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Trump tax returns: IRS hobby rules jeopardize $1.1 million in deductions

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Former President Donald Trump’s years of business losses are a red flag from the IRS, says a well-known tax expert.

Trump’s federal tax filings show several aerospace companies reporting losses for three consecutive years, putting those businesses at risk of being reclassified as nonprofits or “hobby” businesses under the rules of the Act. the IRS.

As more Americans enter the gig economy, understanding these rules can help self-employed taxpayers stay away from the IRS by tracking annual profits and losses and avoiding purchases. discretionary trading in years that would create losses that could trigger IRS hobby rules.

In the case of Trump:

  • DJT Aerospace LLC broke even in 2016 and 2017 and recorded losses in 2018-2020.
  • DT Endeavor I LLC and DJT Operations II LLC lost money between 2018 and 2020.

The IRS frowns on losing streaks. The service believes companies should make a profit at least three of every five years, including the current year (or at least two of the last seven years for activities that consist primarily of the breeding, showing, training or racing of horses).

“If someone has a business, they are operating the business to make a profit,” the IRS said in a 2019 tax tip. leisure, not for profit.”

Hobby Loss Rules

Donald Trump and Melania Trump at New Years Eve Party

Former President Donald Trump and former first lady Melania Trump stop to speak to the media as they arrive for a New Year’s Eve party at Mar-a-Lago in Palm Beach, Florida on December 31, 2022 . (AP Photo/Lynne Sladky/AP Images)

TRUMP TAX FILINGS: FIVE NOTABLE FACTS

The IRS can prohibit business losses by reclassifying the activities as a hobby. Before Trump’s tax reform law — the Tax Cuts and Jobs Act of 2017 — hobbies could write off expenses as miscellaneous deductions until their net income reached $0. Any additional expense would not be deductible.

TCJA has eliminated various deductions. If the IRS decides Trump’s aviation companies are hobbies, Trump would still have to report the income, but wouldn’t be allowed to claim expenses, effectively turning nearly $1.1 million in 2018 business deductions -2020 in non-deductible hobby expenses, increasing taxable income and creating back taxes.

“If a taxpayer receives income for an activity that they do not engage in for profit, the expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted,” the IRS said. in his tax advice.

red flags

Copies of Trump tax return

Copies of former President Donald Trump and former first lady Melania Trump’s individual tax returns for 2019, released by the Democratic-controlled House Ways and Means Committee, are pictured Friday, Dec. 30, 2022. (AP Photo/Jon Elswick/AP Images)

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“Ongoing losses will continue to flag tax returns,” Eva Rosenberg told FOX Business in a statement. Rosenberg is an enrolled agent qualified to represent taxpayers before the IRS and the founder of TaxMomma.com, a popular tax advice website.

“Typically, the IRS computer generates a report on companies that do not meet certain guidelines based on statistical analysis (DIF scores),” she adds.

Losing money for three or more years does not automatically mean the IRS will reclassify your business as a hobby.

“When you can prove a business is being operated legitimately, you can get around these rules,” Rosenberg told FOX Business.

Bend the rules of the hobby

Stock photo of a Red Audit stamp on a US 1040 personal income tax return.

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Rosenberg says some things that are essential for this proof include:

  • Have a business plan that shows when the business expects to make a profit,
  • Having a trading asset that appreciates and will more than cover any losses, and/or
  • Changing business operations to find a way to generate a profit.

Changes may include adjusting product lines, revising prices or improving marketing.

5 THINGS TO KNOW ABOUT YOUR 2023 TAXES

Rosenberg says if you’re facing a hobby audit, it’s important to show change.

“And the tax man described it to me that way once. She used a definition of insanity – doing the same thing over and over again and expecting different results.”

Leisure risk rules are not limited to sole proprietorships. The nonprofit rules also apply to partnerships, estates, trusts and S corporations, meaning other Trump businesses may be at risk.

Rosenberg says, interestingly enough, that the IRS places a stronger red flag on personal returns and “not such a strong indicator” on partnership returns.

“And you can see, in this case, most of the [Trump’s] losses were generated on the returns of the partnership”, she adds.

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