It Pays To Seek Tax and Business Advice

Get good advice before jumping in. An hour discussing what you want to do with a tax and business expert could save you a substantial amount.

In one case two individuals started a delivery business. They didn't realize they'd have to file as a partnership. They then decided to incorporate and elect S status. Because of the timing they filed a partnership for the last few months of one year and as an S corporation the next year.

Because of the switch in entities, they couldn't take the Section 179 expense deduction. Moreover, a transfer of equipment from the partnership to the S corporation was delayed and they had to pay sales tax a second time. Add to that the extra accounting and legal fees and the mistake cost them over $5,000, a substantial amount considering the size of the business.

At KR Hoffman & Co., LLC, we want to help you turn your idea into your ideal business. Start your company the right way and get a head start on success. Call us at 954-591-8290 to discuss any tax and business concerns you may have.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

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Tax Court Says To Seek Help

In Robert L. Bernard et ux. (T.C. Memo. 2012-221) instead of correctly reporting the IRA distributions on their tax return, the taxpayers mischaracterized $99,334.82 of the distributions as proceeds of sale, claimed a combined basis of $49,054, and reported $50,280.82 as long-term capital gains and agreed they failed to report certain additional distributions.

When the 2007 return was prepared, the taxpayer had misfiled or misplaced the information returns reporting their income. The taxpayers had received notice that the IRS was challenging their treatment of IRA distributions on tax returns for earlier years. The taxpayers obtained an extension of time to file the 2007 return because he was suffering from depression, confusion, and memory loss. He was hospitalized in May 2008 during the period of extension for filing the 2007 return.

The taxpayers prepared the return themselves using commercial software. They advanced several arguments as to why they shouldn't be taxed on the full amount of the distributions, but Court rejected the arguments. The IRS also claimed the taxpayers were liable for the accuracy-related penalty. The taxpayers relied on his health problems as an excuse for the numerous errors on the return.

The Court noted that the taxpayers confused authorities describing a serious medical condition as an excuse for late filing of a return with those describing reasonable cause sufficient to avoid a penalty under Section 6662(a). The Court viewed the taxpayers' failure to seek competent help in preparing the return as negligence and allowed the penalty.(emphasis mine)

It pays to consult with a tax and business experts. K.R. Hoffman & Co., LLC is your tax and business expert. Please call me at 94-591-8290 with any questions or concerns you may have.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

How Not To Run A Business

In Leon Solomon Verrett III et ux. (T.C. Memo. 2012-223) the taxpayer's activity was small construction jobs. The construction activity has not generated a profit for any of the 17 years it has operated.

The taxpayer managed his construction activity from a home office. It had a listing in the local telephone directory, but no business plan, dedicated bank account or Internet presence. The taxpayer did not use computer software to track finances although he had done so as a purchasing manager. He was not licensed as a general contractor. The construction activity consequently generated limited income without the license because he could not lawfully undertake larger construction jobs. He owned a tractor, four trailers, various power tools and other machinery that he used in his construction activity. He charged lower rates than did other local contractors. The taxpayer did not follow the industry practice of applying a 20% overhead charge to the cost of materials. Rather, he directed his clients to purchase the materials from a home improvement store. Most of the taxpayer's construction services during the years at issue involved uncompensated projects for his family and his church. The taxpayer used the same tools and equipment for these endeavors that he used when providing paid construction services.

The taxpayers claimed construction activity income of $3,400, $4,000 and $13,395 and expenses of $31,757, $36,152 and $30,174 for the years at issue. The Court looked at the none factors reviewed in determining whether an activity is engaged in with a profit motive and found the taxpayer was not engaged in the activity for profit. The Court noted the taxpayer's decisions regarding pricing, the general contractor's license and unpaid projects, however, show that he was not primarily motivated by profit. It was significant that the construction activity never generated a profit. A for-profit enterprise would not repeatedly and consistently generate losses without changing its practices. The Court also cited that the losses offset his wife's wage income.

In reading the Court's decision, I find the following passage interesting:

B. The Expertise of the Taxpayers or Advisers: The second factor is whether petitioner developed his own expertise and sought guidance from industry experts. See sec. 1.183-2(b)(2), Income Tax Regs. Petitioner acknowledged his practices made the construction activity consistently unprofitable. He testified that he came from a family of construction workers, yet nothing in the record established his relatives were experts or that he consulted with them. We find that petitioner did not demonstrate any business expertise or consult with any experts. This factor weighs against petitioner.

If you are a new entrepreneur or a seasoned veteran, it pays in the long run to consult with a tax and business advisor.  I am available to discuss with you any questions you may have regarding tax implications of a business decision or general business questions. Feel free to call me at 954-591-8290 or email me with your questions. I am available to answer that one-time question or my firm can be retained as an ongoing, on-call advisor.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Tax Code Runs Deep

American capitalism has produced generations of great brand names, and Chevrolet is one of the most iconic. Swiss race car driver Louis Chevrolet founded his car company in 1911, then sold it to his partner just four years later. General Motors acquired the company in 1918, and positioned Chevrolet as an everyman's car to compete with Ford's Model T. The company prospered through the 1950s and 60s, producing the legendary Corvette among other models. More recently, Chevy was caught in the economic downturn of 2007-2010, leading to General Motors bankruptcy reorganization. But GM and Chevy rebounded quickly, and now actually are in one of the strongest periods in their history.

Right now, Chevrolet is running a truly bold marketing campaign for our era of skeptical consumers. Their "Love It or Return It" campaign lets you buy any new Chevy through September 4 -- and, as the name implies, if you don't love it, you can actually return it. There's fine print, of course. You have just 60 days to decide, and you can't drive it more than 4,000 miles. Oh, and -- you knew the tax angle was coming, right -- "you may be subject to federal, state, or local tax on any benefit paid."

Huh? Tax on a benefit? What "benefit" is there in returning a car you decide you don't like?

Well, as so often happens with a question like this, the answer is, "it depends." Let's say you take delivery of a new Corvette. (Red, of course.) The manufacturer's suggested retail price on a base coupe is $49,600. You drive it off the lot, confident you're behind the wheel of your dreams. But soon you get tired of the 430-horsepower V-8, the 4.2-second 0-60 acceleration, or the standard leather 6-way power seats. So after 60 days and 3,999 miles, you take it back.

You've always heard that cars lose half their value the minute you drive them off the lot, right? Well, that's an exaggeration -- but "your" Corvette is still probably worth $8,000 less than than what you paid for it. So if you get a full refund, have you just realized $8,000 in income? And if you used the car for business, do you have to recapture anything you depreciated?

Let's take another example. You're an environmentally responsible driver, but you can't afford the sexy new Tesla Model S. So you settle for a $40,000 Chevy Volt. You gleefully claim the $7,500 plug-in motor vehicle credit. And again, after 60 days and 3,999 miles (but only a couple of tankfuls of gas), you return it and get your $40,000 back. Now what? First off, have you even kept the car long enough to claim the credit? And as with the 'Vette, if you owe tax on the "benefit"... what is that benefit? That credit reduces your "basis" in the car to $32,500, so how much tax you owe on the difference depends both on what the car is worth and whether you get to keep the credit! (Oy!)

Washington knows how important the auto industry is to our economy, so the tax code is full of incentives to drive sales. This credit is just one example. Business owners have long known of another one -- which is that buying a truck in December can make for some nice year-end planning. Then there was 2009, when we saw a limited-time above-the-line deduction for state and local sales and excise taxes on new car sales. And in that same year, the much-mocked "Cash for Clunkers" program generated $2.877 billion in rebates on 690,114 vehicles, too. So don't be surprised if the IRS really does pay attention to these sorts of questions!

We want you to enjoy the freedom of the open road -- especially if it means a sweet convertible with the wind in your hair. But -- especially if you use your vehicle for business -- we want you to make smart choices. So call us before you trade in your old ride, and let us help you get the most out of your wheels!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Importance of Proper Record Keeping

It is not difficult to find professionals who advise, whether in person, on web sites, or otherwise, that tax records should be retained for three years. Some advisors suggest that tax returns should be kept for longer periods or even indefinitely, but that receipts and other supporting evidence can be shredded or trashed after three years. Too infrequently does the advice include a warning that receipts connected with basis determinations need to be kept for at least as long as the property is owned.

A recent Tax Court decision, Roberts v. Comr., T.C. Memo 2012-197, demonstrates the pitfalls of not retaining basis-related records. The taxpayer purchased a property in 1980 and sold it in 2005. The taxpayer testified that he paid $63,500 for the property and the IRS accepted this claim. The taxpayer also testified that he expended $75,000 for improvements to the property but offered no evidence other than what the court characterized as “vague self-serving testimony.” It’s very possible that the taxpayer made improvements of some amount, but because of the failure to retain and produce evidence, the taxpayer was taxed on gain that perhaps did not exist.

One of the interesting aspects of this case is that the taxpayer was an appellate lawyer. Worse, the taxpayer failed to file federal income tax returns for 2004 through 2007. Presumably the taxpayer attended law school. Perhaps the taxpayer took a basic tax course. Somewhere along the line the taxpayer should have learned about record retention, not only for tax purposes, but for other purposes as well.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Bringing Home the Gold

Friday marked the Opening Ceremonies of the Games of the XXX Olympiad. Britain's Queen Elizabeth, along with her Corgis, made their film debut parachuting into the stadium with superspy James Bond. The world's eyes are waiting to see who takes home the gold -- and whenever someone takes home "the gold," you know the IRS will be there to help them count it!

How excited do our friends at the IRS get when the Olympics roll around? Well, believe it or not, there's an argument to be made that the medals themselves are taxable. Way back in 1969, the Ninth Circuit Court of Appeals ruled that shortstop Maury Wills owed tax on the $10,000 value of the Hickock Belt he received for being named Athlete of the Year. But the IRS isn't taxing Olympiads on their medals -- at least, not yet. (Would that mean a Gold medal is just a Silver, after taxes?)

The United States Olympic Committee -- the nonprofit organization that coordinates U.S. Olympic efforts -- awards its own cash prizes to U.S. medalists. Those prizes are $25,000 for each Gold medal, $15,000 for each Silver, and $10,000 for each Bronze. That income is obviously taxable.

But the IRS knows the real payoff doesn't come from the medal itself. The real payoff comes from endorsement deals the stars make. Take swimmer Ryan Lochte, for example. On Saturday, he dethroned Michael Phelps as king of the mens' 400 meter individual medley. Lochte had already appeared in commercials for Nissan, AT&T, Gatorade, and Gillette, before the games had even begun. Fortune magazine estimates he'll make $2.3 million this year, before any bonuses for, you know, actually bringing home an Olympic medal. Forbes estimates that if Lochte picks up more gold in London, his endorsements might actually top those of Phelps. And Bloomberg BusinessWeek guesses that Phelps made $6 million in 2010. With possibilities like that, you can be sure the IRS will have their fingers crossed for Thursday's 200 meter individual medley!

Some athletes do well in competition and do well in endorsements, but still manage to disappoint the IRS. In 2010, skiier Lyndsey Vonn took home the gold in womens' downhill, which led to endorsement deals with Under Armour, Red Bull, Rolex, and Kohl's. Earlier this year, the IRS slapped her with a lien for $1.7 million in tax. (Lyndsey promptly settled her debt, blamed it on a nasty divorce from her husband and trainer, and apologized on her Facebook page.)

Olympic fame and fortune can pay financial dividends for decades to come. Thirty-six years ago, a determined American athlete named Bruce Jenner became a national hero, setting a new Olympic record while winning the gold in the decathlon. Three decades later, he's making headlines again as stepfather to those krazy Kardashian sisters. Is it paranoid to start wondering now which of today's Olympic champions will preside over a reality-TV trainwreck in 2042?

We realize that few of you are reading these words from Olympic Village in London's East End. But it's important to plan ahead for any sort of special prizes or windfalls you enjoy. Whether you're bringing home a medal, or you just want to keep more of the gold you've already got, we're here for you, and for your family, friends, and colleagues, too.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

You're Fired!

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and then go on with their day. But sometimes they try a little "self help." So now let's look at what one auditor did when she wanted to minimize her taxes.

Jacynthia Quinn spent 20 years as an IRS auditor in El Monte, California. The IRS audited her and her husband for 2006 (when she claimed $23,549 in charitable deductions and $22,217 in medical expenses) and 2007 (when she claimed $24,567 in charitable deductions and $25,325 in medical expenses). The Service disallowed those charitable and medical deductions, among other writeoffs, and the case wound up in Tax Court.

You'd think an IRS auditor would be the first to know how to avoid an audit! So, how did Quinn do on the other end of the hot seat? Well, let's look at those charitable contributions first:

"Petitioner proffered 'receipts' purportedly confirming charitable contributions. They were inconsistent and unreliable. Representatives from seven different charitable organizations credibly testified that the receipts were altered or fabricated. For example, petitioner offered a receipt purportedly substantiating $12,500 of charitable contributions to a religious organization. The purported receipt, however, identified individuals other than the couple as the donors. The organization's records did not reflect any contributions made by the couple and confirmed that the other identified individuals had contributed $12,500."

Uh oh. That doesn't sound good. Bad enough if one donor testifies your receipts are faked. But seven? How about those medical deductions? Any better luck there?

"Petitioner similarly failed to substantiate the claimed medical and dental expenses. Some of her documentation also suffered from authenticity problems and appeared to have been 'doctored.' Petitioner offered three documents purportedly issued by Dr. Christopher Ajigbotafe or his staff confirming more than $9,000 in medical expenses for Mr. Quinn. Each document, however, spelled the doctor's last name differently ('Ajigohotafe,' 'Ajibotafe' and 'Ajigbotafe'). One 'statement' was dated in January 2006 and estimated expenses for the upcoming year. The amount of expenses for 2007 contained in another 'statement' was contradicted by a letter purportedly from the doctor's staff."

Keep in mind here that Quinn is an IRS auditor, with 20 years of training and experience auditing exactly these sorts of deductions! Naturally, the Tax Court didn't show her a lot of sympathy -- they sided with the IRS on every issue and even smacked her with a civil fraud penalty. In fact, the IRS Restructuring and Reform Act of 1998 requires the IRS to fire any employee who willfully understates their federal tax liability (unless they can show the understatement is due to "reasonable cause" and not "willful neglect"). Since Quinn's own "excuse" is on a par with the dog eating her homework, she's likely to lose her job as well.

It's certainly entertaining to read about cases like Jacynthia Quinn's. It's satisfying to see a cheater get her comeuppance. And it's great to see the IRS enforcing the same rules for its own employees as it does for us. But there's a valuable lesson here, even for the majority of us who don't cheat. Dotting the "i's" and crossing the "t's" is important for everyone. That's why we don't just outline strategies and concepts to help you pay less tax. We work with you to implement those strategies and document them to survive scrutiny. And remember, we're here for your family, friends, and colleagues too!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Employee or Independent Contractor?

That was the issue in Twin Rivers Farm, Inc. (T.C. Memo. 2012-184). The taxpayer operated an horse farm and engaged two workers. The workers lived in a trailer on the property, did not appear to have paid rent, and were paid $300 and $150 per week. They cleaned the barn, barn area and grounds, groomed and watered the horses and moved them between pastures. All equipment was owned by the taxpayer. The taxpayer paid workers' compensation and employer's liability insurance, but did not file Form 943 (for agricultural workers), make deposits of employment taxes, and did not file Forms 1099 with respect to the workers.

The Tax Court examined seven factors including degree of control, investment in facilities, opportunity for profit or loss, right to discharge, whether the work was part of the principal's regular business, permanency of relationship, and the relationship the parties thought they created and held that the workers were employees of the taxpayer. The Court found the taxpayer liable for employment taxes, additions to tax under Sec. 6651(a) and penalties under Sec. 6656 for all the years at issue.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

Accurate Record Keeping Is A Must!

In Carl J. Mistlebauer (T.C. Memo. 2012-186) the IRS determined that the taxpayer did not maintain adequate books and records for his business reported on a Schedule C.

The IRS used the bank deposits method to reconstruct the taxpayer's income. The Court noted a bank deposit is prima facie evidence of income and the IRS need not prove a likely source of that income. The taxpayer bears the burden of proving that IRS's determinations of income based on the bank deposits method are erroneous and may satisfy that burden by establishing that the deposits that remain at issue are derived from a nontaxable source.

According to the taxpayer, none of the deposits to his bank accounts that remained at issue for each of those years was taxable because the respective sources of those remaining deposits were loans, lines of credit, proceeds from the sale of all his investments, and IRA distributions. But the only support for his position was his own testimony, which the Court found to be general, conclusory, uncorroborated, and self-serving. The Court did not rely on the testimony and sided with the IRS in finding the taxpayer had unreported income.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

Work at Home? You May Qualify for the Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.

    1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

        • as your principal place of business, or

        • as a place to meet or deal with patients, clients or customers in the normal course of your business, or

        • in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

    2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

    3.   Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

    4.   There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

    5.   If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

    6.   If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.