Good information is worth paying for
I don’t have a tremendous amount of free time during the tax season, but sometimes I just can’t help taking the time to read some of the “top ten” lists that come through my e-mail. I believe it was David Letterman who started the Top Ten List thing that is now such a staple of the Internet. Charlie Sheen is such a winner that he will probably be claiming that next. “Top Ten Wackiest Deductions Ever” and “Top Ten Ways to Cut Your Tax Bill by $1,000” are examples of ones I have read lately. Since I’m a tax professional, my favorite is “Top Ten Reasons to Pay a Professional to Prepare Your Tax Return.”
These lists all have good information and may provide us insight into how the Internal Revenue Service and the courts look at certain situations. For example, among the top ten wackiest deductions, a taxpayer deducted the costs of raising, feeding and maintaining two emus as a business. They never did claim any income associated with the two emus. They just claimed expenses. Eventually they were audited and the IRS disputed the fact that the taxpayers had a business. The IRS claimed that since they didn’t have a business, they couldn’t very well have business deductions. The court agreed with the IRS and all of the deductions were disallowed.
What can we learn from this situation? There aren’t many emu farms in the Rockford area, but there might be a sheep, goat, horse, buffalo or alpaca farm out there. We can infer that two sheep, goats, horses, buffalo or alpacas might not be enough to be called a business. We don’t know how many animals it does take to be called a business, but two might not be the answer. Now that’s valuable information.
Another item we could infer from this case is that a taxpayer that is generating no income but claiming deductions might want to be ready to prove they have a business. There are several factors that come into play when proving the business claim. The opportunity of making a profit is an important factor. In this case, how much income could be generated by two emus or two sheep or two buffalo? Is the potential of making a profit even there? Is there a plan in place to own enough emus to make it a business?
Another factor that is important concerns the “atmosphere” of the activity. Does the activity feel like a business or is it someone having fun with two emus? Is there a business plan in place detailing how the business would grow? Are additional animals going to be purchased or raised? Is there a budget for advertising and marketing? Is there even a budget? Those types of factors apply to every business or business-to-be out there.
Ultimately, if the IRS says you don’t have a business, you should be ready to prove you do have a business. It’s that complicated and yet that simple.
We can also learn much from the top ten list of reasons to use tax professionals. In fact, this ties back to the wackiest deductions list. Bona fide tax professionals will do their best to keep taxpayers from getting their name on the wacky deduction list. It’s not a place for the average taxpayer. Top ten tax professionals do more than prepare returns. They give valuable advice and answer questions. If they don’t know the answer to a question, they know where to find the answer. Tax professionals may not know exactly how many emus it takes to be called a business, but they do know the IRS has won a court case by proving to a judge’s satisfaction that two emus are a little short. That type of information is worth paying for. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry at www.actiontaxservice.com