Questions about deductions

A client had some questions for me about business deductions. Since these are common questions, I decided to post the client's questions below in anonymity and provide my answers:

We talked about billing magazine subscriptions to the corp and deducting them, but you mentioned I would have to have a place more like an office that has visitors, waiting area, etc... If I "rent" this space from them would this allow me to deduct magazine subscriptions?

Remember, there's a fine line between being aggressive and committing tax fraud. Deductions must be necessary and reasonable. If your line of work consists of face-to-face meetings at the clients' locations and there is no legitimate reason to have a waiting room, then magazine subscriptions are not deductable. Doctors' offices, for example, are different. There is a legitimate need for office space as well as a waiting room; however, the magazine subscriptions are still a grey area of the law. It would be difficult to prove to the IRS that a subscription to - for example - Playboy is a necessary and legitimate expense for a business. To make the deduction more acceptable and more to your advantage in the vent of an audit, try to subscribe to magazines related to your line of work. For example, if a doctor's office - a business with a legitimate reason to have a waiting room - subscribes to magazines to help patients pass the time while sitting in the waiting room, magazines such as Men's Health, Fitness, and the like could be argued to provide a benefit to the doctors as well as the patients - why wouldn't a doctor subscribe to such magazines (they promote healthy living, something doctors are concerned about)? My professional opinion is to keep away from magazine subscriptions UNLESS they are specifically trade subscriptions wherein you obtain key advice, trends, etc. regarding your line of work.

I recently started an S-corporation and have questions on meals expenses. A couple of scenarios:

I'm on the road and far from home and eat while there. Should I use the corp credit card to pay for the meal, or should I pay for the meal myself and keep the receipt for tax time, or should I pay for the meal and submit the receipt to the corp for a meal reimbursement?

I wouldn't pay for the meal myself and hold the receipt for tax time. Either having the company reimburse you at the end of the month or having the corporation picking up the check immediately works better. This avoids losing the receipt and guarantees your deduction. Since you own the corporation and the company's bottom line transfers on your return, you're better off taking the deduction through the company as opposed to claiming it as an unreimbursed employee expense at the end of the year on your personal return. Here's why. Unreimbursed employee expenses are not guaranteed. First, you have to qualify to itemize your personal deductions on your individual return (as opposed to taking the standard deduction). Every year, as you pay less mortgage interest and the standard deduction increases, it will become harder for you to take the option to itemize deductions. Secondly, unreimbursed employee expenses are subject to a special area of the tax law where they (along with other misc. deductions such as tax preparation fees and investment expenses) must exceed 2% of your adjusted gross income and only the amount above the 2% threshhold is elligible for deductability. For example, if you make $100,000 per year, your unreimbursed employee expenses and all other misc. elligible deductions must exceed $2,000 to be considered elligible. This is a gamble. By allowing the deduction through the corporation, you're lowering your corporation's bottom line. Since the bottom line is taxable on your personal return, your lowering your taxable income automatically and guaranteeing the deduciton. For example, your company's bottom line without unreimbursed meals is $60,000 and your allowable deduction for meals is $1,000. Using the $100,000 example above, you won't be able to deduct the $1,000 meals expense on your personal return as an itemized deduction because you need at least $2,000 in elligible expenses (and only anythin above that $2,000 threshhold is allowable). If you put the deduction through the corporation, your taxable bottom line that gets transfered on your personal return is $59,000. You guarantee the deduction, lower your income, and pay less tax. It's a win-win scenario.

My wife and I go to dinner. Since we're Pres and VP, when could we consider a dinner a "business expense", if at all? Since I'm on the road so much and barely see my wife during the week, pretty much every meal is truly a "working meal" where we go over work-related stuff, as well as personal/family stuff, of course. If there is a way to consider it a business expense?

Be careful here. According to the IRS, you can't call personal meals business dinners. There has to be a legitimate purpose for the business meal. For example, if you were to both be on the road working together, you can take the deduction. If you held a meeting over dinner and recorded your meeting minutes - it's a grey area. If you decide to go out for dinner and your wife asks, "how's business?" - it's not a legitimate deduction.

I purchase a lot of DVD and keep them at the office. I mostly play them as background noise, but others watch them and borrowe them. Are they deductable?

DVDs are not deductable for the sheer fact that you can view them at any time. I often purchase songs from itunes on my laptop to listen to the music while working and drown out background noise. However, since I am able to sync these songs to my ipod and listen to the songs while fishing, hunting, hiking, working out, doing yardwork, etc. It's not deductable. The same goes for clothing expense - if you can use the purchase elsewhere, it's not deductable. However, if you're searching for a deduction you can go to one of those embroidery places and get a few shirts made up with your company name on it. Here, you're advertising your business and/or buying uniforms. You obviously wouldn't wear these shirts anywhere else but when working or trying to drum up business.

IRS Stimulus Rebate

I heard on the TV that the IRS will be giving out extra rebates in October. How do I qualify? (Anonymous, West Pittston, PA).

I am not certain where you received the information, but there is no second stimulus rebate payment. Qualifying taxpayers only receive one rebate check. What you may have heard is that taxpayers must file their 2007 income tax returns by October 15, 2008 in order to qualify for the economic stimulus rebate.

What to do if you haven't filed your return in years

Question: I just received a letter from the IRS informing me that my husband never filed our tax returns from 2004. When I asked my husband about it he said he forgot to file the last 4 years. What do I do? (Anonymous)

First, I would gather up all your tax documentation from the previous four years and file the returns ASAP. If you cannot locate your documents (i.e., 1099s, W-2s, etc.), you can call the IRS on the number provided on the letter. If you misplaced the letter, you can call toll free at 1-800-829-1040 to speak to an agent (NOTE: don't call on Mondays or Fridays - these are the busiest days for the IRS and you will most likely become frustrated trying to get a hold of a live person). If you explain to the agent that you lost your documentation and need to complete your returns for 2004, 2005, 2006 & 2007 they can send you a transmittal that provides all the appropriate numbers needed to have your returns completed. Once you have the information needed to complete the returns, I advise that you seek a qualified tax professional to assist you in preparing these returns in a reasonable amount of time.

I stress qualified because there are many people and companies out there that prepare returns, but are not really qualified to prepare them. Most taxpayers are not aware that the Internal Revenue Service does not restrict non-licensed professionals from preparing income tax returns. In other words, according to federal regulations a paid tax preparer does not have to be a certified public accountant or enrolled agent to prepare taxes. In April, 2006 the Government Accountability Office published the results of a study it conducted that indicates that large tax preparation service companies contribute to error rate. It was noted in the report that most of the preparers at these companies are unenrolled, inexperienced, and have little or no background in tax preparaton. Such companies as H& R Block and Jackson Hewitt do not require that their employees or franchise owners to have any prior experience in tax preparation or a college degree in accounting. To make a long story short, before you find a tax professional, make sure that they have the background necessary to prepare your returns - a six-week crash course offered by H&R Blockhead is not sufficient. It takes years of experience and education just to begin the ins and outs of the tax law.

The second thing I would do is not accept the answer "I forgot to file" for four consecutive years. There are two reasons why someone doesn't file a return: sheer laziness or because they are afraid they owe and can't pay the bill. If you and your husband owe money, you will be subject to interest and penalties which will make the tax bill much higher. The IRS will not accept the excuse that you were not involved in your household's finances and tax matters. This makes you equally as liable for the debt as he is. To make matters worse, the IRS allows you 3 years from filing deadline date to complete your returns and claim your refund - so if you were due a refund for 2004, you lost your right to claim any part of it.

What's done is done and you can't change the fact that your taxes haven't been filed. To prevent this from happening again, I would begin engaging in conversations to openly discuss all financial matters and tax matters with your husband. Perhaps you should take over some of the responsibilities or plan a weekly time slot to do things together. I found in almost half of the cases where taxes haven't been filed, there are usually a few credit card bills or loan payments that have slipped through the cracks too.