The Art of the Tax Loss
Everyone knows what a hobby is, right? It’s something you do to relax and have fun, not something you do as an occupation. And everyone knows what a business is, too. It’s something you do to make money. So everyone should know the difference between a hobby and a business, right? Well, it turns out that’s a harder question than you might think — especially where our friends at the IRS are concerned.
This week’s story concerns Susan Crile, a tenured professor of studio art at Hunter College in New York City. Teaching art is her “business,” and she earns a respectable professional income from it — from 2004 through 2009, her salary grew from $85,999 to $106,058.
But Susan was a distinguished painter and printmaker long before securing her coveted teaching position. She’s sold 356 works of art since 1971. Her work hangs in the permanent collections of at least 25 museums, including the Metropolitan Museum of Art and the Guggenheim Museum. It also graces Fortune 500 and government offices, including the Federal Reserve Board, the Library of Congress, and various U.S. embassies. Criles works approximately 30 hours per week in her Manhattan studio during the academic year, and full time at a larger studio upstate in the summer. She also travels extensively for her work, including a trip to Kuwait to depict burning oil fields during the first Gulf War.
You would hope that an artist as accomplished as Criles would enjoy fame and fortune from her work. She may be famous, at least in the art world, but fortune seems to be lagging. She’s grossed as much as $111,815 from sales in a year, but never shown a profit. From 2004 through 2009, Criles reported just $15,865 in income from her art. But for that same period, she reported $286,976 in expenses. These included the cost of materials, of course, but also expenses for vehicles, mortgage interest (presumably on her studio property), travel, meals and entertainment, utilities, research, maintenance, and local transportation.
Unfortunately, you don’t have to take any art classes to become a tax auditor. Maybe that’s why the critics at the IRS panned her tax returns. They called her art a hobby, not a business, and used the so-called “hobby loss” rule to disallow all her deductions exceeding her income. Then they presented her with their review — a bill for $98,547 in taxes and penalties!
Tax Court judge Albert Lauber agreed that some of Criles’s deductions, like telephone and cable TV bills, newspaper subscriptions, tips to her doormen, and cabs to the opera, museums, and social events, were inappropriately personal and ought to be disallowed. But then he addressed the real question: had she created her art with a bona fide intent to earn a profit? Fortunately, the tax system offers a nine-factor “paint by numbers” test for distinguishing a hobby from a business, and the judge concluded that Criles’s time, effort, and expertise outweighed her spotty income over time. Deduction upheld!
Do you have a hobby that makes (or loses) money? Maybe it isn’t really a “hobby” at all, and maybe you can take advantage of it come tax time. The only way to know for sure is to call us and ask for a plan to make the most of your activity. So call us today while there’s still time to plan for 2014, and together we’ll see if we can paint a picture of savings!
In The Headlines
Is Bitcoin Becoming Respectable?
Even as the value of Bitcoin has fallen 55% this year against the dollar, consumers are embracing the digital currency. People have opened 41 million Bitcoin accounts worldwide, according to the Bank of England. Parents are dispensing allowances in Bitcoin to teach their kids to be digital citizens. Marijuana smokers are buying buds from Bitcoin-enabled vending machines. Consumers in emerging markets such as Brazil and Russia are starting to use Bitcoin to hedge their volatile currencies. While the total value of Bitcoin commerce is not known, Gil Luria, an analyst at Wedbush Securities, estimates global spending on goods and services using the currency has doubled in the past year.
New and updated apps and digital wallets make using Bitcoin easier. Mainstream companies numbering more than 75,000 say payment services Coinbase and BitPay accept it. Consumers can use Bitcoin to pay Dish Network for TV service, Expedia for hotel rooms, and Dell for PCs. So-called Bitcoin Boulevards, where retailers take the currency, have opened in The Hague’s World Canal area and in Cleveland Heights, Ohio, where participating businesses include Mitchell’s Fine Chocolates and Shawn Paul Salon.
By far the most popular virtual currency, Bitcoin was created in 2008 by the mysterious Satoshi Nakamoto, an individual programmer or possibly a group of programmers. Most currencies are managed by central banks. Bitcoin has no central administrator; a network of computers run by volunteers validates transactions, which require encrypted electronic signatures. While advocates see digital currencies as the money of the future, Bitcoin will have to overcome a number of hurdles, including concerns about security, before becoming widely accepted.
The first Bitcoin users were mostly investors seeking to profit from the currency’s wild swings. These included libertarians drawn to the freedom from government control, and tech geeks who deem paper money and credit cards antiquated. Lui Smyth, an anthropology researcher at University College London (known as London’s Global University), concluded from surveying users last year and again this spring that Bitcoin has attracted a more mainstream demographic in recent months. In 2013 more than 42% of the 1,000-plus people who took the online survey professed to be libertarians and anarcho-capitalists who favor the elimination of the state. This year only 22% of about 400 respondents described themselves that way. Among Bitcoin users, Smyth says, “You’ve got a wider spread of age, a wider spread of gender.” He adds, “Politics has gotten less important in getting people to join.”
Seeing the potential to attract a new group of customers, merchants are luring Bitcoiners with discounts. In one promotion, Dell knocked $150 off Alienware computer systems. Most merchants list prices in dollars and use the current exchange rate to calculate the price in Bitcoin. Most also immediately convert Bitcoins into dollars via services like BitPay and Coinbase to protect against swings in the digital currency’s value, although a few keep some of the Bitcoins they receive. Electronics Web merchant Newegg offered users $75 off purchases of $300 or more and $150 off orders of more than $500.
Brooke Mallers, a stay-at-home mom with six kids in Evanston, Ill., first spent Bitcoin last fall, when she bought her children Nike and other gift cards for Christmas. In April, she and her husband used Bitcoin to buy patio furniture on Overstock.com; in July, she purchased a Dell gaming computer for the kids. “I have a Ph.D. in English lit,” she says. “Neither of us has a technical background. I just like the idea of decentralization, that things are more distributed. We just think it’s awesome. We are kind of fanatic about it.”
Bitcoin is catching on outside the U.S., too. Peter Surda, an economist in Vienna, Austria uses it two or three times a week to buy everything from food to electronics to plane tickets. “Spending Bitcoin did indeed become easier, because more merchants accept it,” he said. “Also, various integration services do the purchases on your behalf, even if the merchants have no idea what Bitcoin is.” If anything, using the currency to buy goods and services is even more popular in Europe than in the U.S., says Tony Gallippi, co-founder of BitPay, which is based in Atlanta. “The adoption of the euro is a really good parallel to the adoption of Bitcoin. It’s fresh in their mind,” he says. “Adding a new currency for them is a very easy task.”
GE Sees an Industrial Future Made of Software and Data
General Electric (GE) is envisioning a future in which robots handle dull, dirty, and dangerous work across a range of health care, manufacturing, and field service applications while humans handle duties requiring more advanced cognitive and fine-motor skills. For GE, this is the next phase of the “Industrial Internet,” its in-house phrase for what others call the Internet of things—the ever-growing collection of connected devices “talking” to businesses with valuable data. This phenomenon is worth an estimated $1 billion in incremental revenue for the company this year alone, mostly in the form of advanced asset performance management services, according to GE’s top executive. Last year, the strategy inspired GE’s $105 million investment in Pivotal, a data analytics company spun out from the data storage firm EMC.
“If you went to bed last night as an industrial company, you’re going to wake up this morning as a software and analytics company,” GE Chairman and CEO Jeff Immelt told hundreds of customers and analysts attending the third “Minds + Machines” summit.
Using its Predix technology, GE already captures 50 million data points collected and communicated by 10 million sensors installed on $1 trillion worth of equipment ranging from medical imaging systems to locomotives to jet engines. That information is helping GE customers drive higher operational efficiencies, predictive maintenance and diagnostics that can reduce downtime, and synchronized fleet management applications.
Kate Johnson, vice president and commercial officer for sales and marketing at GE, offers the example of an offshore oil rig operator that recently averted a potential failure after detecting changes in production performance data. The savings: $7.5 million in lost production by replacing the part proactively.
Elsewhere, wind farm operator E.ON generates 4% more power from turbines it manages in collaboration with GE. And AirAsia Group stands to save up to $10 million in fuel costs this year by using Predix to reroute flight paths and optimize air traffic flow, based (among other things) on the performance data it collects about GE jet engines. “This data has been available for safety applications, now these livestreams could be used for flight planning,” said Rajesh Gill, group chief pilot, AirAsia.
By the end of 2014, there will be more than 40 applications and services based on GE’s platform, but the company hopes to spur many others by making Predix available to businesses interested in developing industry-specific solutions. In addition, GE is working with Cisco Systems and Intel to make sure support for its technology is included in future routers and other connected devices. To address security concerns, GE’s Wurldtech division is testing a firewall designed for the unique protection considerations of sensors, substations, trains and other industrial equipment.
With more than 50 billion connected machines predicted by 2020, the biggest challenge to GE’s industrial internet strategy is not the technology, it is the process reengineering necessary not just to make sense of data, but to take meaningful action on it. “Remember the human interface. All this means nothing if you don’t have someone extracting this data to make it reality,” AirAsia’s Gill said.
Sources:
1. http://buswk.co/1vi5w2v – Businessweek
2. http://bit.ly/1p2IIMV – Fortune
The Good News Is . . .
• U.S. chain-store sales posted a strong gain of 5.0% for the fiscal month of September on a year-over-year basis, according to a tally of comparable-store sales compiled by the International Council of Shopping Centers (ICSC). Chain store sales account for roughly 10% of retail sales and are an indicator of retail sales and consumer spending trends.
• Costco Wholesale Corp., a leading big box food retailer in the U. S., reported earnings of $1.58 per share, an increase of 12.9% over year-ago earnings of $1.40. The firm’s earnings topped the consensus estimate of analysts by $0.06. The company reported revenues of $35.5 billion, an increase of 9.3%. Management attributed the company’s results to growth in same store sales, as well as improving gross margins, and greater cost efficiencies.
• Becton, Dickinson & Company, a medical technology firm, said on Sunday that it would acquire CareFusion, which provides products and services to hospitals, for $12.2 billion in cash and stock. Combining Becton, Dickinson and CareFusion will create one of the five largest medical device companies in the world, with a range of offerings for pharmacies and hospitals. According to Vincent A. Forlenza, Becton Dickinson’s chief executive, the acquisition will help it improve medication management, primarily in hospitals.
Sources:
1. http://bloom.bg/1bidM2T – Bloomberg
2. http://bit.ly/1p2IMwn – IMarketReports.com
3. http://www.cnbc.com/id/18080780/ – CNBC
4. http://bit.ly/1o62TPa – Costco Wholesale Corp.
5. http://nyti.ms/1EJBmrC – NY Times Dealbook
Planning Tips
Tips for Creating a More Effective Estate Plan
Too often, the need for the most basic estate-planning documents is overlooked or misunderstood. While many people would admit they should have a will, 50% of Americans with children and 41% of baby boomers age 55 to 64 do not have one. Below are some of the essential documents you should have for your estate plan. Once you have these documents in place, make a point to periodically review and update them, especially if you have had any major changes in your life.
A Will – If you care about who will get your assets upon your death, then you need a Will. Without one, the state in which you resided will decide who gets your money, typically in a certain order, starting with your spouse and then your children, moving on to your parents and then siblings and finally going to a broad category called “other,” should none of the previous people exist. This potential nightmare can be solved simply by designating, in writing, who gets what.
Beneficiary Designations – If you have a life insurance policy or any type of retirement account, you likely filled out a beneficiary designation form indicating who would get this money upon your death. This is an extremely important piece of paper because it, and not your Will, determines who gets your money. It is even more important to revisit and update your list of beneficiaries to reflect any changes in your life, such as getting married or divorced or having a child. To find out whom you currently have designated, contact your insurance company for life insurance; employer for 401(k) plans; or brokerage firm for individual retirement accounts.
Financial Power of Attorney – A financial power of attorney assures you that someone you trust will make financial decisions on your behalf should you become incapacitated or unable to make those decisions for yourself. By designating a financial power of attorney, you will have more control over your financial affairs and a better chance that your wishes will be followed. Without one, the court will step in and appoint someone to take care of these decisions, and that process can take some time. While the court typically appoints a close family member, that person may not be the one you would have chosen. This is especially imperative if you have a non-spouse partner. By designating your financial power of attorney, you also have control over the scope of powers to grant your agent, from access to your financial accounts to managing all of your financial affairs.
Medical Power of Attorney – Like the financial power of attorney, the medical power of attorney lets you choose who will make medical decisions on your behalf if you are not able to make those decisions for yourself. It allows your designee to have access to your medical records, consult with your doctors, and admit you to a hospital or long-term care facility, among other things. The person you designate will also see that your Advanced Medical Directive is carried out.
Advanced Medical Directive – End-of-life decisions, such as whether you want tube feeding or to be put on a ventilator, are deeply personal and can be incredibly difficult for loved ones to make if you have not put your wishes in writing. An Advanced Medical Directive that clearly defines what you do and do not want lifts this burden from your loved ones while assuring that your final instructions are followed.
Sources:
1. http://bit.ly/1yqzi6h – Bankrate.com
2. http://onforb.es/1ELTrFy – Forbes
3. http://www.cnbc.com/id/101957932 – CNBC
4. http://abt.cm/1uZRUHD – About.com
5. http://bit.ly/1wnQwNq – AARP
6. http://fxn.ws/ZVLzl5 – Fox Business News
