Month: May 2010

The IRS Statute of Limitations – How Long Does The IRS Have To Collect A Tax Debt?

IRS statute of limitations
The IRS usually has 3 years, usually…

The IRS Statute of Limitations – In most cases, the IRS may “assess additional tax” for the last three tax years, but that doesn’t mean they can’t look

  1. Under IRC section 6501(a), the statue of limitations (SOL) for assessment of taxes expires three (3) years from the due date of the return or the date that you file your return, whichever is later. Extending the due date for filing the return does not change the date the SOL starts to run.
  2. The IRS statute of limitations does begin to run until you file your return, even if it relates to a year long past. In such cases the taxes can be assessed at any time.
  3. The statute does not run if you file a false or fraudulent return or are willfully attempting to evade tax. Here too the tax may be assessed or collected at any time.
  4. If you substantially understate your gross income (more than 25%), the IRS statute of limitations is extended to six (6) years.
  5. With respect to collections, the IRS generally has ten (10) years after the date of the assessment of tax or levy to collect. That applies to assessments made after November 5, 1990.

There are other exceptions and special circumstances that affect the IRS statute of limitations. If you’ve been outside of the US for a significant period of time, for example, or agreed to an extension with IRS, your SOL deadlines may be different. The rules governing the statues of limitations begin at IRC Section §6501.

Audit Tip For Tax Practitioners: Always be aware of the statutes of limitations for years adjoining your client’s audit years. The examiner may wish to “open up” prior years that have closed.  Also, the IRS may examine tax returns extending well before the three year assessment period, even if no exception applies, to gain additional information about the taxpayer and his affairs.

Ari Good has considerable experience in federal income and excise tax issues, and in state sales, use, property, intangibles and franchise tax matters. Good Attorneys At Law, PA defends taxpayers facing tax audits in industries ranging from aviation to hospitality. Mr. Good has a proven track record in complex tax transactions and in serving businesses of all sizes.

Analysis of the 2010 Small Business Jobs Act

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business, paid for with various revenue raisers. Here’s a brief overview of the tax changes in the new law.

Tax breaks and incentives

Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.

The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

100% exclusion of gain from the sale of small business stock for qualifying stock acquired after Sept. 27, 2010 and before Jan. 1, 2011. Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don’t exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after Sept. 27, 2010 and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.

General business credits of eligible small businesses for 2010 allowed to be carried back five years. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses in 2010 aren’t subject to AMT. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.

S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).

Special rule for long-term contract accounting. The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.

Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (revenue raisers)

Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).

Increased information return penalties (effective for information returns required to be filed after Dec. 31, 2010).

Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after Sept. 27, 2010, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).

Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.

Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of Sept. 27, 2010.

Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit. The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.

Nonqualified annuity contracts. The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.

Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after Sept. 27, 2010 are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.

Please keep in mind that I’ve described only the highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to call.

What Constitutes A “Hardship” Distribution From My Retirement Account?

Qualified Deferred Compensation Plans Under 401(k), 403(b) and 457(b)

The rules for hardship distributions vary by the type of plan from which you intend to take a hardship withdrawal. What constitutes a “hardship” is typically set forth in the plan itself. If your 401(k), 403(b) and 457(b) plan permits hardship withdrawals, for example, the plan may permit distributions for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses.

What is the IRS definition of “hardship”?

While similar, the specific tests for hardship withdrawals vary slightly according to the type of plan. A hardship distribution from a 401(k) plan, for example, depends on an “immediate and heavy financial need of the employee” and/ or the employee’s family (See Reg. §1.401(k)-1(d)(3)(i))). Under the provisions of the Pension Protection Act of 2006, the need of the employee also may also include the need of the employee’s non-spouse, non-dependent beneficiary. The amount of the distribution may not exceed the amount of the need, however, the distribution may include funds necessary to cover any taxes or penalties that may result from the distribution. (Reg. §1.401(k)-1(d)(3)(iv)(A)). The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence. Expenses for the purchase of consumer goods such as a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee. (Reg. §1.401(k)-1(d)(3)(iii)). If your hardship distribution is from a 457(b) plan, in contrast, you must be able to show “unforeseeable emergency.” (Reg. § 1.457-6(c)(2))

A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee’s spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Thus, for example, a vacation home owned by the employee and the employee’s spouse generally is considered a resource of the employee, while property held for the employee’s child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. §1.401(k)-1(d)(3)(iv)(B))

What Do I Need To Provide In Order To Prove I Have An Immediate And Heavy Financial Need?

Most 401(k) plans follow “deemed necessary” rules, which in plain terms means it is not necessary to provide personal financial information to your employer or plan administrator to prove hardship. Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. An employer may generally rely on the employee’s representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources, unless the employer is actually aware that the employee can meet his immediate need:

(1) Through reimbursement or compensation by insurance;

(2) By liquidation of the employee’s assets;

(3) By stopping elective contributions or employee contributions under the plan;

(4) By other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer; or

(5) By borrowing from commercial sources. (Reg. §1.401(k)-1(d)(3)(iv)(C))

What is the maximum amount that can be distributed as a hardship from a 401(k) plan?

The amount allowable as a hardship distribution cannot be more than your total elective contributions – including Roth contributions – as of the date of the withdrawal, less any prior elective distributions you’ve taken for prior hardships or other reasons. This is referred to as the “maximum distributable amount”. This amount generally does not include earnings, non-elective contributions (such as required minimum distributions) or matching contributions. Other amounts under the plan, if any, such as your employer’s matching contributions and discretionary profit-sharing contributions may also be distributed on account of hardship if the plan so provides. (Reg. §1.401(k)-1(d)(3)(ii)).

What are the tax consequences of taking a hardship distribution from a 401(k) plan?

After an employee receives a hardship distribution of elective contributions from his or her 401(k) plan, generally the employee will be prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.
(Reg. §1.401(k)-1(d)(3)(iv)(E)(2))

Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Hardship distributions permanently reduce the employee’s account balance under the plan.

A hardship distribution cannot be rolled over into an IRA or another qualified plan. (Code § 402(c)(4))

What is a distribution on account of an “unforeseeable emergency” under a 457(b) plan?

Unlike 401(k) and 403(b) plans, a hardship distribution under a 457(b) plan can only occur when the participant is faced with an unforeseeable emergency. (Code § 457(d)(1)(iii)). An unforeseeable emergency is a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Examples include imminent foreclosure on, or eviction from, the employee’s home, medical expenses, and funeral expenses. Generally, the purchase of a home and the payment of college tuition are not unforeseeable emergencies.
(Reg. § 1.457-6(c)(2)(i))

Whether a participant or beneficiary is faced with an unforeseeable emergency depends on the facts and circumstances. However, a distribution is not considered an unforeseeable emergency to the extent that the emergency can be relieved through insurance, liquidation of the participant’s assets, or cessation of deferrals under the plan. (Reg. § 1.457-6(c)(2)(ii)). A distribution on account of an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need. (Reg. § 1.457-6(c)(2)(iii))

Are hardship distributions allowed from IRAs?

There is generally no limit on whether or when an IRA owner may take a distribution from his or her IRA. There may, however, be considerable tax consequences from taking an “early distribution” absent a hardship. The rules defining “hardship” for IRA withdrawals are similar to those pertaining to qualified retirement plans. If qualified, hardship distributions from IRAs and Roth IRAs will be exempt from the additional tax.

Certain other types of withdrawals from an IRA account would not subject you to the extra tax. These include withdrawals for higher education expenses or to finance a first-time home purchase. (Code § 72(t)(2)(E),(F))

Employment Tax Trust Fund Penalty

The Draconian Trust Fund Penalty – When Is An Employer Deemed To Have Willfully Failed To Withhold and Remit Employees’ Income Taxes

Putting the burden on employers to collect income tax on its behalf is a very effective, efficient and cost-saving tool – for the government. To encourage employers to pay the government first, Internal Revenue Code Sec. 6672, imposes a “Trust Fund Recovery” penalty. The term “trust fund” taxes refer to taxes that are withheld from employees’ pay towards their federal income tax obligations, plus the employee’s one half share of the Federal Insurance Contributions Act (FICA) that fund Social Security and Medicare programs. The idea is that these amounts are held by the employer “in trust” for the government. Willful failure to remit the amounts so collected can subject the employer to a civil penalty equal to 100% of the unpaid amounts not paid with the quarterly employment tax returns (Form 941). Another important part of this penalty is that it attaches not only to the employer but to the “responsible person” individually. In this sense the government has the ability to hold the entity and its members, officers and shareholders jointly and severally liable both for the taxes due and for payment of the penalty.

Generally, a Section 6672 assessment will be assessed when:

The individual was a responsible person (anyone who has the status, duty, and authority over financial decisions) within the liable entity; and
That individual or those individuals willfully failed to collect, truthfully account for, and pay over trust fund taxes (by knowingly paying other creditors while the trust fund taxes were due to the IRS). This is not uncommon where businesses are distressed financially and opt to cover payroll over paying the IRS.

What constitutes “willfulness” is a question of fact, that is, dependent on the particular circumstances of your situation. Courts have found “willfulness” in the following circumstances:

1. A company vice president and office manager (B) who had authority to sign company checks and use corporate funds to paid debts to creditors other than the IRS after discovering that the company was delinquent in its 941 filings. B kept the company books and payroll records and knew that the unpaid taxes continued to accrue. Yet, he remained a company vice president for a year thereafter without paying the withheld amounts to IRS.

2. Payment to other creditors in preference to the U.S. by the president of a manufacturing corporation who was signatory on the corporation’s bank account, in charge of day-to-day operations, and aware of delinquent taxes as they accrued.

3. Use of corporate funds by president to pay other company creditors after he discovered that FICA and withheld income taxes had not been paid to the government. The court ruled that once the responsible person discovers that these taxes have not been paid, it is his duty to pay the government what is owed before he pays other creditors, regardless of his reason for not doing so.

4. Payment of employee wages by volunteer corporate officers of a not-for-profit corporation while previously incurred withholding and FICA taxes for the last two quarters of Year 1 and first three quarters of Year 2 hadn’t been paid over. This constituted payments to creditors other than the U.S. The officers’ admissions that payments were known to be somewhat “late,” together with the conclusion that the corporation continued to pay its routine debts, supported a finding of willful conduct. Despite the officers’ claim that they took “corrective action” by hiring outside accountants and certifying paid administrators of the corporation, the extended period of nonpayment beyond May 3, Year 1, the time they became aware of late payments and tax problems, plainly indicated that they didn’t take “all reasonable efforts” to see that the taxes would in fact be paid. Assertions by two of the officers to the effect that the money was embezzled by corrupt employees weren’t adequate to controvert their earlier admissions that they were aware that the corporation wasn’t meeting, in a timely fashion, its withholding tax obligations to IRS.

5. Failure by corporate president/chief operating officer to pay over the corporation’s withheld income tax and FICA after he knew the corporation failed to pay these amounts for the first three quarters. He was an authorized signatory on the corporation’s bank account and was responsible for disbursing corporate funds.

6. Failure by corporate president/90% shareholder to remit withholding taxes that he was aware were delinquent and his preference of other corporate creditors over IRS.

7. The responsible person had knowledge of payments to other creditors after he was aware of the failure to pay withholding taxes.

8. The chairman of the board of directors/vice president’s use of corporate funds to pay other creditors after learning that withheld taxes hadn’t been paid over to IRS.

9. Endorsement of checks to creditors by a part-time bookkeeper who knew that withheld payroll taxes were due.

10. Taxpayer knew that the corporation’s taxes weren’t paid and allowed the corporation to pay other creditors, or signed corporate checks paying other creditors, before the government.

11. Taxpayer’s instructions to another corporate officer who was the majority shareholder to pay the taxes due did not excuse the taxpayer from willfulness where he was the person issuing most company checks, was aware the taxes were unpaid, and used available funds to pay other creditors.

12. Taxpayer knew of and authorized payments to other creditors—including the payment to himself for the then due installments on a loan that he had made to the corporation and the continued payments of interest to his wife and son on loans that they had made to the corporation—after he was aware of the failure of the corporation to pay the withheld taxes.

13. A chairman of the board, who was also a 97% shareholder and aware of unpaid withholding taxes, invested additional funds into the corporation and directed payments to other creditors over IRS.

14. A president/50% shareholder (PS) had actual knowledge that his brother, the other 50% shareholder, hadn’t paid withholding taxes when payments were made to creditors and to PS as wages. The district court didn’t believe PS’s claim that his brother deliberately and effectively misled him with regard to tax payment. PS knew that a tax payment had been returned for insufficient funds. PS clearly ought to have known that there was a grave risk that withholding taxes weren’t being paid and was in a position to find out for certain very easily.

15. Husband/manager of wife’s store knew of unpaid payroll taxes via correspondence directed to him from IRS and continued to perform management duties, including the issuance of checks.

16. One of the corporation’s owners (A), who was also an officer, director and daily manager of the corporation, failed to correct mismanagement of the corporation’s tax responsibilities after having notice of the withholding tax delinquencies. A (1) had notice of the tax delinquencies when she signed some of the corporation’s quarterly tax returns which set forth unpaid payroll taxes owed by the corporation and when she fired the operations manager for failure to pay the corporation’s tax liabilities and (2) paid or allowed to be paid creditors of the corporation instead of IRS.

17. A corporate president/chief stockholder allowed the payment of other creditors when he knew that withholding taxes hadn’t been paid. He acted willfully as a matter of law for purposes of a summary judgment against him, since he knew that withholding taxes hadn’t been paid and, during that time, corporate funds were used to pay wages to employees.

18. A corporate president knew of the corporation’s unpaid employment tax liability and participated in decisions to pay creditors other than IRS. The corporate president attended board of directors meetings at which the corporation’s failure to pay employment taxes was discussed and stated that creditors should be paid based on whether they demanded payment and whether the company needed the creditors’ services. Thus, he placed payment to IRS on a low priority.

19. President and partial owner of a corporation sold her interest and claimed that she was unaware of the unpaid taxes at the time when she ceased active involvement in the corporation. Her allegations were contradicted in pleadings relating to her counterclaim for contribution in which she stated that she had contacted IRS and was advised that there was a trust fund tax liability of $40,000. This knowledge, as well as her admission in the counterclaim pleadings that she participated in the decision not to pay the entire tax obligation, resulted in a finding of willfulness.

20. Shareholders, officers and directors of a corporation signed checks making payments to creditors while they knew that the corporation’s withholding tax liability remained unpaid. The checks were presented to these shareholders, officers and directors by a shareholder/officer/director who was in charge of the corporation’s day-to-day affairs.

21. General manager, who had authority to sign company checks and who directed the payment of the company’s bills, tendered a check for the payment of past due taxes to IRS, but the check was returned because of insufficient funds. After the check was dishonored, the taxpayer didn’t try to pay the past due taxes again, and acknowledged that he authorized or allowed other creditors to be paid during the period the taxes were accruing.

22. Manager of company was aware of the payroll tax problems yet paid other creditors ahead of the government. To the extent that he may have relied on others to pay the taxes, this reliance was unreasonable, given the company’s poor track record in this area.

23. Vice president/chief financial officer preferred another creditor and himself, in his capacity as a creditor, over IRS, despite knowledge that his company owed withholding taxes. Although he had no check-signing authority, he decided how funds were spent and which creditors were paid.

24. Corporate officers who had been notified that the corporation had received a notice from IRS indicating that the corporation was delinquent in its payments of withholding taxes continued to pay other creditors instead of IRS based on their subjective belief that the notice was incorrect.

25. Taxpayer was one of two partners of a partnership that bought a manufacturing company, which failed to pay over withheld taxes while it was owned by the partnership. The partner was a vice-president of the company and said that he chose to pay the company’s other creditors rather than IRS because he had to leave the company in viable operating condition in order to rescind the purchase agreement.

Contributing source: RIA / Checkpoint

One can see that the threshold for “willfulness” is fairly low. It appears that mere knowledge of an outstanding FICA tax / withholding obligation, coupled with payment to other creditors could constitute willfulness and support the government imposing the Trust Fund Recovery Penalty. This is a very hot area for the federal and state governments at this time. Employers would be very wise to make sure that the government is paid first.

Ari Good, Esq.

Tax Deductions For The Self-Employed

Preserve Deductibility of Your Home Office Expenses Through Careful Bookkeeping and Records

There are a number of universal “truths” when it comes to home office deductions and the “mixed” use of property that can serve both personal and business uses, like vehicles:

(1) Do not commingle funds. It goes without saying that having multiple accounts for multiple business ventures, and your personal affairs, can be a hassle. Keeping separate accounts for these needs is nevertheless one of the essentials. You can often administer multiple accounts relatively easily online if you maintain your personal and business accounts at the same bank.

(2) Make sure the deductions you claim match your books and receipts. It is not difficult for there to be some “slippage” in how well you keep your receipts and the deductions you take on your tax return, however, an auditor will be looking for these discrepancies. Most accounting software such as Quickbooks allows you to automatically download credit card activity into your accounts. It is then up to you to match the entries to the correct accounts, or to delete the entries if they do not relate to your business. As with online banking and multiple bank accounts, it pays to keep separate credit cards for your business and personal affairs. This helps you avoid the commingling problems identified above.

The IRS is unfortunately fond of jargon and acronyms. In order to be efficient, auditors will look for “LUQ” items, or “large, unusual or questionable” expenses. There is no precise definition of what these items are, but when it comes to reviewing your own books, consider the following approach:

  • Do you have deductions for certain types of expenses that are much larger than others?
  • Do you have deductions that repeat more frequently than others? You may need to replenish your paper supply frequently, for example. There is nothing to say this is not deductible if used for business purposes, however, it might be wise to order in bulk if multiple orders stick out relative to your other expenses.
  • Does the amount of the deduction match the item to which it relates? A $700.00 deduction for renting a conference room for a hotel seminar probably “looks right”. A $700.00 deduction for office supplies might not.
  • Beware of the difference between capital and ordinary expenditures. If you purchase capital equipment such as a computer, for example, you may not be able to deduct the full purchase price in full. Rather, you must depreciate this type of equipment and take your deductions over the equipment’s “recovery period”.

Please do not hesitate to contact us for further information and tax guidance in managing your home office and “dual use” property tax issues.

(c) 2010 Good Attorneys At Law, PA