and pay the Self-Employment Tax.
Self-Employment Income commonly results from the following sources:
- You operate as a Sole Proprietor and report those business activities on a Schedule C attached to your Federal Form 1040.
- You are a Partner in a Partnership.
- You are a Member in an LLC that is taxed as a Partnership.
- You are a Single Member LLC and report your business activities on a Schedule C attached to your Federal Form 1040.
Self Employment Tax Deduction:
If you receive Self-Employment Income and pay a Self-Employment Tax you are allowed to deduct 50% of that SE Tax on Form 1040, Page 1, Line 27. Since this is an “above the line” deduction this will reduce both your Federal and Illinois income.
Self Employed Health Insurance Deduction:
Taxpayers with Self-Employment Income who pay their own health insurance premiums may be allowed to deduct their health insurance premiums paid on Form 1040, Page 1, Line 29 (rather than as an Itemized Deduction subject to a 7.5% floor). Since this is an “above the line” deduction this will reduce both your Federal and Illinois income.
Illinois Sales and Use Tax:
Illinois has a Sales tax and a Use tax. Briefly, if you are an Illinois taxpayer who purchases merchandise while you are in Illinois (or for use in Illinois) and do not pay Illinois Sales tax you may be required to pay an Illinois “Use” tax. This could occur, for example, if you purchase merchandise over the internet or while out of Illinois.
The IDOR has been actively pursuing taxpayers who fail to pay their Sales or Use tax. Solely for the convenience of Illinois Taxpayers (not because the IDOR needs the money) Taxpayers who owe $600 or less of Use tax for 2012 may report this on their Form IL-1040, Page 2, Line 23 and pay the Use tax with their Form IL-1040.
Taxpayers who owe more than $600 are not allowed this “convenience” and must file an Illinois Use Tax Return (IDOR Form ST-44) and pay the Use tax with Form ST-44.
Illinois Real Estate Tax Credit:
Briefly, under the Illinois Income Tax Laws, you may entitled to a tax credit equal to 5% of the real estate taxes paid by you for your principal residence. You can use this credit, dollar for dollar to reduce your Illinois Income Tax. This is computed and presented on Illinois Schedule ICR, Section A.
Be Careful Out There:
There is a lot of Phishing, Identity theft and fraud going on out there. Protect your Social Security Number and other key information.
Copyright ©, Keith B. Baker – 2013
This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.
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