Eight options when you owe taxes.

You owe the IRS money.  If it’s a small enough amount, then you just pay it.  What are your options when it’s a large amount?

The IRS will work with you and you have eight options available to you.

Change your payroll check withholding.  While this may not help you this year, it would help you from potentially owing taxes in future years.  File a revised W-4 with your employer and have them withhold more in taxes by either lowering your number of dependents or having them withhold an additional dollar amount.

The IRS takes debit/credit card payments.  There may be an additional fee for the transaction through a third party but it may be a cheaper fee than the one that you pay to set up a payment plan with the IRS.

Payment plans are another way to go.  Otherwise known as an installment agreement.  You can set up an agreement with the IRS to pay monthly.  You can also set up a direct debit so that the payment comes out of your account on the same date every month and you’ll never miss a payment that way.  The fees for this type of plan is $105.  An additional fee of $52 is for the direct debit agreement.  If your income is below a certain level though, they will only charge $43.

Maybe you are getting a loan or think you can come up with the money soon?  Then ask for a short term agreement.  This means that you can pay the full amount in 120 days or less.

There’s the tax bill payments option too.  Here you receive a bill from the IRS.  Pay it as soon as possible as interest and penalties accrue every month.  If you can’t pay it all, a loan may be the best option as their interest may be less than the interest and penalties that you get from the IRS.

Have you heard about electronic funds transfer?  This is a great way to pay your tax bill by phone or you can set up an account through the EFTPS website.

The IRS has a program called Fresh Start.  If you are really struggling to pay your taxes, you should look into this program. Their objective is to make it easier for you to pay back taxes and avoid tax liens.

Last, but not least, is an offer in compromise.  This program allows you to pay less than the full amount you owe. If the IRS agrees to your offer, then be prepared to pay the new and agreed upon amount in full as payment plans are not an option.  This one is the most time consuming process.  Even if everything is filled out perfectly, it can still take the IRS quite a long time to respond to it.  While you can do this yourself, you may be better off paying your accountant to do this for you.  He will know what documentation you will need to support your application for the offer.

Horse Farming – A Business or a Hobby?

As tax season is upon us, I thought it might be beneficial for horse owners and businesses to see whether you can claim your horse activities as a business and what factors will determine that.

The American Horse Council reports in “Tax Tips for Horse Owners” that the taxpayer cannot deduct expenses of an activity which are greater than income from that activity if the activity is “not engaged in for Profit”. In other words – A hobby- cannot be deducted against income from any sources. On the other hand, if an activity is engaged in for profit ( a business rather than a hobby), losses are fully deductable against other income.

In determining whether an activity is engaged in for profit, all facts and circumstances with respect to the activity are taken into account. These facts and circumstances must indicate that the taxpayer entered into the activity or continued the activity with the objective of making a profit. If a profit is made in two years during a seven year period, it will generally be presumed that the taxpayer has a profit motive.

The IRS regulations list certain factors which are considered in determining whether an activity is engaged for profit. All factors are considered, not only the ones listed in the regulations.

The factors normally considered are:

  • How does the taxpayer carry on the activity – is it in a business-like manner? Do they maintain complete and accurate bookkeeping records, carry on the activity in a similar manner to other activities of the same nature which are profitable and changes operating methods with the intent to improve profitability.
  • The expertise of the taxpayer or his advisors.
  • The time and effort taken by the taxpayer in carrying on the activity. If the taxpayer only devotes a limited amount of time, does he employ others to meet his goals?
  • Will assets such as land and horses appreciate?  Does the taxpayer intend to profit from that?
  • The success if the taxpayer in carrying on other similar of dissimilar activities.
  • The taxpayer’s previous income or losses associated to the activity.
  • The amount of profits in relation to the losses and in relation to the amount of the investment and the value of the assets used in the activity.
  • Substantial income from sources other than the activity, particularly if the losses from the activity generate substantial tax benefits.
  • Elements of personal pleasure or recreation, however pleasure derived from the activity is not considered sufficient cause to classify the activity as not engaged in for profit.

Presuming that an activity is a business:

Horse businesses, unlike most other businesses, have to show a profit in two years out of a seven year period in order to be considered a business.  This applies to the second profit year and all years thereafter within the seven-year period beginning with the first profit year. If it is a new activity, two profit years during any of the first seven years of operation will classify it as a business activity for all those seven years – provided the taxpayer makes a special election by the due date of the tax return for the third tax year in the seven year period.

If there are no profits shown in two years during a seven- year period, it doesn’t necessarily rule it out as a business.  If nothing can be presumed the taxpayer must rely on the factors listed in the regulations or other facts and circumstances.  The taxpayer should be able to demonstrate that the business will be profitable in the future, even if it hasn’t been for a number of years.

Any capital gains or any other sales relating to the activity are taken into consideration when determining a profit or loss year for purposes of the presumption.

If you want more information, email me a message through our contact page.