QUESTION: My now ex-wife and I began a business in 2006 under an LLC. Since we had just started, we showed a loss that year, and took it accordingly on our joint tax return. This year, part of our divorce decree gave her the business and all the debts. I didn’t get any money for my 50% stake, because the business hadn’t begun showing a profit. But most of the start-up money came from my personal savings (which was noncommunity property during the marriage) as a loan to the business. Can I take the full amount that I personally invested (roughly $7,500) as a loss on my taxes this year?
— Evan Tiras, Glendale, Ariz.
ANSWER: Your divorce and the subsequent transfer of business ownership makes this a complicated situation. It would appear, at first blush, that it’s simply too late for you to take a loss, chiefly because your ex-wife, now the owner of the business, is entitled to any tax deductions related to your former joint venture.
However, you might have some options. During divorce proceedings, couples often forget to address the tax consequences of splitting up assets, says Lee Rosen, president of divorce firm Rosen Law Firm in Raleigh, N.C. Then when tax season rolls around, a missed deduction comes to light. When this happens, couples “frequently go back and amend the documents so [one spouse] can take advantage of the tax benefit,” says Rosen. Typically, the spouse getting the tax break agrees to pay attorneys’ fees, plus compensation (if appropriate) to the former spouse. Whether it’s worth the cost, trouble and possible emotional hassle of dealing with your ex-wife is up to you. Check with your divorce attorney and a trusted tax advisor before proceeding.
One other possibility: You might be able to write off the $7,500 loan as a bad business debt . That’s technically when someone owes you money you can’t collect. In this case, you’d have to prove several factors: that the money you poured into the business wasn’t considered marital property; that it was indeed a loan (not a contribution of capital) and that you took reasonable steps to collect the debt, according to Patrick Astre, a financial planner in Shoreham, N.Y. Be aware, however, that you may draw some unwanted attention, as the Internal Revenue Service closely scrutinizes loans between related parties.
QUESTION: I’m a small-business owner, and I often drive from Toledo, Ohio, to Lansing, Mich. Can I deduct mileage as well as my truck payments?
ANSWER: You can’t deduct both expenses specifically. But many business owners do deduct the cost of owning or leasing a vehicle though a simple process called the standard-mileage-rate method. Rather than adding up actual expenses (such as operating costs and the cost of gasoline) you simply track business miles, then multiply that by a flat rate, which is 48.5 cents a mile for 2007 and 50.5 cents for 2008. So if you drove your truck, say, 10,000 miles in 2007, you would deduct $4,850, regardless of what your actual expenses were.