Tax Prep fee for self-employed

[appelman]

Has anybody developed guidelines for allocating tax prep fees to Schedule C for a self-employed client? I have two current cases: one whose only income is from the Schedule C; the other shows 33K business income and 2K wages. No itemized deductions in either case.

[S T]

My Billing

I usually will show a split billing for clients with Sched C -

$$ to form 1040 and sched A, Sched B, Sched D, etc.

$$ to form 1040 - Sched C allocation

I always want to be able to list an Accountant's or Tax Prep fee on Schedule C,
my feeling though is it has to be reasonable in relationship to other income on the return.

Sandy

[joanmcq]

Since I use a split forms/hourly billing format, its easy to allocate the forms that pertain to the biz, rental, etc. Usually these are the items that result in hourly charges too.

[erchess]

I was taught years ago

to look at the itemized bill to see the charges for the C and anything else that wouldn't be there if the person were not self employed. The idea was to compare that total with twenty percent of the fee and deduct the larger.

I now omit the second step and just go with the total of the business related schedule charges. The schedule of fees is well thought out and does in nearly every case reflect the amount of work and skill I am putting in.

[appelman]

In these cases...

In these cases, unfortunately, someone else had done the prior year return on which the fees were paid, and he had not broken anything down.

[Snaggletooth]

Use your own

Appelman, if you want to allocate the previous year's fee between Sch C and Sch A,
I would do your own allocation method (whatever it is) to arrive at a percentage. Then I would apply the same percentage to last years' fee.

A little rambling here. If a client has a schedule C, F, E, etc. I do not allocate anything to Schedule A, where my fee would almost always end up non-deductible because of the 2% and also to non-itemizers. Purists will cringe if they read this.

In addition to the fact that it is not fair (since when has that mattered to the govt), the fee was crammed onto the 2% category under the 1986 tax law with the covert purposes of eliminating it altogether. However, the "ordinary and necessary" doctrine of business makes it deductible from this perspective. It would be a disastrous self-defeating position for the IRS to claim tax preparation is not necessary for a business.

Simply put, my clients would use TurboTax if they did not have sideline business income. Virtually no time is spent on the 1040 and Sch A stuff in comparison to Schedules C, F, E or even D (and I don't think the zealous agents would apply such an allocation to D either).
Out of a typical 3 hour appointment, I doubt 20 minutes would be spent on W-2s and Schedule A stuff. There are a few exceptions such as an occasional 2106 or Medical which exceeds the threshhold.

For my clientele, if you defined the deductible amount as the amount which would exceed the cost of doing their own return, some 90% of them would not be using a preparer at all.

In all my years (feels like 100), the ONE constant during ALL this time is the inclination of the tax laws to lessen the practicality of using of Schedule A,

[taxxcpa]

Schedule C fee

If someone's income is solely from Schedule C, then all of the fee could logically be a cost of the business. If he had no business, he would have no income.

[FEDUKE404]

Utopia

If someone's income is solely from Schedule C, then all of the fee could logically be a cost of the business. If he had no business, he would have no income.

That may be a bit of a stretch, unless perhaps the person is single, has no other income, uses the standard deduction, and has no tax payments/credits.

FE

[taxxcpa]

Stretching

That may be a bit of a stretch, unless perhaps the person is single, has no other income, uses the standard deduction, and has no tax payments/credits.

FE

If the IRS wanted to nit-pick they might say a small part of the fee was attributable to Schedule A.

[tpnl]

Doesn't the IRS have a rule on this?

My boss, who has been doing taxes for 50 years, tells me we charge all clients the same. Meaning we have a fee for the 1040, A, B, C etc. Even if the client "only" has to file because they are self employed, they only get the Sch C to write off their tax prep. We don't try to finess they system. The reason for this is, my boss says, is the IRS has a rule that you cannot overstate our fees and give clients that are self employed, landlords, etc, higher fees associated with tax prep for business than you do the clients that have only W2.

[taxxcpa]

Your boss is wrong.

My boss, who has been doing taxes for 50 years, tells me we charge all clients the same. Meaning we have a fee for the 1040, A, B, C etc. Even if the client "only" has to file because they are self employed, they only get the Sch C to write off their tax prep. We don't try to finess they system. The reason for this is, my boss says, is the IRS has a rule that you cannot overstate our fees and give clients that are self employed, landlords, etc, higher fees associated with tax prep for business than you do the clients that have only W2.

Different Schedule Cs take a different amount of time and effort than others. Would your boss charge the same if someone brought in all the figures neatly arranged as he would charge someone who simply brought in a shoe box full of receipts for his Schedule C?
Would he charge someone with two dividends the same as someone who had dozens?

Even if you charge for each line entry, some things may require you to make inquiries while others are easy to interpret.

[Kram BergGold]

De Minimus

It is my understanding that the IRS allows one to ignore allocating if the non business part is trivial. Say you charge $300 for a Schedule C and A return. $20 is the amount allocable to Schedule A. In this case the entire $300 goes on C. However, same scenario except there is Schedule B and Form 2441. Now the allocation is $230 C and $70 A. Here I would apportion and only deduct $230 on C.

[FEDUKE404]

Source needed

...It is my understanding that the IRS allows one to ignore allocating if the non business part is trivial....

Cite for this "understanding" ??

[Bees Knees]

Cite for this "understanding" ??

TC Memo 1994-130. The tax court allowed a full deduction on Schedule C for a $55 tax preparation fee claimed by a self-employed lumberjack. The reason was any nonbusiness income allocation would have been minimal.

The question is, how much higher of a fee could we go before it is no longer minimal? Rev. Rul. 92-29 gives the example of a $500 tax prep fee being allocated between Schedule C and Schedule A.

So somewhere between charging $55 and $500 for the whole return, it may be fully deductible on Schedule C, or it may need to be allocated because the non-business portion of the fee is no longer minimal.

[taxea]

I originally learned that it is based on and allocated by income and not any other means. Has that changed through the last fifteen years?
I have always totalled the income from
pg one of 1040, Sch C, Sch E etc and allocated the tax fee by percentage of each versus total income.