Category Archives: Tax Basics

IRS Material Participation Rules – Paul Gaulkin CPA

white clock with black numbers

A passive activity is defined as “any activity which involves the conduct of a trade or business, and in which the taxpayer does not materially participate” according to Code Section 469(c)(1). Also included in the definition are rental activities, without regard to the extent of taxpayer participation. This basically excludes trade or business activities in which a taxpayer does materially participate are not passive activities. In terms of real estate activities, these are generally considered to be passive no matter … Read more

Determine Passive Activity Loss Rental Property – Paul Gaulkin CPA

house with for rent sign

An activity is a rental activity is during the year: 1. Tangible property held in connection with the activity is used by customers or is held for use by customers; and 2. Gross income attributable to the conduct of the activity represents amounts paid principally for the use of the property. Generally speaking, any rental activity is a passive activity, without regard to material participation. This means that no matter the amount of hours you put into a rental activity, … Read more

Calculate Net Operating Loss – Paul Gaulkin CPA

chart showing losses

The term “net operating loss” is defined as the “excess of deductions over gross income”. This excess of deductions over gross income is subject to modifications which limit the net operating loss to only business losses. Reporting Loss A loss reported on a tax return by an individual taxpayer with business income is modified in the following ways in order to determine a net operating loss deduction: Start with taxable income or loss + Any NOL deduction from another year … Read more

How to Calculate Tax Liability – Paul Gaulkin CPA

person using calculator

Taxable income is computed using one of the two overall accounting methods, the cash method or the accrual method. It is possible to use a combination method that involves using both the cash method and the accrual method. Different Accounting Methods Under the cash method, income is reported when it is received and deductions are taken when the expense is paid. The accrual method requires income to be reported when all the events necessary to fix the right to receive … Read more

Sales and Use Tax – Paul Gaulkin CPA

cubes spelling sales

The sales and use tax is imposed on retail sales of tangible personal property and in some circumstances, sales of services. It is important for businesses to distinguish between retail sales and wholesale sales because this tax is normally only imposed on retail sales. If you are a wholesaler, you do not want to be subject to additional taxes that are not your responsibility for paying. Retail Sales Tax At the most basic level, retail sales are sales directly to … Read more

Hybrid Method of Accounting – Paul Gaulkin CPA

Balancing the Accounts

The main type of accounting methods that the IRS allows a taxpayer to take advantage of are the cash method and accrual method of accounting. It is a general misconception that a taxpayer must utilize one method or the other method, but this is not true. A taxpayer has the option to use a combination of permissible accounting methods. Hybrid Method Restrictions For example, the accrual method, which must be used for purchases and sales of inventory, may be combined … Read more

Definition of Section 1245 Property – Paul Gaulkin CPA

personal writing financial statements

When you think of Section 1245 property, you should really be thinking of Section 1231 property. Section 1245 is actually a subcategory of depreciable Section 1231 property. Section 1245 property is personal property which is subject to depreciation or amortization depending on the type of property. This definition includes property such as: 1. Property that is tangible and was used as an integral part of a specified business activity or activities. 2. Amortized property such as patents and leaseholds of … Read more

Stock for Stock Exchanges Non-recognition – Paul Gaulkin CPA


No gain or loss will need to be recognized in the event a taxpayer exchanges common stock in a corporation solely for common stock in the same corporation, or if preferred stock is exchanged solely for preferred stock in the same corporation. It is important to note that voting rights are not a factor when determining non recognition. Non recognition will apply even though voting stock is exchanged for nonvoting stock or nonvoting stock is exchanged for voting stock. How … Read more

Capital Asset Definition – Paul Gaulkin CPA

Keyboard with keys saying stocks and bonds

The IRS does not actual define for taxpayer what it considers to be a capital asset. Instead, the IRS specifies what it considers not to be a capital asset. The IRS defines a capital asset as any property held by the taxpayer except: 1. Stock in trade or other inventory property or property held by the taxpayer primarily for sale to customers in the ordinary course of a trade or business. 2. Depreciable property used in a trade or business. … Read more

Is Property Tax Deductible – Paul Gaulkin CPA

a chart of houses up and down

Local, state, and foreign real property taxes are generally deductible by the person who the tax is assessed to. In most cases this will be the property owner but it can be another person in some other situations. This property tax can be deductible in either the year in which they were paid or accrued. In the event that they are for non-business real property, they are deductible as an itemized deduction. Special Assessment Tax A special assessment tax paid … Read more