Wipfli Alerts & Updates: IRS Releases Taxpayer-Friendly Regulations Affecting the New 3.8% Tax in Time for the Holidays!

November 27, 2013
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Late yesterday, the IRS released final regulations regarding the new 3.8% net investment income tax.  The net investment income tax was created by the 2010 Affordable Care Act..  It imposes new taxes on interest, dividends, gains (including capital gains), rents and other passive income.  Income (including rents) generated by trades or businesses in which a taxpayer materially participates is excluded from the tax.
Surprisingly, the new regulations include significant changes to the proposed regulations and address many concerns taxpayers had raised with the IRS, including rules on self-rented property, self-charged interest income, gains and losses from disposition of property, grouping activities and real estate professionals. 
The most important changes make it significantly easier for business owners who rent to their businesses to avoid paying the 3.8% tax on their net rental income. 
Another beneficial rule makes it easier for individuals who operate real property trades or businesses to qualify for the exclusion from the tax without having to meet the “trade or business” test for each rental activity they own. 
Other valuable provisions allow taxpayers to:
  • Regroup activities on an amended return
  • Carryover a portion of any net operating losses generated in a prior year
  • Deduct certain excess losses that were nondeductible under the proposed regulations
  • Determine in the year of sale the amount of excluded gain applicable to future installment sales
  • Report gains under a newly-created simplified reporting method for reporting gains. 
Overall, the new regulations constitute a significant improvement over the regulations proposed late last year.  With careful planning and the right grouping elections, the impact of the new net investment income tax can be minimized. 
Please contact your Wipfli relationship executive for more information on how you can make the right moves under the new regulations and reduce the impact of the new net investment income tax

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