This article article was published in the "New Rochelle Review" in the March 2006 issue.

“Life And Money”  TM –  Tax Tips for Tough Times - Part 1

By Frank Sisco, CPA, PFS

Nearly all of us go through tough times at one point.  Tough times can happen due to a death in the family, a disability, a failing business, a lost job, damage caused by nature, a major car accident, a ravaging illness, emotional conflicts, and the list goes on.  We all know that during such times, you should get the emotional support of relatives and friends and perhaps advisors, and have a positive attitude coupled with faith.  It is also wise to minimize the financial damage that may also occur.  Cutting current and future taxes is one such step.  The saved money could come in handy to improve the situation at hand and perhaps help in the future.  Seek the advice of a CPA, or other trusted tax expert, who has specific experience with these situations because the tax laws can be complex and implementation can have significant ramifications.  This column addresses tough times brought on by losses of a failing or failed business.

When a business loses money, there are steps to take that could save taxes, both currently and in the future.   For an ongoing business that has losses, the owner should consider generating taxable income from other activities that could be matched against these losses, thereby eliminating the future taxes that may have been incurred on that taxable income.  For example, if your business lost $200,000 this year, you may consider selling a rental property that has an unrealized gain (even to a family member at its true present value) thereby eliminating the taxes on the gain that would be incurred when you sell it. Also consider selling investment securities with significant appreciation to utilize the tax loss.  Another strategy would be to carryback the loss to prior years, by filing amended tax returns, and receive a refund of some or all of the past taxes that were paid.  For taxpayers who may be subject to estate taxes in the future and who own a business that now has a much lower value, the present may be an opportune time to shift some of the ownership to children or grandchildren because the gift amount may be much less, thereby using less of the gift/estate tax exclusion.

For a business that is sold or closed at a loss, you should obtain the advice on using Section 1244 of the Internal Revenue Code.  Steve Serwatka, CPA and partner of Arthur Allen and Company located in Greenwich, CT, said recently, in summary, that Section 1244 allows certain corporations (e.g. captitalization under $1 million; for original owners' investment) to treat such losses as "ordinary losses" rather than "capital losses."  Ordinary losses can reduce ordinary income (e.g. wages, interest, rental income) without limitation while capital losses cannot, except for $3,000. Mr. Serwatka also suggests that a taxpayer consider using certain provisions of the tax laws related to hobby losses in order to deduct certain expenses that the taxpayer might have ordinarily overlooked as deductible.

For losses for continuing and for terminated business, another tax strategy is to withdraw money from IRAs and other retirement accounts in order to generate taxable income to offset the losses.  This removes the future tax liability attached to those retirement funds which can now be invested in liquid savings accounts. Frank LaRusso, CPA in Harrison, NY, indicated that he has applied this strategy in several client situations with beneficial results.   A similar technique is to withdraw money from tax-deferred annuities and also to convert traditional IRAs, which are taxed when withdrawn, into Roth IRAs, which are not.  Roth IRAs have the additional benefit of being exempt from the minimum distribution rules which start at age 70 ½.

The next column will deal with tax tips associated with tough times brought about by other unfortunate events mentioned at the beginning of this article.

About the author

Frank Sisco is a CPA and Personal Financial Specialist, and author of several articles about personal finance and issues of life and money.   His firm, Financial Management Corporation, is located in Harrison, NY.  Frank makes his home with his wife and daughter in New Rochelle, NY.  He can be reached at 914.381.3737 or by email at ideasmoney@aol.com, or visit his website at www.LifeAndMoney.com which contains this and prior articles.

Submitted 2/22/06, 5pm

by Frank Sisco