At this time of the year, we always have individuals come in and want to include expenses and deductions, on their tax return, for items that they are not allowed to take.
Last week CNNMoney published an article on the "Craziest Tax Deductions." It is a highly enjoyable read. You can check out what some taxpayers have tried to deduct and why some of these deductions have had some merit while others were either by the tax preparer or IRS.
Can you guess which of the deductions may have some merit and why.
Carrier pigeon as a business expenses. The owner did not trust telephones or computers and lived across town from his business partner. He used carrier pigeons to communicate with his business partner.
Hip replacement for a dog. Dogs are an important part of a family, to the point where some families consider them a dependent. One family wanted to write-off medical expenses for the hip replacement of their family dog.
Pole dancing classes for your spouse - One man wanted to write off the Pole Dancing classes his wife was taking. He believed that this should qualify as a legitimate business expense under "meals and entertainment." The husband felt watching his wife pole dance allowed him to unwind. While it may have been entertaining for him, it was not a valid business entertainment expense.
These are just a few examples of some of the items that are listed in the article. Have you heard of or tried to write-off some odd expenses? If so, leave a comment below and share those with us.
Have you started or thinking of starting a business in NC? If so, you may want to attend the next seminar that the North Carolina Department of Revenue is hosting. On March 14, 2012 they will be conducting a seminar for new or future owners of businesses in NC.
The seminar is part of an ongoing series of business seminars that the NC Department of
Revenue has been conducting around the state. The seminars began last fall and to date they have been held in Charlotte, Greensboro and Raleigh.
According to Governor Bev Perdue, "These seminars are a way for state government to help new businesses get started by explaining the North Carolina tax laws that affect businesses in our state. Participants will leave the seminar knowing the tax laws that govern a business and the responsibilities of a business owner. Events like this help us make government more user-friendly and easy to understand."
This seminar will take place on Wednesday, March 14, 2012 and begins at 10:00 AM. It is a two hour event and will be held at 4701 Atlantic Ave in Raleigh which is the NC Department of Revenue Service Center.
Topics to be covered at this seminar include, registering your business in NC, filling out and sending in your tax returns as well as getting information about the Small Business Taxpayer Recovery Program. This program helps businesses who have fallen behind on sales, withholding and other Trust taxes. Under this program business owners may receive penalty and fee waivers and establish a repayment plan with the state on overdue taxes.
Space is limted for this seminar so preregistration is required. If you are interested in signing up for the seminar you may send an email to SmallBusinessSeminar@dornc.com.
If you are a small business owner there are resources available to you to access and assist you with starting or managing your business. Best of all many of these resources are either free or can be accessed at minimal cost.
We have assmebled a list of resources for small business owners that can be downloaded for free.
Are you an owner of an S Corporation? If so, you may want to do a salary checkup and make sure your salary is reasonable and customary. Ealier this year the Eighth Circuit Court upheld a lower court's decision regarding the salary of the owner of an S Corporation.
In 2002 and 2003 the owner of the S Corporation paid himself a salary of $24,000 while taking distributions of $230,651 and $175,470 respectively. Based on an expert witness hired by the IRS, the IRS argued that the owner's salary was unreasonably low and that a reasonable salary for this owner was $91,044.
The benefit to an owner of an S corporation, for taking compensation as distributions rather than as W2 wages, is that they save themselves the Federal Insurance Contributions Act (FICA) taxes commonly known as Social Security and Medicare taxes.
The IRS argued the owner was underpaying himself by $67,044. Accordingly, based on the IRS' argument, these are wages that should have been subject to Social Security Taxes and Medicare Taxes.
Back in 2002 and 2003 the Social Security and Medicare taxes for an owner was set at a rate of 15.3% (7.65% owed as the employee and 7.65% owed as the employer). The total tax on the additional $67,044 in wages equals $10,258 per year ($67,044 multiplied by 15.3%). For the two years in question, the total additional Social Security & Medicare tax would have been $16,626.
The Eighth Court affirmed the lower courts decision and based on the owners work experience and knowledge, the $24,000 salary was unreasonably low.
Additional information about the court case and the IRS argument can be found here at the Journal of Accountancy's web site in an article published by Sally Schreiber.
It is important for an S Corporation owner to seek advice from a professional CPA to help him or her determine a reasonable salary for the purpose of payroll wages. If the IRS believes your W2 wages are too low you may be in the unenviable position of trying to defend it to the IRS. If you can't make a legal argument or justify your wages before the IRS (or courts) and the IRS determines they are too low, you will owe additional FICA taxes plus penalties and interest.