Stem Cell Study May Cure Tax-Dollar Addiction

…my addiction drives me to steal money from average Americans and spend it on my pet projects,”

This pretty well describes how our rulers see their purpose in office.

Uproar Over Roberts’s Tax Returns Discounts Existing Disclosure Curbs

…no one — not even the president of the United States — is required to publicly divulge his or her tax information.

 

Bush to Senate Judiciary: Release Your Own Tax Records

Aircraft Charter Business That Incurred Losses for 12 Straight Years Was For-Profit Activity – A common issue involves how long a taxpayer can show a loss from a business before IRS classifies it as a non-deductible hobby. Many people, including far too many tax professionals, misinterpret the IRS safe harbor rule.  What this rule says is that IRS is required to accept a venture as a deductible business if it shows net profits in three out of five years.  Many people construe that to mean any business not meeting that test is not producing deductible losses.  As this case cited by CCH proves, that has never been the case. 

As with any tax matter, the burden of proving you are entitled to claim a business loss lies with you.  You must be able to prove to IRS or the Court that you have been conducting the business according to professional standards that could eventually result in net profits and it is not just being done for fun.  In fact, I have always advised anyone who is interfacing with IRS to banish the word FUN from their vocabulary in regard to their businesses.  Once that word pops up, IRS auditors scrutinize everything more closely in their search for expenses to disallow.  The fact is that most IRS auditors hate their government civil service jobs and cannot fathom the fact that many of us self employed people actually enjoy what we are doing.

 You can download the full record of this case from the Tax Court website.

For several years, I have been trying to explain that there are several pitfalls to choosing to use the supposedly sexy S corp format instead of a plan Jane C corp.  Several months ago, an IRS auditor told me that his upcoming projects would involve in-depth reviews of pass-through entities, such as partnerships and S corps.  This project would include following every single pass-through item from the K-1s into the owners’ 1040s.

IRS has now officially announced the upcoming commencement of an in depth study of 5,000 randomly selected S corp tax returns for the years 2003 and 2004.  Their reason is the tremendous growth in the use of this format, which as I have pointed out on several occasions, is due to widespread ignorance on the part of small business owners who jumped into this without having the foggiest idea of what the repercussions were, just because they heard from someone that S corps are the best way to operate. 

 Joe Kristan appropriately compares this to the more well known 1040 audits from Hell, where IRS analyzes every single item on the victims’ tax returns in order to fine tune their audit selection criteria.  Every S corp shareholder should have their fingers crossed that their corp isn’t one of the unlucky 5,000 to be chosen by IRS. You need to remember that, if your corp is selected, your 1040 will also be part of the IRS examiner’s audit; so it could very easily open an extremely messy can of worms.    

Q:

Hello Kerry,

We just bought a some what expensive boat out of our corporation.  We will use the boat both for personal and client entertainment.  Would it be an OK idea to depreciate this asset on our corporate return?

Thanks for your input.

A:

It would be the same as with a car or any other vehicle.

There are a couple of main ways in which it can be handled.

You can just depreciate the business usage percent of the boat’s cost.

or

You can depreciate it as 100% business usage and then you either:
  reimburse the corp for the personal usage

or

include the value of the personal usage in your W-2 wages. 

Kerry