• Chart of accounts structure and appropriate level of detail.
• Using "classes" and "types" to track your revenue and expenses in greater detail. 

The IRS has released the final copy of Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts where calculations for the 3.8% tax on net investment income are made. Unfortunately, as of this writing, the final instructions for the form have not been released. And sixteen of the lines on the form say "See Instructions". This is an indication that even the IRS is not quite sure what to do with this legislation. However, here are some points to keep in mind while gathering your 2013 tax information:

• The tax only applies if your modified adjusted gross income is above $250,000 on a joint return, $200,000 on a single return, and $125,000 if married filing separately.
• The rules for deductions use the term "properly allocable" which leaves the exact method open to interpretation. It will be years before this is tested in the tax courts.
• Rental expenses are already calculated on Schedule E, but with the surtax and phase-out of itemized deductions, you should consider whether some expenses on Schedule A can be moved to Schedule E.
• Rental income from property rented to an activity in which the taxpayer materially participates is exempt from the surtax. Further, the gain on the sale of such property will also be exempt.
• Investment property does not necessarily produce current income, but may have current expenses, such as property tax on vacant land.
• Investment income is also subject to state and local taxes, so you can deduct a "reasonable allocation" of these taxes in determining the surtax. What is reasonable remains to be seen.
• Investment interest expense, including amounts carried over from before 2013, is deductible to the extent it is deductible on Schedule A.
• Capital losses, including capital loss carryovers from before 2013, can be deducted to the extent of capital gains.
• Passive losses, including passive loss carryovers from before 2013, can be deducted to the extent of passive income.
• Expenses attributable to generating income not subject to the surtax (such as brokers fees for tax-exempt bonds) are not deductible.

Undoubtedly there will be further developments in this area in the coming months. 

Being dissatisfied with low returns on typical IRA investments, some individuals have turned to nontraditional investments to beef up their retirement accounts.  Such investments include private loans, real estate, and businesses, for example. While these types of investments are not specifically disallowed, compliance can be tricky and can lead to penalties or disqualification of the plan.  For example, it is permissible to use IRA funds to purchase a publicly traded limited partnership that holds rental real estate.  The problem starts when the partnership has debt-financed property that creates income that is taxable as unrelated business taxable income (UBTI). This income needs to be reported on a Form 990-T and could cause the IRA to owe tax. The IRA may be required to file Form 990-T even if no tax is due.

A potentially more dangerous situation can occur when the IRA invests in a business.  In one case, an IRA acquired a 98% interest in an LLC that held a business. This was not prohibited, but the trouble started when the LLC paid the IRA owner compensation for services he provided to it. The Tax Court ruled that this was a prohibited transaction and deemed that all of the IRA assets were distributed and includable in the owner's income. Since the IRA owner had not reached age 59-1/2, the distribution was also subject to the 10% early distribution penalty. To make matters worse, the taxpayer was also assessed a penalty for substantial understatement of income tax.

On January 27th the IRS issued Rev. Proc. 2014-18

which will allow executors who failed to make an election to transfer a deceased spouse's unused estate tax exclusion to the surviving spouse. This election is made on a timely filed Form 706, but since in most estates the value of assets is less than the amount required to file the form, the election may have been missed. Up until now executors would have had to request a private letter ruling if the deadline expired. The new procedure gives executors a second chance to consider whether the "portability" election should be made. While this impacts all married individuals who died in 2011, 2012, or 2013, it may be of particular importance to same-sex couples. The Rev. Proc. specifically addresses the impact of the Supreme Court's decision in Windsor by indicating that these couples were not previously eligible for the portability election.