Are you an active business owner or a passive one? That is, are you there handling the day-to-day operations of your enterprise, or are you more of an investor, providing capital but leaving the labor to others?
The answer to that question has significant tax implications, as Barbara Weltman at the Big Ideas for Small Business blog notes.
“It is commonly accepted wisdom that tax rules are complicated,” she wrote recently. “This belief is well supported by the conflicting tax rules that apply to business owners, depending on their participation in the business.”
The difference has implications when it comes to the qualified business income deduction, net investment income deduction, passive activity loss rules, and self-employment tax.
“Whether you sweat each day in your endeavors or are an investor who watches the books determines the tax rules that apply to you,” Weltman says. “Discuss your status with your CPA or other tax advisor.”