How Business Owners Can Avoid the New Investment / Tax Take an Active Role in Running the Enterprise, and Prove It to the IRS

Arden Dale for the Wall St. Journal writes: Business owners can avoid paying a new 3.8% investment tax on their profits by taking on an active role in running the enterprise. But they need to document their workload and maintain that work level year after year, experts say.

The tax on net investment income, enacted as part of the Affordable Care Act, took effect in 2013. It is levied on dividends, capital gains and other investment income for most married joint filers who have more than $250,000 in adjusted gross income. (For most singles, the threshold is $200,000.)

The Internal Revenue Service imposes the tax on individuals who are the ultimate owners of entities such as partnerships and S corporations, whose income passes through directly to the owners, when it determines owners have more of a passive "investor" role—based partly on how much time they spend on the job. Active owners don't have to pay the tax on income from the business.

Financial advisers say clients are asking how hard it would be to go from being a passive owner to an active one. "This is not easy to do," says Katherine Dean, managing director of wealth planning at Wells Fargo Private Bank, which has $170 billion under management. "Don't try to convert passive activities if you are not seriously participating in the continuing running of the business." [snip].  The article continues @ the Wall St. Journal.... To continue reading visit the Wall St. Journal, Click Here!