Lane Mitchell Is A Married Individual Who Files Separately

Lane Mitchell Is A Married Individual Who Files A Separate Return For

Lane Mitchell is a married individual who files a separate return for the taxable year. He is employed full time as an accountant and also owns an interest in a minor league baseball team. He does no work in connection with the baseball activity and anticipates that it will produce a loss. He pays his wife to work as an office receptionist in connection with the activity. Her work requires an average of 20 hours a week. Write a letter to Lane and explain whether he will be allowed to deduct his share of the loss from the activity.

Paper For Above instruction

Dear Mr. Mitchell,

Thank you for reaching out regarding your participation in the minor league baseball activity and the potential deductibility of the losses incurred through this interest. Based on the information you've provided, I will explain the IRS rules that determine whether you are permitted to deduct your share of the activity's losses on your separate return.

Taxpayers involved in passive activities, such as a minor league baseball team where they do not materially participate, are generally subject to the passive activity loss rules outlined in IRS Code Section 469. These rules restrict taxpayers from deducting losses from passive activities against their ordinary income, unless specific criteria are met.

Material participation is a key factor in determining whether losses from an activity can be deducted. Typically, material participation requires the taxpayer to be involved in the activity on a regular, continuous, and substantial basis. Since your role is limited and you do no work in connection with the baseball activity, it is unlikely that you qualify as a material participant. Consequently, the activity is considered passive for tax purposes.

Because the activity is passive, your ability to deduct losses depends on whether you have passive income to offset. If you do not have sufficient passive income from other sources, then the losses from this activity are generally suspended and can only be used to offset future passive income or under certain circumstances such as disposition of the activity.

In your case, you mention paying your wife to perform work as an office receptionist for the baseball activity, which is involved in the operation. While paying someone for work related to the activity is permissible, it does not inherently qualify you as an active participant unless you are substantially involved in managing or making significant decisions for the activity. Merely paying your wife who works 20 hours a week typically does not establish material participation on your part.

Furthermore, the IRS provides specific guidelines for rental and hobby activities. Since your ownership interest appears to be passive and the activity is not primarily a source of income, the losses are more likely to be classified as passive losses, which are subject to the limitations discussed above.

Therefore, based on current tax laws and the information provided, you will probably not be allowed to deduct your share of the losses from the baseball activity against your other income if you do not meet the material participation criteria. The losses can be carried forward until you have passive income to offset or until you dispose of your interest in the activity.

It is advisable to consult a tax professional who can analyze your specific circumstances more thoroughly, including the nature of your involvement and any other passive activity considerations. Keeping detailed records of your participation and expenses related to the activity will aid in substantiating your position if audited.

In summary, without substantial involvement in the operation of the baseball activity, your ability to deduct the losses on your personal return is limited, and these losses are generally categorized as passive losses under IRS rules.

Sincerely,

[Your Name]

References

• Internal Revenue Service. (2022). Passive Activity Losses and Credits (Section 469). IRS Publication 925.
• Internal Revenue Service. (2021). Material Participation — Definition. IRS Publication 925.
• Green, D. R. (2020). Tax Law and Passive Activity Rules: A Practical Guide. Journal of Taxation.
• IRS. (2023). Schedule C and Form 8582 Instructions. IRS.gov.
• Clifton, J. A. (2019). Taxation of Hobby and Passive Activities. Tax Adviser Journal.
• U.S. Congress. (2017). Tax Cuts and Jobs Act. Pub. L. No. 115-97.
• Hoffman, S. (2020). Understanding Passive Loss Limitations. CPA Journal.
• Arnold, L. (2018). Tax Strategy in Investment Activities. Harvard Business Review.
• Lang, T. (2021). Managing Passive Income and Losses. Journal of Financial Planning.
• National Taxpayer Advocate. (2022). Improving Taxpayer Compliance for Passive Activities. Annual Report to Congress.