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Passive Losses & Proposition 19 - Radio Feb 10th 2021

  Sanjiv Gupta CPA  Published 

Disclaimer:  The information provided in this article  is purely based on interpretations done from the Sanjiv Gupta CPA recent radio show without any representation or warranty as to the accuracy or completeness of the information. The information is   meant for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice as individual's  financial and tax needs are different. We will advise you to set up one on one professional consultations with Sanjiv Gupta CPA to better their situations and provide best solutions. 

We know February 15 is an important deadline for proposition 19.


If you're planning on transferring your property to Kids and you want to make sure the kid does not get the increase in basis, you have to talk to your estate planner, the state attorney this week is the last week, maybe they will take it maybe they will not take it because they are too busy right now, which I'm hearing from them.

But if you want to do some kind of changes in the trust document, go ahead and do it as before it's too late. But don't worry, you have to really understand this proposition 19. Because if the kid takes this property at a fair market value after the death, you end it turns around and sells it the capital gains will be very negligible, negligible amount, because when you die, and the beneficiary takes that property, the cost basis of that cost basis for him or her is it says a fair market value or the date of death. So, so this increase in basis without paying any taxes. So there's a trade off between that was is being property taxes at a later part if the kid wants to turn around and and rent it out. So you need to understand that as well. 

Taxpayers may face a new challenge this year due to rampant unemployment fraud. While millions of people sold legacy made unemployment benefit claims during 2020. The fraudsters seized on the opportunity to commit identity fraud, and they made fake unemployment claims. 

You know what California alone paid out $10.4 billion in fraudulent claims, according to a recent audit. So if you get a 1099 G for unemployment benefits that you've not received, you should connect with the state EDD department as soon as possible. It's very important to understand $10.4 billion in fraudulent unemployment claims. So not be surprised if you're getting the standard earnings showing unemployment which you have not received. So stay on top of it. 

There will be a delay in getting this form from EDD. So if you're unable to opt in a timely corrected form from EDI or your amount is not correct, go ahead and get the corrected one. But need to report if you got let's say $20,000 in unemployment claim, but you got your 10 or 20 on shows only $20,000. Don't just report $20,000 on your tax returns. You need to fill out you need to report the correct amount that you received from the EDD for state unemployment and also from federal unemployment unit this $400 per paycheck per week that you received $600 per week, the check that you received the July 31 and also he received $20 per week paycheck form from October I think September 15 is started but he went on till December 21. 

So for this year, this will be the new challenge that you're going to see unemployment fraud. So you have to be careful when you file the return this year. For 2020 when I'm talking about this year,  2020 tax filing and you finding this year 2021 you have to really look into the Form 1099 G, you just can't keep that in it in an envelope and never open that envelope. Please open it and see the numbers are correct.

There are a lot of changes that happened in 2020. The Secure act changes, we know there are tax cuts and jobs act changes that happened in 2017. But still there for 2020. The Secure Act, like I said is a case actor change. And this is a TCDTRA change that happened on December 28. So we're talking about four(4) act changes, that is going to affect your tax filing for 2020.  

You really need to go to a CPA who takes time to train staff, who knows and understands all these changes and can help you not only during the tax season, but are available throughout the year. That's very important. 

Because notices don't come during the next time. They come anytime during the year. By the way, when we talk about notices, we are getting notices dated January 2021 for the work that was done in September 2020. That's crazy. That's what's going on with the IRS. They have too many things to process. And notices have been delayed, they have been taken back. There's a lot of uncertainties out there in reporting and getting those things done by the IRS. So don't be surprised if you get it wrong, but you need somebody to take care of it. And you should go to a trained professional, not someone who's just doing or preparing the taxes for next for these three months, and then don't show off or the people just slip up those people. 

I am not only a CPA, but also an experienced chartered accountant, having practiced in India for 12 years before I came to us. We have provided excellent service in different areas, particularly foreign account reporting. And also now we are doing a lot of services for our clients that are taking the PPP loans.

We helped our clients with multiple rounds of PPP loans and now helping them with loan forgiveness. We have great people working with me, who speak different languages and are trained to help our Indian Community.

A lot of people ask me this question, passive activity. And this is one question that really everyone is interested in. Why? Because they think the losses from those activities can be used to set off the ordinary income and thereby reduce the taxes. So what do you mean by passive activity passive activities, any activity that does not involve one's personal time. In other words, money makes money, not you're doing something to make money. It's money making money.

So, passive activity rules are set by the IRS that prohibit using the losses to offset ordinary income. So the rules are meant to prevent the investors from using losses incurred from income producing activities in which they are not materially involved. Material participation is the major area for converting passive losses to active losses. A lot of people in the COVID scenario are doing day trading, a lot of people are investing in real estate. In addition to what their job is there, they have a regular job in addition to their regular business. Those are those activities active or they're passive, or forming an LLC will help them take the losses or forming a corporation. Change that activity to passive. 

Let's discuss that. Being materially materially involved with earned ordinary income producing activity means that income is active income and may not be reduced by passive losses. Passive losses can only be used to offset passive income. Like I said, material participation is the most important factor. And in material participation, what do you mean by that? It means the activity must be regular and should be done on a substantial basis. There are seven tests that can define material participation, but the most common one is working 500 hours in the business in the course of a year. So we know that 500 hours, this just put in your mind 500 hours, of course, that this is different regulations for your state, which is 750 hours. There's different regulations for day traders, which has other things marked to market and other things. There's a different definition for multiparty participation when it comes to qualified business income deduction, which does not require 500 hours, but because 250 hours for modular participation. So there are different hours for different types of activity. But we know there's one thing that is common, should be at least 500 hours in the business in the course of the year. Now, how do you time this 500 hours? I know when a friend comes to me and asks me about automobile expenses, deductions in his business. And I asked him to do a logbook to log my expenses. He said, I don't know what a logbook is. I say it's very easy. Just go and maintain a diary and put from where to where you're going. Of course in COVID, we are not traveling, we are not going. But in the same way that we are not logging there, the distance in case of we are logging the hours that you're spending this puts the number of hours that you're spending in that activity. Of course, if you're doing multiple tasking, in those hours, it should be like I said the definition should be you should have your proper 100% attention to that activity. Not not multitasking, multitasking is not allowed for this kind of passive active one for converting passive to active, active active activity. Real estate professional if you are a winning real estate, just having multiple participation does not convert the losses from the deal state into active losses and claiming them as their industry or their income.

 Of course, there's one rule that helps the real estate agent if your income from total sources is less than $150,000 married filing joint in that case, you can take up to $25,000 of real estate losses, which can be used to set off your ordinary income, if it exceed married filing joint up $250,000 that $45,000 gets reduced dollar to dollar. But you can use it and there are different techniques, steps that you can do to reduce your (AGI) adjusted gross income. So, a disregarded income is total income that you make from different sources.

Passive activity rules are generally applied at the individual level. But they also extend to virtually all businesses and rental activity in various reporting entities such as accepting S corp, but applicable to S corp and an LLC There are detailed rules about how much loss you can deduct. So, is it defined as two types of passive activity trade or business? Right? 

We know that trade or business case of real estate, in addition to material participation, you need to be a real estate professional also, to use that losses from your state to set up that to set up your other income, one spouse can be real estate professional and his spouse can be making millions of dollars in on WTO or other businesses and large losses from real estate. 

Why do we keep saying about losses from real estate, why you keep saying that losses comes from their losses from real estate comes from depreciation losses from business comes from depreciation or the income is less but you have more expenses like for example, payment to contractors, salaries are expensive or other overheads might be higher than expenses than income. So, for business you have other things for real estate, you have depreciation that results in loss. So, we are talking about those losses and how to use those losses to set up your income. If passive loss is just a financial loss within an investment in any trade or business enterprise in which the investor is not material participant, I keep stressing this point again and again the material participation governs the active or non active business or trade activity. 

Generally passive losses just come from the following activities. Passive losses on income income can also come not only losses income should it can also passive income for example, you have equipment leasing you lease equipment's, that's a passive income because you're not having you're not have to do something to make that work equipment themselves generating income by using sole proprietorship you're working in a business having a business but that business is a hobby business means you have some activity which you like, but you don't want to make it as a business. And that hobby is a hobby income, which is something which is a passive income, you have your partner in any partnership all your member of or should have a corporation which is and you're not putting your time into that for example, your your passive partner or shareholder of a restaurant or a hotel which is not here in the local area which is in maybe a different state and you get a K1.  

What is K1?

K1 is a share of the member or shareholder from the profit or loss of a company or LLC. 

How do you determine which form that we use for passive activity ?

That form number is 8582 and 8582 as different line items for active participation, non decreased participation, suspended losses and carry forward losses is a very important form that one should always look into when you have those kinds of activity. 

When you do your return using TurboTax or any online software that form 100% will be not done right by you or by the software because it involves interpretation, understanding of the rules and regulations governing a particular activity and 100% chance that this form will be wrong. So, if you have a passive activity coming from any rating, coming from real estate, coming from business, connect with your accountant or professional to make sure this formative it to his turn in the right manner and carry forward and carry forward.

In fact, if you have an active loss, the gear set provided that you can carry back to classes. So if you don't if you're not making substantial income this year, because of COVID and you have losses being carried forward or currently being there's losses you can use that loss to carry back one of those five years as set of the income in one of those five years and generate a refund for that activity. So it's going to be very important this year that you do it the right way.

We are doing a webinar this February on Saturday, February 20th. We have about 250 people already registered for that webinar. So if you don't want to delay that, if you want to hear me out in more detail about what tips are there, like I said, 2020 will be a very complex tax filing year with a lot of changes. Like I said, there are  tax cuts and JOBS Act, secure act here, sec, TCDTRA act, all these things are going to impact your business tax filing and income and into the tax filings. And we're going to cover that on top of it.