A picture of a bad deduction. Early in my career a practitioner confided to me that every 1040 should have a Schedule C, the 1040 report of business income, so that taxpayers could write-off personal expenses. That’s never been the actual tax law, but too many taxpayers believe otherwise.
The actual tax law is that you can’t deduct as business expenses costs without an intent to actually make money. Iowa has been independently enforcing this rule, known informally as the “hobby loss” rule. A newly-released protest resolution has an example of a Schedule C business that may not have been conducted with adequate vigor:
The Business Activity Questionnaire you completed indicated that you spent 8-10 hours per year on the business. That is less than one hour per month. This hardly seems reasonable to have for a successful business. An average photoshoot can last longer than 1 hour including let up and tear down and then most photographers spend additional time editing or developing the photos.
What made the state suspicious? From the protest response (my emphasis)
There is no evidence that the taxpayer has ever been successful in this business. With the exception of 2014, there is no record indicating that you filed a sales tax return or a schedule C showing any receipts since your permit was issued.
One of the most important parts of a real business is revenue. You could look it up. If you have none, it may be hard to convince the revenue agent you are serious.
You receive some income from other sources, and the losses you report from this activity does lower your income, in some years enough to make you exempt from tax.
That can be a clincher. If you have “business losses” that never end, but they save you taxes on other income, that’s a likely sign that your real “business” is reducing your taxes.
“[The] typical [client I’m] seeing now,” reveals Virginia LaTorre Jeker, a tax attorney in Dubai, is “someone who [was] either born in the US and left as young child, or who has [an] American parent from whom they have acquired citizenship.
The individual will always have another nationality, typically from a Middle Eastern country which they consider as their true home. Most times, these individuals will never have filed a US tax return since they were unaware they had any US tax obligations.”
If you think this sounds insane, you are right. No other country does anything like this.
Robert Wood, FBARs For Foreign Accounts Are Due June 30. Should You File For The First Time? “You don’t want to ignore a filing obligation now that you know about FBARs. But one should consider where you are going long term with your issues, how quickly you plan to act, and whether you have good and accurate information to file now.”
Jim Maule, How Does a Politician Fix a Tax Law The Politician Doesn’t Understand? Well, they’re obviously perfectly willing to enact tax laws they don’t understand in the first place. Yet for all the demonstrated incompetence of politicians, Prof. Maule wants to put more things under their control.
TaxGrrrl, Banks Quick To Turn Over ‘Abandoned’ Assets To Revenue-Hungry States:
Originally accounts were typically considered abandoned only if they went untouched for decades. But revenue-hungry states have been dramatically shortening that “dormancy” period to get their hands on this booty.
Because the state politicians
want the money don’t trust the private sector to take care of their customers, and they are looking out for you!
Peter Reilly, Campaigning For Bishopric Not A Valid Exempt Purpose – Kent Hovind Update. It’s not? I guess I can skip my mitre-measuring session.
Robert D. Flach, FOUR REASONS TO REMOVE THE EITC FROM THE TAX CODE: “Probably the most important reason – Tax credits, especially refundable credits, are a magnet for tax fraud.” That’s exactly right.
Rachel Rubenstein, Reflections on the General State of Tax-related Identity Theft (Procedurally Taxing). “From 2004 to 2013, the NTA identified tax-related identity theft as one of the “‘Most Serious Problems” faced by taxpayers in nearly every annual report submitted to Congress here.”
David Brunori, The Revolt of the Corporations (Tax Analysts Blog). “The message is clear: Businesses have options and will move to sunnier tax climates.”
Howard Gleckman, The House GOP’s Internal Battle Over Online Sales Taxes (TaxVox).
Tony Nitti, Donald Trump Announces Bid For Presidency: What Is His Tax Plan? And who cares?
Alan Cole, IGM Panel: Real Income Growth is Understated (Tax Policy Blog):
The IGM Forum, a University of Chicago project that surveys academic economists on issues, last month found that economists broadly agree that real median income numbers understate real growth in standards of living.
I think that has to be true. Don Boudreaux likes to compare items in old Sears catalogs with their modern counterparts to show how much better — and cheaper, in terms of hours of work needed to pay for them — the modern goods are:
The list is long of consumer goods that ordinary Americans today can easily afford but that were unavailable commercially to even the wealthiest Americans in the 1950s. This list includes digital cameras, lightweight waterproof sportswear, high-definition televisions, recorded Hollywood movies to play at home, MP3 players, personal computers, cellphones, soft contact lenses, and GPS devices.
We take for granted everyday things, like the internet, flight, automobiles, paved roads between cities, that the richest men of 200 years ago did without.
TaxProf, The IRS Scandal, Day 769
News from the Profession. Counteroffers Rarely Work for Employees Jumping Ship (Caleb Newquist, Going Concern).