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Turn your “passive” business interest into an “active” one.

Usually, a small business owner works long hours at their trade.  But you might own a significant interest in another business operation, or perhaps your main business, where you mostly sit on the sidelines.  Turn your “passive” business interest into an “active” one.  You might be able to avoid a tax hit from the 3.8% net investment income tax.  The NIIT, which was authorized by the massive 2010 healthcare law, might apply to income realized as a passive investor. But an active business owner can escape the noose.  The NIIT applies to the lesser of “net investment income” or the amount by which your modified adjusted gross income exceeds a threshold amount. The threshold is $200,000 for single filers and $250,000 for joint filers.  The definition of NII covers income items like interest, dividends, annuity distributions, rents, royalties and net capital gain derived from the disposition of property.  It also includes income derived from passive activities.  Some of the income items specifically excluded from NII include salary, wages or bonuses; distributions from IRAs or qualified plans; income taken into account for self-employment tax purposes; gain on the sale of an active interest in a partnership or S corporation; and items otherwise excluded from income tax.  You may glean from the list that it makes a big tax difference if you’re characterized as an “active” or “passive” investor. When you’re a passive investor, the income received from the activity counts as NII for purposes of the 3.8% tax, but income from an active business doesn’t.  The tax code spells out the rules distinguishing a passive activity from an active one. A passive activity is an activity in which you do not “materially participate.” Material participation occurs when you’re involved in the activity on a “regular, continuous, and substantial” basis.  There are several ways to establish material participation in an activity, such as working 500 hours during the year.  Rental real estate activities are generally treated as passive activities even if you qualify as a material participant. However, you can avoid this outcome if you meet the more stringent requirements for a “real estate professional.”  Typically, you have to log more than 750 hours on the job during the year.[/vc_column_text][us_image image=”3797″][/vc_column][/vc_row]