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Self-Employment Tax Question: Business Expenses
11-12-2007, 09:41 AM
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#1
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gone traveling
Join Date: Aug 2006
Posts: 994
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Self-Employment Tax Question: Business Expenses
If one has self-employment income... I know one MUST pay income
and Social Security taxes.
My question is: MUST one deduct expenses on gross to arrive at a net...
or are business expense records/deductions optional with the IRS ?
I know, normally one wants to deduct as much business expense as
one legally can... but there are several reasons one might choose
not to deduct expenses and just pay tax on the gross. Will the IRS
have a problem with this? Is this legal ?
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11-12-2007, 09:55 AM
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#2
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Moderator Emeritus
Join Date: Feb 2004
Location: minnesota
Posts: 13,228
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We recently had someone ask the same question because they wanted enough income in their business to be able to contribute to a retirement plan.
I am not aware of any law which requires you to deduct expenses. However, if you do not deduct depreciation, the IRS will treat the depreciation as taken when you subsequently sell the asset. This will reduce your basis and may lead to recapture of depreciation and tax, even if you never took the depreciation.
Please note my signature.
EDIT: see corrective post below.
__________________
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No more lawyer stuff, no more political stuff, so no more CYA
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11-12-2007, 09:55 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,635
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I am sure you can just forget expenses. I am curious, could you provide a few of the several reasons one might choose not to deduct expenses and just pay tax on the gross (income) besides the one Martha provided? In the "hit" business and cannot reveal names of your sub-contractors?
Boy, that was way, way off the mark.
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Vietnam Veteran, CW4 USA, Retired 1979
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11-12-2007, 10:04 AM
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#4
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gone traveling
Join Date: Aug 2006
Posts: 994
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Quote:
Originally Posted by R Wood
I am sure you can just forget expenses. I am curious, could you provide a few of the several reasons one might choose not to deduct expenses and just pay tax on the gross (income) besides the one Martha provided? In the "hit" business and cannot reveal names of your sub-contractors?
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Reasons why not to deduct business expenses:
A) IRA
B) EIC
C) IRS Audits
D) Too much of a hassle to keep records.
E) All of the above
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11-12-2007, 10:07 AM
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#5
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gone traveling
Join Date: Aug 2006
Posts: 994
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Quote:
Originally Posted by Martha
We recently had someone ask the same question because they wanted enough income in their business to be able to contribute to a retirement plan.
I am not aware of any law which requires you to deduct expenses. However, if you do not deduct depreciation, the IRS will treat the depreciation as taken when you subsequently sell the asset. This will reduce your basis and may lead to recapture of depreciation and tax, even if you never took the depreciation.
Please note my signature.
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Thanks for the info.
If the business has no assets, other than myself, am I home free ?
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11-12-2007, 10:19 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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I do a little consulting work and get paid for lectures outside of my regular work. I declare that income on my Schedule C. My expenses for these gigs (travel, meals) are all paid by my clients. When they send me the 1099, it shows only my pay for services and not the expenses.
I rarely deduct any other expenses against this income. Sometimes I buy a book related to my consutling and it's deductible or I find an old toll road receipt that I forgot to submit.
My business has no assets. I am home free and you will be as well.
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11-12-2007, 10:31 AM
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#7
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Thinks s/he gets paid by the post
Join Date: Feb 2004
Posts: 2,670
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Quote:
Originally Posted by Martha
...I am not aware of any law which requires you to deduct expenses...
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What about Rev Rul 56-407?
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No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
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11-12-2007, 10:44 AM
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#8
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gone traveling
Join Date: Aug 2006
Posts: 994
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Quote:
Originally Posted by retire@40
What about Rev Rul 56-407?
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Is it this ?
revrul56-407
Can the IRS compel one to keep business expense records ?
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11-12-2007, 11:30 AM
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#9
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Moderator Emeritus
Join Date: Feb 2004
Location: minnesota
Posts: 13,228
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Yes, that is the ruling. For self employment tax purposes you are required to take all deductions. Retire@40 is correct and I was wrong or at least overbroad in what I said.
The question is whether you could avoid taking certain expense deductions not to maximize your social security, but for other reasons. The IRS seems to implicitly let people forgo deductions from time to time. Retire@40, ever see an audit on this issue?
If taking the expense would only reduce your tax, how could the IRS enforce a rule that required taking of an expense? I understand the self employment tax issue though, but wouldn't it be the social security administration who would audit for that issue?
Just talking, not expressing any opinion.
Here is some of "the law" from a listserve for tax lawyers:
Section 1402 of the Code, relating to self-employment income, reads, in
> part, as follows:
>
>
>
>
> (a) Net Earnings From Self-Employment.--The term "net earnings from
> self-employment" means the gross income derived by an individual from any
> trade or business carried on by such individual, less the deductions
> allowed
> by this subtitle [Subtitle A] which are attributable to such trade or
> business. * * *.
>
>
>
>
> Section 162 of the Code provides for the deduction of all ordinary and
> necessary expenses paid or incurred during the taxable year in carrying on
> any trade or business. In general, expenses are deductible in the taxable
> year which is the proper taxable year under the method of accounting used
> to
> determine taxable income.
>
>
>
>
> Revenue Ruling 56-407, C. B. 1956-2, 564, holds that an individual must
> claim all of his allowable deductions, including depreciation, in
> computing
> his net earnings from self-employment for self-employment tax purposes.
>
>
>
>
> In J. H. Welp v. United States, 201 Fed. (2d) 128, it is stated that "the
> objective of the Internal Revenue Code is the ascertainment and reporting
> of
> true income and the payment of the proper tax thereon."
__________________
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No more lawyer stuff, no more political stuff, so no more CYA
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11-12-2007, 11:44 AM
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#10
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Moderator Emeritus
Join Date: Feb 2004
Location: minnesota
Posts: 13,228
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Did some more poking around as a result of retire@40s post. I found this excellent article: http://law.bepress.com/cgi/viewconte...=villanovalwps
I have come around fully. If you get any tax benefit from not taking an expense, you are at risk. Tax benefits may include all sorts of things, from retirement plans to earned income credit.
A red flag for an audit may occur if you claim no business expenses.
__________________
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No more lawyer stuff, no more political stuff, so no more CYA
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11-12-2007, 12:13 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2006
Posts: 12,880
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I have also been advised that one must report and take all allowable deductions.
__________________
Al
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11-12-2007, 12:21 PM
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#12
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Thinks s/he gets paid by the post
Join Date: Oct 2007
Location: Willamette Valley, Oregon
Posts: 1,979
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Quote:
Originally Posted by Martha
Did some more poking around as a result of retire@40s post. I found this excellent article: http://law.bepress.com/cgi/viewconte...=villanovalwps
I have come around fully. If you get any tax benefit from not taking an expense, you are at risk. Tax benefits may include all sorts of things, from retirement plans to earned income credit.
A red flag for an audit may occur if you claim no business expenses.
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If one "inflates" (by not taking allowable expenses) earned self-employment income in order to contribute more to IRA, one is making "excess" contributions to that IRA. Dangerous.
Also, if a taxpayer maximized IRA contribution by overstating self-mployment income, and he states the IRA contribution amount on the 1040, then that amount should be the same as what he reports on Schedule SE. But rules for schedule SE require netting out all allowable expenses.
I am afraid the IRS could *get you* in all kinds of ways. It would be audit roulette.
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Dreams Worth Dreaming are Dreams Worth Planning For. I Spent a Career Planning for Early Retirement.
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11-12-2007, 05:46 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Feb 2004
Posts: 2,670
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Quote:
Originally Posted by Martha
...The question is whether you could avoid taking certain expense deductions not to maximize your social security, but for other reasons. The IRS seems to implicitly let people forgo deductions from time to time. Retire@40, ever see an audit on this issue?...
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The IRS will adjust the tax return to reflect net income that is closer to "actual" than previously stated by the taxpayer and impose penalties if it finds that unclaimed deductions created a direct or indirect benefit to the taxpayer, whether monetary or not.
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No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
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11-12-2007, 08:10 PM
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#14
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gone traveling
Join Date: Aug 2006
Posts: 994
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How does the IRS know what those unclaimed deductions are ?
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11-12-2007, 08:39 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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Is this an appropriate place to discuss the rationality of our present taxation system?
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11-12-2007, 08:43 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Feb 2004
Posts: 2,670
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Quote:
Originally Posted by Helena
How does the IRS know what those unclaimed deductions are ?
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You better watch out,
You better deduct,
Better not evade,
I'm telling you why:
The IRS is coming to town.
They're making an audit list,
And checking it twice;
Gonna find out
Who's breaking the law.
The IRS is coming to town.
They see you when you're cheating.
They know when you're a fraud.
They know if you've been filing or not,
So file correctly for goodness sake!
Oh, you better watch out!
You better not overstate your income.
Better not understate your income,
I'm telling you why:
The IRS is coming to town.
The IRS is coming to town!
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
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11-12-2007, 09:11 PM
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#17
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gone traveling
Join Date: Aug 2006
Posts: 994
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If one claims a deduction for a business expense,
one needs to keep records to prove the deduction.
How does the IRS prove you had a deduction you
didn't claim ??
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11-12-2007, 10:10 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Oct 2007
Location: Willamette Valley, Oregon
Posts: 1,979
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Quote:
Originally Posted by Helena
If one claims a deduction for a business expense,
one needs to keep records to prove the deduction.
How does the IRS prove you had a deduction you
didn't claim ??
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Are you advocating filing a false tax return misstating actual income in order to gain social security or retirement contribution advantages because the IRS "may" not catch you?
__________________
Dreams Worth Dreaming are Dreams Worth Planning For. I Spent a Career Planning for Early Retirement.
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11-12-2007, 10:22 PM
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#19
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Thinks s/he gets paid by the post
Join Date: Feb 2004
Posts: 2,670
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Quote:
Originally Posted by Helena
If one claims a deduction for a business expense,
one needs to keep records to prove the deduction.
How does the IRS prove you had a deduction you
didn't claim ??
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One place they could start looking is your business checking account.
You do have a business checking account, don't you?
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
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11-12-2007, 10:39 PM
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#20
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gone traveling
Join Date: Aug 2006
Posts: 994
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Quote:
Originally Posted by retire@40
You do have a business checking account, don't you?
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No, I don't use a business checking account. I don't have an office.
I make no product... I do no buying or selling... I render a personal
service via contract and my income is reported to the IRS via a 1099-Misc.
*
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