ALBUQUERQUE, N.M. — Q: In 2012, my wife and I invested $250,000 in a startup business organized as an S corporation. We got 50 percent of the stock, although the other shareholder’s investment was primarily services. This investment has now gone bad and I am looking at a $250,000 loss for 2014. What happens to the loss?
A: Ordinarily, the loss from a disposition (in this case worthlessness) of corporate stock is a capital loss. A capital loss can only be used to offset capital gains or to reduce other income sources at the rate of $3,000 per year.
But to encourage investment in (often) risky smaller companies, Congress created a special status called Section 1244 stock. Section 1244 stock is available only for the first $1 million of capital invested and then only to individuals who were the original holders of the stock.
If qualified, a loss on the disposition of Section 1244 stock is ordinary, meaning it is deductible without limit, instead of capital. But this special treatment is limited to $50,000 per year, or $100,000 for joint filers.
If the joint-return loss exceeds $100,000, the excess is a capital loss. The per-year limit applies only when stock is disposed of in multiple periods. Since your loss occurred entirely in one year, you are limited to a total of $100,000 of ordinary loss.
So you should report a $100,000 ordinary loss and a $3,000 capital loss in 2014, and then have $147,000 of loss carry forward to 2015 and beyond.
And if you had losses reported on a schedule K-1, your basis may have been reduced and the 2014 loss may be less than $250,000. If any prior K-1 losses were deferred under the passive loss rules, they would now be allowed.
Q: I am sort-of retired, but continue to do consulting work on a part-time basis, primarily as an expert witness in various legal proceedings. I live in Albuquerque and I was called by a Los Angeles law firm in the spring asking about my availability as an expert in a major case they were working on. They told me it would require significant work in a short period, expected to be about eight weeks, and that they had several other expert options in southern California so they did not want to pay my travel costs. The “hook” was a very high hourly rate and the expectation of 150 to 200 hours of work. My wife and I thought it would be an adventure to rent a beach house for two months and we did so for $15,000. The case settled while we were out there, so I did not get as much work as expected, but did earn almost $22,000. My question is whether I can deduct all of my travel costs to and from California, including mileage for our two cars, as well as the rent of the house? I had fun but wouldn’t have paid $7,500 per month without the work.
A: I don’t think the answer is clear, but there is a generous deduction available to a taxpayer who is “away from home” for a temporary period.
Home is your tax home, which is the place where you regularly conduct business. If you do consulting on a regular basis, Albuquerque should be your tax home.
Obviously, your living expenses here in Albuquerque are personal and not deductible. The “theory” behind allowing away-from-home expenses is that, when a work assignment is temporary, you incur dual living expenses. You should be allowed to deduct the excess costs when they were incurred to pursue a business.
A temporary assignment is one expected to last for less than one year. So far, everything looks good for you.
What I don’t know is how much time you spent on business and how much on personal pursuits. If too little on business, it is reasonable for the IRS to argue that you could have traveled back and forth, and reduced your costs.
So you have a factual issue and I would suggest careful documentation, not just of the costs and the time spent on business, which you probably have for billing purposes, but also the days spent on business and personal pursuits.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.