Charles Blair, DDS
John McGill, MBA, CPA, JD
I have operated an unincorporated dental practice for more than 20 years. In addition, I also have a part-time farm which grows apples and other fruits. The farm usually loses money. Since I give away apples and other fruit to my patients, can I consolidate both businesses on a single Schedule C on my tax return and use my farm losses to offset my practice income?
No. IRS regulations require that a separate Schedule C be completed for each separate business activity. In a recent tax court case - Zdun vs. Commissioner, T.C. Memo 1998-296 - the court held that, in a situation similar to yours, the farm operation must be considered as a separate business activity. As such, losses would be deductible only to the extent that you were able to prove the farm operations were organized and operated with a profit motive under Section 183, and not as a hobby.
My CPA recently told me that I must begin sending a 1099 to my attorney for whatever legal fees I pay to him during the course of the year, but only when the amount exceeds $600. I thought that this was exempt since my attorney was incorporated. Who is correct?
Your CPA is correct. Internal Revenue Code Section 6045(f) requires furnishing a 1099 for all payments to attorneys in connection with legal services. The Treasury Regulation Section 1.6041-3(c) exception for payments to corporations is not applicable, so that and payments made to incorporated attorneys must be disclosed on a 1099 as well.
I recently sold my practice and now the buyer wishes to purchase the building as well. Since I have owned the property for more than 20 years, it is now fully depreciated. My accountant has told me that some of the gain arising from the sale of the building will not be taxed at 20 percent. Is this right?
Your accountant is correct. The portion of the capital gain arising from the depreciation recapture - original cost of the building minus current tax basis (0) - will be taxed at a maximum rate of 25 percent under the law, while the economic gain - net sale price minus original cost of the building - will qualify for the maximum 20 percent rate on capital-gain income.
If you sell the building on an installment basis (receive payments for more than one year), there is another quirk in the tax law that you should be aware of. The IRS proposed regulations under Section 453 providing that as payments are received, all of the initial gain is allocated to the depreciation recapture (maximum 25 percent rate) first; only after all of the gain related to the depreciation recapture has been realized will you begin recognizing the true capital gain subject to the lower 20 percent maximum capital-gain rate.
Over the years, I have taken out several whole life insurance policies that now have built up substantial cash values. During this time, I have taken loans against each of these policies to pay for education and other living expenses. If I now cash in these policies, what is my tax situation?
As a general rule, the loan amount, as well as all accrued interest, will be offset against the cash surrender value you receive. In computing your income realized on the surrender of these policies, the amount received will include not only the actual cash proceeds, but also the discharged loans including accrued interest. See Atwood vs. Commissioner, T.C. Memo 1999-61.
The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($155 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.