"Economic substance" is a new tax rule
Tax Tip of the Week
June 30, 2014
"Economic substance" is a new tax rule
Suppose someone offered you a business opportunity that would let you defer tax on your passive income, then later benefit from lower tax rates by converting ordinary income to capital gain. Would you invest?
In general, structuring business activities in a tax-efficient manner is part of good planning. However, when you enter into a transaction with no bona-fide business motive and that transaction changes nothing but your tax situation, you can run afoul of the economic substance rules.
These rules were not found in the tax code prior to the 2010 health care laws. Instead, they were applied by courts to individual cases. Now, economic substance is defined by a two-part test. When the rules apply, your economic position must change in a meaningful way and you must have a substantial business purpose for choosing a course of action.
What happens if you fail the economic substance test? You lose any tax benefits you claimed and you may be subject to a penalty of up to 40% of the underpayment caused by the loss of the benefits.
Please call before you decide to participate in ventures that purport to save tax dollars. We're here to help you make prudent choices.
"Tax Tips" are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
© MC 2014
June 30, 2014
"Economic substance" is a new tax rule
Suppose someone offered you a business opportunity that would let you defer tax on your passive income, then later benefit from lower tax rates by converting ordinary income to capital gain. Would you invest?
In general, structuring business activities in a tax-efficient manner is part of good planning. However, when you enter into a transaction with no bona-fide business motive and that transaction changes nothing but your tax situation, you can run afoul of the economic substance rules.
These rules were not found in the tax code prior to the 2010 health care laws. Instead, they were applied by courts to individual cases. Now, economic substance is defined by a two-part test. When the rules apply, your economic position must change in a meaningful way and you must have a substantial business purpose for choosing a course of action.
What happens if you fail the economic substance test? You lose any tax benefits you claimed and you may be subject to a penalty of up to 40% of the underpayment caused by the loss of the benefits.
Please call before you decide to participate in ventures that purport to save tax dollars. We're here to help you make prudent choices.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
© MC 2014
