For federal tax purposes, the determination of “business” or “hobby” is a matter of deduction. If your new venture is considered a business, you can deduct losses against other income.

However, when the activity is classified as a hobby, the “hobby loss” rules limit the amount you can write off. Expenses you incur might be deductible only if you itemize – or they might even be nondeductible.

The distinction affects the amount of tax you owe. So how can you prove you’re trying to run a money-making business despite several years of losses?

One test you’re probably familiar with is the general rule of earning a profit in three of the past five years. If your business has more income than deductions in three of five consecutive taxable years, the IRS generally accepts that you have a profit motive. (The time frame is two years in seven for certain horse-related activities.)

Unable to meet that test? Additional factors play a role as well. For instance, the Tax Court agreed that a volleyball consulting service with multiple loss years qualified as a business, in part because of a businesslike manner of operation. Among other items, the Court mentioned the maintenance of a separate bank account and accurate records as support for a profit motive.

Positive indicators of your profit-making intentions also include your expertise in the activity, the time and effort you put into your new business, and your success in other ventures.

If you’d like a complete list of the IRS “business vs. hobby” criteria, please contact us. We’ll be happy to review the guidelines with you.

It’s massive, and it’s complicated. At more than 2,400 pages, the Affordable Care Act (ACA for short) has left businesses and individuals confused about what the law contains and how it affects them.

The aim of the law is to provide affordable, quality health care for all Americans. To reach that goal, the law requires large companies to provide health insurance for their employees starting in 2015, and uninsured individuals must get their own health insurance starting in 2014. Those who fail to do so face penalties.

Insurance companies must also deal with new requirements. For example, they cannot refuse coverage due to pre-existing conditions, preventive services must be covered with no out-of-pocket costs, young adults can stay on parents’ policies through age 26, and lifetime dollar limits on health benefits are not permitted.

The law mandates health insurance coverage, but not every business or individual will be affected by this requirement. Here’s an overview of who will be affected.

FOR BUSINESSES – It’s all in the numbers
• Fewer than 50 employees
Companies with fewer than 50 employees are encouraged to provide insurance for their employees, but there are no penalties for failing to do so. A special marketplace will be available for businesses with 50 or fewer employees, allowing them to buy health insurance through the Small Business Health Options Program (SHOP).
• Fewer than 25 employees
Small companies that pay at least 50% of the health insurance premiums for their employees may be eligible for a tax credit for as much as 35% of the cost of the premiums. To qualify, the business must employ fewer than 25 full-time people with average wages of less than $50,000. For 2014, the maximum credit increases to 50% of the premiums the company pays, though to qualify for the credit, the insurance must be purchased through SHOP.
• 50 or more employees
For companies with 50 or more full-time employees, the requirement to provide “affordable, minimum essential coverage” to employees has been delayed for one year and is not required until 2015. Originally, employers had been required to file information returns that reported details about the health insurance they provided, with penalties to apply if the insurance did not meet standards. Companies complained that they needed more time to meet the reporting obligations, and in response the IRS made the reporting requirement optional for 2014. Without the reporting, the IRS could not determine penalties, so the penalties also were postponed for a year.

Bottom line: the IRS is encouraging companies to comply in 2014 even though there are no penalties for failure to do so.
• The business play or pay penalty
Starting in 2015, companies with 50 or more employees that don’t offer minimum essential health insurance face an annual penalty of $2,000 times the number of full-time employees over a 30-employee threshold. If the insurance that is offered is considered unaffordable (it exceeds 9.5% of family income), the company may be assessed a $3,000 per-employee penalty. These penalties apply only if one or more of the company’s employees buy insurance from an exchange and qualify for a federal credit to offset the cost of the premiums.

FOR INDIVIDUALS – It’s all about coverage
Currently, attention is focused on the health insurance exchanges or “Marketplace” that opened for business on October 1. Confusion about the Affordable Care Act has left many people thinking everyone has to deal with the exchanges. The fact is that if you are covered by Medicare, Medicaid, or an employer-provided plan, you don’t need to do anything.
Also, if you buy your health insurance on your own and are happy with your plan, you can keep your coverage. However, the only way to get any premium-lowering tax credits based on your income is to buy a plan through the Marketplace.
• The exchanges (Marketplace)
Each state will either develop an insurance exchange (Marketplace) or use one provided by the federal government. The Marketplace will allow those seeking coverage to comparison shop for health plans from private insurance companies.

There will be four types of insurance plans to choose from: Bronze, Silver, Gold, and Platinum. The more expensive the plan, the greater the portion of medical costs that will be covered. The price of each plan will depend on several factors including your age, whether you smoke, and where you live.

Many individuals will qualify for federal tax credits which will reduce the premiums they actually pay. Each state’s Marketplace will have a calculator to assist individuals in determining the amount, if any, of their federal tax credit.
• The individual play or pay penalty
If you’re one of the 45 million or so Americans without health insurance, you will need to get coverage for 2014 or pay a penalty of $95 or 1% of your income, whichever is greater. Low-income individuals may qualify for subsidies and/or tax credits to help pay the cost of insurance.

The penalty increases to $325 or 2% of income for 2015 and to $695 or 2.5% of income for 2016. For 2017 and later years, the penalty is inflation-adjusted. Those who choose not to be insured and to pay the penalty instead will still be liable for 100% of their medical bills.

NOTE: If you will be shopping for health insurance on the Marketplace, be aware that there’s no need to rush to enroll; the enrollment period runs from October 1, 2013, through March 31, 2014. Take the time you need to review your options and select what’s best for you and your family.

MORE ABOUT THE LAW AND YOUR TAXES

In addition to the penalties required by the Affordable Care Act, the law made other tax changes that could affect you. Among them are the following:
• Annual contributions to flexible spending accounts are limited to $2,500 (indexed for inflation).
• The 7.5% adjusted gross income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65. Those 65 and older can use the 7.5% threshold through 2016.
• The additional tax on nonqualified distributions from health savings accounts (HSAs) is 20%, an increase from the previous 10% penalty.
• The payroll Medicare tax increases from 1.45% of wages and self-employment income to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. This rate increase applies only to the employee portion, not to the employer portion.
• A 3.8% Medicare surtax is imposed on unearned income (examples: interest, dividends, capital gains) for single taxpayers with income over $200,000 and married couples with income over $250,000.

The Affordable Care Act may be one of the most complicated and confusing laws ever passed, but one thing is very clear: the law will affect the taxes of most Americans. In order to manage your tax bill, you will have to factor the new health care rules into your overall personal and business tax planning. For guidance, contact our office.

To begin checking out your state’s exchange (Marketplace), start at www.healthcare.gov – the federal government’s website on the Affordable Care Act.

NOTE: This Memo is intended to provide you with an informative summary of the tax issues connected with the Affordable Care Act. This massive package of legislation contains varying effective dates, definitions, limitations, and exceptions that cannot be summarized easily. For details and guidance in applying the tax provisions of this law to your situation, seek professional assistance.

• You should continue to file and pay taxes as normal. Individuals who filed a personal tax return extension should file their returns by Oct. 15, 2013.

• All other tax deadlines including the payroll tax deadlines remain in effect, including those covering individuals and businesses.

• You can electronically or paper file your tax return. However, paper filing will be delayed until they resume operations. Enclosed payments with paper tax returns will still be accepted by the IRS.

• Tax refunds will NOT be issued until government operations resume.

• Only automated toll-free telephone applications will remain operational.

• Taxpayer can obtain a tax transcript via mail during the shutdown by using the automated tools at irs.gov.

• Taxpayers with audits, collection, Appeals or Taxpayer Advocate cases should assume their meetings are cancelled. IRS assigned to the case will reschedule those meetings after normal operations resume.

• Tax software companies, tax practitioners and Free File will remain available to assist with taxes

The health care reform law passed in 2010 included a provision that would require employers of 50 or more full-time employees to provide affordable health insurance to their workers or face steep penalties. That provision was scheduled to take effect January 1, 2014.

The Treasury Department has announced that the effective date of this provision will be postponed for one year. The mandatory employer and insurer reporting requirements and any penalties connected with them will be delayed in order to allow more time for companies to adapt to meet the requirements.

In a “2013 Summertime Tax Tip,” the IRS reminded taxpayers about the current rules on home sales. Here’s a quick review of those rules.

Tax Free Home Sale
The tax law allows the majority of taxpayers who sell their homes to enjoy 100% tax-free profit from the sale.

If you have owned and used your home as your principal residence for at least two of the five years preceding the sale, you may exclude from income tax up to $250,000 of profit if you’re single or up to $500,000 if you’re married filing jointly. Generally, the exclusion may be used only once every two years.

The law provides that married individuals may exclude up to $500,000 of profits if:
* either spouse owned the home for at least two of the five years before the sale,
* both spouses used the home as a principal residence for at least two of the five years before the sale, and
* neither spouse is ineligible for the exclusion because of the once-every-two-year limit. If one spouse cannot use the exclusion because of the once-every-two-year rule, the other spouse may still claim the exclusion if he or she qualifies. However, the exclusion then cannot exceed $250,000.

Meet the Requirements
The law does contain some relief for those taxpayers who cannot meet the ownership and use rules or who have already excluded gain on a home sale within the two-year limit. If the failure to meet either rule is due to a job change, health problems, or certain other unforeseen circumstances, a partial exclusion may be available. The partial exclusion is calculated based on the fraction of the two years that the requirements were met.

The IRS reminds homeowners that if all the gain in their home sale is excludable under the rules above, they probably don’t need to report the sale on their tax return. Only one home sale per two-year period can be excluded, and only a taxpayer’s main home qualifies for an exclusion. If a taxpayer has two homes and lives in both of them, the main home is usually the one lived in most of the time.

If you have questions about the tax consequences of your home sale, contact our office

It turns out you can go back after all – at least when it comes to last year’s decision to convert your traditional IRA to a Roth. The question is, do you want to?

You might, if your circumstances have changed. For example, say the value of the assets in your new Roth account is currently less than when you made the conversion. Changing your mind could save tax dollars.

Recharacterizing your Roth conversion lets you go back in time, as if the conversion never happened. You’ll have to act soon, though, because the window for undoing a 2012 Roth conversion closes October 15, 2013.

Before that date, you have the opportunity to undo all or part of last year’s conversion. After October 15, you can change your mind once more and put the money back in a Roth. That might be a good choice when you’re recharacterizing because of a reduction in the value of the account. Just remember you’ll have to wait at least 30 days to convert again.

Give us a call for information on Roth recharacterization rules. We’ll help you figure out if going back is a good idea.

Review your tax deductions for 2013 while there’s still time to manage them for a lower tax bill this year. The standard deduction for 2013 is $12,200 for married couples filing a joint return and $6,100 for single taxpayers. If your deductions are close to the threshold, consider accelerating deductible expenses. For example, you can add sales tax paid on a new vehicle to the IRS standard amount when claiming the itemized deduction for state and local sales tax.

If you’re one of the millions of taxpayers who’ve moved recently, don’t forget to notify the IRS of your address change. Use “Form 8822, Change of Address,” or send written notification to the IRS center where you file your return. Include your full name, old and new addresses, social security number, and signature. If you filed a joint return, include this information for both taxpayers. Keeping the IRS informed of your current address will ensure that you receive notices and refunds without delay.