The IRS Tax Credit on New Cars May Make New Cars a Better Deal Than Used

The US Government really, really, really, REALLY wants  us to buy cars.

To help stimulate the industry – and our economy as a result – the IRS has reinstated the tax deduction for sales tax paid when purchasing a car.  I recall that when I bought my first car they’d just taken this deduction away from taxpayers, and if not so happy for having my first ever new car I’d have been a lot more peeved.

According to the IRS website, taxpayers who buy new passenger cars between Feb. 16, 2009 and Jan. 10, 2010 will be able to deduct their state and local sales and excise taxes on their 2009 returns. The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. The deduction phases out for individuals with modified adjusted gross income between $125,000 and $135,000, and joint filers with MAGI between $250,000 and $260,000.

The special deduction is available regardless of whether a taxpayer itemizes deductions on their return. The IRS reminded taxpayers the deduction may not be taken on 2008 tax returns.

So, this won’t lessen your tax bill this year.  But  if you’re facing a large car repair it might be worth it to get a new vehicle.  I’ve been reading that used car prices are increasing because people are unwilling or unable to take the plunge with a new car.   Between cut-rate pricing, very favorable financing and the new tax break it may make more sense to buy new – something I said I’d never do again.

Of course if you don’t need a car then it’s not frugal to buy one, no matter how good the deal. Thankfully our cars are in good shape.  Let’s hope it stays that way…

The Accountant’s Daughter Says The IRS May See Your Business as a Hobby

When Husband began doing freelance design work we decided to give the business a more generalized name – X Consulting – so that if we decided to seek other business opportunities we could do it under the name of a single business.

Now that I’m going to be doing this new work I checked with my brother to see if it would be more advantageous tax-wise to have checks made payable to me or to X Consulting. He recommended I use X Consulting to further substantiate that it is, in fact, a business. He then shared with me this letter that my Dad’s office sends to clients about this very issue:

Like many of us, you’ve probably dreamed of turning a hobby or avocation into a regular business. You won’t have any unusual tax headaches if your new business is profitable. However, if the new enterprise consistently generates losses (deductions exceed income), the IRS may step in and say it’s a hobby-an activity not engaged in for profit-rather than a business. An activity is presumed to be engaged in for profit for a tax year if it shows a profit for any three or more out of five consecutive years ending in that tax year. Otherwise, it can be deemed a hobby.

What are the practical consequences? Under the so-called hobby loss rules, you’ll be able to claim those deductions that are available whether or not the enterprise is engaged in for profit (such as state and local property taxes). However, your deductions for business-type expenses (such as rent or advertising) will be limited to the excess of your gross income from the hobby over those expenses that are deductible whether or not the enterprise is engaged in for profit. Deductible hobby expenses are claimed on Schedule A of Form 1040 as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” By contrast, if the new enterprise isn’t affected by the hobby loss rules, all otherwise allowable expenses would be deductible on Schedule C, even if they exceeded income from the enterprise.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, IRS and the courts will look to the following factors: how you run the activity; your expertise in the area (and your advisers’ expertise); the time and effort you expend in the enterprise; whether there’s an expectation that the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.

The classic “hobby loss” situation involves a successful businessperson or professional who starts something like a dog-breeding business, or a farm. But IRS’s long arm also can reach out to more prosaic situations, such as businesspeople who start what appears to be a bona-fide sideline business.

Please call our offices to get more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do right now to avoid a tax challenge.

So, there you are. Something to think about courtesy of The Accountant’s Daughter.

~

As always, please remember that I am not an expert on finance, or an accountant. I’m just an accountant’s daughter. So, please, please, please contact your accountant for expert advice.

%d bloggers like this: