Each week we'll answer to one of the most frequently asked on the blog of Facebook, Twitter and TaxACT in "You Got it" weekly series
issue :.
I invested enough to finance the planned expenditure in the golf business for my son to cover 3 years as did another investor. The account can be drawn to cover travel, food, anything that promotes the company directly. We are paid a percentage of all revenue and that money goes into another account that is paid to investors at the end of each year. The formula for recovery should allow us to recover our investment, plus a profit over the three years. Since we have given 3-year planned spending in advance do we have the (total invested less income generated in the first year) as a loss in the first year and second year all income is profit from the initial investment is already written off
Dwayne via Blog TaxACT
answer
invest in a business can be an excellent investment choice.
most tax consequences of an investment in a company depends on the structure of the company in which you invest.
in general, there are two types of companies - partnerships and companies ..
How and when you report a gain or loss, or report any income or expenditure depends on the company structure
partnership
If the business is set up as a partnership , and you are a partner in the company the income and expenses pass through your tax return.
company will file an information return and send you a Schedule K-1 (Form 1065) to report your share of the income and expenditure. You will then report the Schedule K-1 (Form 1065) on your income tax return.
Your basis in the partnership is the amount of your investment in the property for tax purposes. The adjusted basis is used to calculate your gain or loss on sale or disposal of participation in society.
Corporation
If the business is set up as a corporation , and you have received stock in exchange for your cash investment, the company distributes profits to you in the form of dividends.
dividends are reported to you on Form 1099-DIV, you must report on your tax return. You will not recognize any gain or loss until you sell or exchange your shares in the company.
In both cases, you need to keep track of your basis for this investment like any other investment.
your initial investment in the business is your starting point in investing. You can then adjust your base accordingly over the years on the basis of income, distributions or reinvestment.
If you receive a distribution company as a return of capital, it means that you are reimbursed for your initial investment in the company.
then you reduce your basic records by any distribution of return of capital.
If you decide to sell your interest in the company, you will then calculate any gain or loss on your investment at the time of sale. You will use your basic investment compared to the sale of products that you get to sell your interest to determine any gain or loss.
If you receive a capital distribution of return that exceeds your basis in the company, the. excess is claimed as a capital gain
For example:
Jason invests $ 5000 in Business A.
in 2013, Jason receives a distribution of capital return for $ 3,000 cash. In Jason's records, it reduces its basis in the investment of $ 3,000, giving an adjusted basis of $ 2,000. The $ 3,000 will not be included as income on his return fiscal 2013.
In 2014, Jason sold his interest in the company for $ 6,000. Jason will claim a capital gain of $ 4,000 for this sale. This gain is calculated as product sales ($ 6,000) less than the adjusted cost base of Jason ($ 2,000)
Another example :.
Say Jason decided not to sell its stake in the company in 2014.
In 2014, he received another capital distribution back for $ 3,500. At the time of distribution, based in Jason investment is only $ 00. Therefore, it will report a gain of $ 1500 (3500 $ less than $ 2,000) on his return, 2014.
The adjusted basis Jason go ahead will now be $ 0. Therefore, any future return of capital distributions will be fully taxable as gain.
When Jason sold his interest, the full proceeds of sales amount will be considered capital gain adjusted cost base because of Jason in the company is $ 0.
All current amounts of income in the year that apply to get you through a Schedule K-1 issued to you by the company.
This form will report your share of any income of the year, you 'll report on your tax return.
depending on the company structure, may need to be considered in your base and these income figures for the current year.
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