Tax Gems

Depreciation – Qualified Indian Reservation Property

Jun 272012

Qualified Indian reservation property that is placed in service after 1993 and before January 1, 2012 is eligible for special MACRS recovery periods that result in faster writeoffs. This allows depreciation to be claimed at an accelerated rate in relation to ordinary MACRS periods. There is no alternative minimum tax depreciation adjustment required.

Before I continue, I’m going to answer the obvious question – before January 1, 2012, why do I care, it’s too late? The answer is: if you have qualified Indian reservation property that you’ve been claiming ordinary MACRS recovery periods on, you can amend a return within three years from the date filed, OR claim catch-up depreciation in the current year. The catch-up depreciation is particularly useful if in the current year you have substantial net profit that’s subject to self-employment tax and income tax. The extra depreciation will help in reducing the current year’s net profit and associated taxes.

It’s surprisingly common for CPAs to be unaware of accelerated depreciation for qualified Indian reservation property. Every year there are numerous CPA prepared tax returns that are eligible for this accelerated depreciation, but do not claim it, resulting in unnecessary self-employment tax and income taxes.

The following table shows the shortened recovery periods:

MACRS Property Class and Recovery Period		Qualified Indian Reservation Property Recovery Period
3-year property		2 years

5-year property		3 years

7-year property		4 years

10-year property		6 years

15-year property		9 years

20-year property		12 years

Nonresidential real property		22 years

Qualified Indian reservation property is MACRS 3-, 5-, 7-, 10-, and 20-year property and nonresidential real property that is:

used predominately in the active conduct of a trade or business within an Indian reservation;

not used or located outside an Indian reservation on a regular basis;

not acquired (directly or indirectly) from a related person; and

not used for certain gaming purposes.

You or any owner of the business does not have to be a Native American. The property needs to reside on an Indian reservation or be located within an Indian reservation on a regular basis. Real property you rent to others that is located on an Indian reservation is also eligible for the accelerated recovery periods.

The following property is not qualified property.

Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property.

Property acquired directly or indirectly from a related person.

Property placed in service for purposes of conducting or housing class I, II, or III gaming activities.

Any property you must depreciate under ADS. Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use.

If the preceding requirements have been met, and you wish to claim catch-up depreciation in the current year (unclaimed Indian depreciation from prior years), you must file Form 3115 – Application for Change in Accounting Method. I’ve provided a PDF file for an example of Form 3115 in current context. Do not use this as is. You must consult a tax professional as your situation will be unique. Form 3115 for qualified Indian reservation depreciation catch-up.

Wade Cicrich, CPA

Securities or Commodities Trader? – The Benefits of Electing Trader Tax Status

Posted By Wade C 10,666 Responses »

Jun 152012

When tax time comes, Uncle Sam insists on sharing your net trading gains, while nearly turning a blind eye to net trading losses. Being an investor, or trader classified as an investor (most traders), has a windfall of negative tax consequences. Fortunately, the IRS has carved out a tax niche for active traders – trader tax status. Having trader tax status means that you are classified as a trader in securities, or commodities.

Here’s a rundown of the tax differences between trader tax status and default investor status:

Trading Gold Futures

Trader Tax Status

Trader tax status signifies that an individual (or entity) is in the business of trading. All valid expenses are deducted in their entirety on Schedule C. There are no limits to valid business expenses. Trading gains and losses are reported on Schedule D as they ordinarily would be, unless a mark-to-market election is made. The mark-to-market election will be discussed in a forthcoming article. The following are example of trading expenses that can be deducted on Schedule C:

Full interest expense, not subject to the investment income limitation rule
Seminars or education
A home office deduction is allowed – if a portion of the home is used exclusively for the trading business
Books and subscriptions
Auto expenses for trips to a broker, etc
Hard-to-borrow fees for short sales
Professional fees
Dividends in-lieu
Trading platform fees, data feed fees
Investment and trading counsel fees
Other valid business expenses, including any expense that can be claimed using standard investor tax status

Schedule C deductions are highly preferable over the limited miscellaneous itemized deductions used by investors. They’re what’s called an “above-the-line deduction”, or deduction from gross income to arrive at adjusted gross income (AGI). Above-the-line deductions originating from a trader’s Schedule C can be used to offset trading gains, a spouse’s wages, or other unrelated business income.

Investment Tax Status

By default, all individuals that trade securities or commodities are classified as investors, even if they attempt to make a living by means of trading. Investors can only deduct certain investment expenses as miscellaneous itemized deductions, to the extent they exceed 2% of adjusted gross income.

Say your AGI is $80,000 and you have $3,000 in miscellaneous itemized deductions. Your 2% AGI floor in this case is $1,600 (2% of $80,000), so you lose the first $1,600 of the $3,000 you claim, but get to deduct the remaining $1,400. If you don’t have enough overall deductions to itemize, you lose the entire investment deduction. With trader tax status, you can claim trading expenses in full — above-the-line, and still claim a standard deduction.

Examples of investment expenses that can be itemized as miscellaneous deductions, subject to the 2% rule:

Investment counsel fees
Transportation to your broker’s or investment adviser’s office
Safe deposit box rent for storing certificates
Software used to management investments
Professional fees necessary to produce or collect taxable income
Replacement of lost security certificates

Investor tax status allows an itemized deduction (not subject to the 2% rule) for interest expense, limited to the amount of investment income, such as dividends or interest. Trader tax status allows a full deduction for interest expense, irregardless of investment income.

Summary

Electing trader tax status allows an individual or entity to deduct additional expenses above and beyond those allowed by investor status. Furthermore, all trading expenses become valuable above-the-line deductions, rather than miscellaneous itemized deductions subject to phaseouts and the 2% rule.

In an upcoming article I will be writing about the caveats on qualifying for trader tax status; the IRS has yet to set clear guidelines. Fortunately, there are court cases and other proximate figures that the IRS rarely challenges! The final article of this series will be on the mark-to-market election, an election that is only available to individuals or entities with trader tax status. The mark-to-market election erases the wash-sale rule and turns all trading gains or losses into ordinary income or losses, rather than capital gains and losses. Ordinary trading income is not subject to self-employment tax.

Capital losses are limited to $3,000 per year. There is no limit to ordinary losses.

Wade Cicrich, CPA