Are you in business? Can you deduct business expenses?

One answer is once you start generating revenue. In Michael S. Oros (T.C. Memo. 2012-4) the taxpayer traveled to South America, Asia, Africa, and Australia with the intention of writing a book. He took some 4,500 photographs and maintained a contemporaneous journal in which he wrote about his different experiences. But some four years later he had not published or completed a book about his trip. On his 2006 tax return he deducted travel, meal, and telephone expenses for a total loss of $19,140. The Court noted that to be engaged in a trade or business a taxpayer must me regularly and actively involved in the activity. The Court said that while some of the facts in the record suggested the taxpayer was engaged in a trade or business (business plan, journal, etc.), it went on to say the taxpayer failed to present any evidence of continuous or repeated activity as an author, and he was a full-time employee. The Court denied a deduction for the claimed expenses.

In Javier L. Gaitan et al. (T.C. Memo. 2012-3) the taxpayer had a business exporting clothing. The IRS disallowed a subtraction for cost of goods sold amounting to $134,575. The taxpayer attempted to prove the amount by (1) receipts and (2) an American Express card, claiming such evidence substantiated $70,275 of the amount disallowed. The Court found four problems with the receipts:

 They did not indicated which purchases were for export and which were for the taxpayers' personal use.

• Many of the receipts were illegible.
• Many of the receipts did not clearly identify the purchaser.
• Some of the receipts show the purchases were made for another business the taxpayers' owned.

The Court noted that the production of the American Express credit card statements was also flawed. The Court sided with the IRS in disallowing the cost of goods sold deduction.

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Business Expenses - Substantiation Requirements

In order to claim any deduction, a taxpayer must be able to prove, if the return is audited, that the expenses were in fact paid or incurred. Small expenses and those which are clearly related to the business may be substantiated by the taxpayer's statement or by keeping receipts, sales slips, invoices, canceled checks, or other evidence of payments.

 The following expenses, which are deemed by the IRS as particularly susceptible to abuse, must generally be substantiated by adequate records or sufficient evidence corroborating the taxpayer's own statement: expenses with respect to travel away from home, including meals and lodging, entertainment expenses, business gifts, and expenses in connection with the use of “listed property”.

 The expenses must be substantiated as to the amount, time and place, and business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated (Temp. Reg. §1.274-5T(a)-(c)). See “Auto Expenses Allowed when Loss of Mileage Log Wasn't the Taxpayers' Fault “

 If you have employees, and you reimburse your employees for their business related expenses under an accountable reimbursement plan, you must require your employees to satisfy the foregoing substantiation requirements in order to be treated as an accountable plan.

If you have any questions about the substantiation requirements or what is an accountable reimbursement plan, please contact us.

Will Bank of America Need To Sell Branches?

Headline from the Chicago Tribune Beaking Business News;  "Bank of America told Fed it could sell branches in emergency: Source".

You can read the story here.

If you bank with Bank of America, ensure your accounts are below the FDIC insurance limits of $250,000.