7 Deadly Tax Sins
When it comes to the IRS, some bad acts are worse than others. We have compiled below the top ones to avoid at all costs. However, if you should find yourself in the middle of one, you should certainly call tax attorneys to get you out of the bad situation (yes, it is a bad situation).
Most employers impose a dress code for the office. As a result, there are more than a few members of the American workforce who must purchase items including expensive suits, dresses, shirts, blouses, and shoes to observe an employer’s dress code. Many employees have wondered whether the cost of these clothes, often worn only for work, is deductible at tax time.
Many professionals, whether lawyers, accountants or physicians, experience and endure difficult economic times before finally earning their graduate degree. On one hand, the high cost of tuition must be paid, which requires either a significant student loan or form of employment. Yet, graduate school leaves little or no time for anything other than study. After such an economically, physically, and mentally draining ordeal, is there a way to recoup some of the blood, sweat and cash exchanged for a graduate degree? Is tuition for law or graduate school a deductible educational expense?
The US government defines a small business as one with sales of $7 million to $25 million a year and up to 1,000 employees. There are more than a few tax breaks available for small businesses and many have been extended for 2016. Some notable tax extenders include I.R.C. § 179 and bonus depreciation as well as tax credits for research and development, work opportunity, and energy production.
*I.R.C. §179 & Bonus Depreciation
Two important tax breaks for small business have been extended: I.R.C. § 179 and bonus depreciation. I.R.C. § 179 allows businesses to deduct the full price of any qualifying equipment or software purchased or leased during the year. The tax-extension bill makes permanent the $500,000 maximum deduction for new and used equipment that was purchased or leased in 2015. Bonus depreciation, which was extended through 2017, allows business owners to depreciate 50 percent of the cost of new equipment purchased in 2015. The two tax incentives can be used together.
Under I.R.C. § 179, taxpayers may claim certain business expenses in the year in which they were incurred rather than depreciating the costs over several tax years. The limit of $500,000 is double the previous limit and large enough that the average small business owner can write off most, if not all, of their equipment purchases in the year of the transaction.
The 50 percent bonus depreciation provision also was extended. After the full $500,000 is taken, exhausting the claim, an additional 50 percent of the adjusted basis of certain depreciable business property purchased and placed in service during 2015 may be deducted.
*Research and Development Credit
Originally enacted to act as an economic stimulus. Internal Revenue Code (IRC) § 41 enables a taxpayer to claim a tax credit for qualified research expenses paid or incurred by the taxpayer during the taxable year in carrying on any trade or business. The availability of this tax credit is established by the definition of qualified research expenses under I.R.C. § 41 and the regulations under I.R.C. § 174. New York State income tax law also permits an New York tax credit for qualified research expenses. An investment tax credit equal to 9% of qualified investment in R&D buildings and tangible personal property (the credit is 7% for personal income taxpayers).
*Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers who hire veterans and individuals from other target groups with significant barriers to employment. There is no limit on the number of individuals an employer can hire to qualify to claim the tax credit, and there are only a few simple steps to follow to apply for the WOTC. After the required certification is secured, qualifying employers can claim the tax credit as a general business credit against their income tax.
*Energy Tax Credits: Investment Tax Credit & Production Tax Credit
The Federal Production Tax Credit (PTC) and Investment Tax Credit (ITC) are incentives for
development and deployment of renewable energy technologies. The Production Tax Credit (PTC) reduces the federal income taxes of qualified tax-paying owners of renewable energy projects. The Investment Tax Credit (ITC) reduces federal income taxes for qualified tax-paying owners based on capital investment in renewable energy projects. The ITC is earned when the equipment is placed into service.
In December of 2015, the House and Senate agreed by significant margins to grant extensions to the 30 percent investment tax credit (ITC) for solar energy and the 2.3-cent-per-kilowatt-hour production tax credit (PTC) for wind power. Other technologies—including geothermal, marine energy and small hydropower—received one-year extensions to their 30 percent ITC under the joint spending and tax measures passed. New York State also offers a tax credit for biofuel production.
In addition to the tax breaks mentioned above, there are an abundance of good old-fashioned deductions that can help lower a small business owner’s tax liability, including:
• Automobile expenses related to business;
• Membership fees in trade organizations, professional groups and chambers of commerce;
• Classes, seminars, and other training in a profession;
• Banking, credit card and ATM fees incurred in business;
• Business travel and meal costs;
• Professional journals, newspapers and books necessary to conduct business.
• Internet and other telecommunication, including cellphone, charges for business use. Only the amount used for business may be deducted;
• If a small business operates from home, expenses relating to that portion of the residence that is work space should be deducted;
• State and local sales taxes.
If you are a small business owner and have questions about any credits or deductions that may reduce your business tax liability, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
Working at the IRS or representing clients before the IRS has its perks and advantages. Having the opportunity to observe all of the outlandish and bizarre attempts by taxpayers to assert legitimate,valid tax deductions is rare. On one hand, it certainly may involve the observance of a unique form of comedy. Here are some odd, crazy, unusual, and please note, unsuccessful tax deductions:
*Crazy Home Office Deductions
A woman that ran a home business tried to deduct what was basically her home refrigerator. She explained to her tax professional that she kept drinks in the refrigerator for customers and other business associates that came to the home office for meetings. According to the owner, this occurred four or five times a year while the refrigerator was in her kitchen and served her family.
By now everyone is familiar with Uber. And in case you’re not, Uber is an online taxi dispatch company that uses its own mobile app that allows its customers to submit a trip request on their smartphones for drivers who then pick up riders using driver-owned vehicles.
Uber’s business is built on an independent contractor (IC) model, which in Uber’s case means that ideally, Uber drivers receive no benefits, use their own vehicles, and pay all expenses for gas, maintenance, and insurance. Twenty to twenty-five (20 to 25) percent of driver earnings are paid to Uber as a fee to use its service. Some estimate that this contractor model can save businesses up to 30% on labor costs.
If a taxpayer converts a home to a rental, when can the taxpayer deduct any losses related thereto?
Related Tax Rules or Regulations
Internal Revenue Code Section 262, which provides that except as otherwise expressly provided, no deduction is allowed for personal, living, or family expenses.
Internal Revenue Code Section 165 permits a deduction for any “loss sustained that is not otherwise compensated for.” In order for an individual to deduct such a loss, the loss must be incurred in a trade or business, be incurred in any transaction entered into for profit, though not connected with a trade or business, or arise from some sort of casualty or theft. If such property purchased or constructed as a primary residence if, before its sale, it is “rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of sale.”
Who qualifies as a real estate professional for tax purposes? More specifically, how does a taxpayer establish that he or she materially participate in rental activities, so that the rentals become non-passive, and any losses can be used without limitation?
Related Tax Rules and/or Regulations
Internal Revenue Code Section 469
Escalante earned income from teaching and his ownership of rental properties that he managed himself. His teaching contract required him to work a minimum of six hours per scheduled work day. As is customary with this type of contract, it contemplated that there would be a substantial number of hours spent outside the classroom engaging in tasks and activities like lesson planning, grading papers, parent-teacher consultations, and faculty meetings.
Related Tax Rules or Regulations
Internal Revenue Code Section 61
Internal Revenue Code Section 280E
Prior to 1982, an illegal business was able to reduce its revenue by the cost of any product it sold (Cost of Goods Sold, or COGS), as well as other ordinary and necessary general and administrative (G&A) business expenses like rent, packaging, utilities, travel expenses, and even the cost of a small scale used to weigh the controlled substances sold by the taxpayer. In 1982, the IRS enacted Section 280E which dictated that businesses that trafficked in controlled substances, as defined by the Controlled Substance Act, could no longer deduct its expenses.