Prepaid Legal Expenses

[Black Bart]

My client pays a monthly fee for any legal problems that may come up. He says it's deductible. I say not. Any opinions?

[OldJack]

I say not if its prepaid personal legal advice.

[jainen]

that question

Maybe he could ask his legal plan to answer that question.

[Matt Sova]

Laughing

jainen, I am laughing my butt off at that remark!!!

[Mark Goldberg]

I say deductible

First, I am assuming this person is in business and the expense is to protect his business. If this assumption is false then of course it is not deductible. But if my assumption is correct then this is like an insurance policy. Since he pays every month I would deduct it. It is not like he is paying for 10 years of a subscription all at once, in which case you amortize the expense.
If you do not deduct it, what would you do with it?

[OldJack]

Is it his business or him personally that is covered under the plan?

[Black Bart]

Jack / Mark

Jack / It is him personally that is covered by the plan--not the business. It will pay either way--an offense while operating the business or to contest a traffic ticket on a vacation/ driving to a restaurant/ arrested in a fight at a Sunday barbecue, etc.

Mark / The policy is not to protect his business--it's to protect him. He used to be a long-haul truck driver and got the policy at that time. He quit that--is now in residential rentals-- still has the same policy. It really isn't connected to the rent business, but still, he's a sole proprietor and will be covered if something happens while working for the business. I understand what you're saying about the prepaid insurance for a business, but it also covers personal stuff. Can't decide where to draw the line. A percentage maybe? 50% personal--50% biz?

jainen/Sova / Glad I could help amuse you.

[Bees Knees]

I agree, you would need to allocate based on business percentage. Make the client decide how much of it applies for business and how much of it applies for personal.

[OldJack]

I would allocate nothing as business and not deduct anything. This is nothing but a personal liability policy. This just isn't a business insurance policy as a matter of fact if anything it was for a previous business when taken out and has nothing to do with his current business.

[Gretel]

I would go by the intentions of the client and take his word. If his intentions still are to mainly cover his business then so be it. With a Sch. C it's anyway impossible to distiguish between owner and business.

Leave it up to the client.

[Black Bart]

With a Sch. C

Thanx to all for opinions. But Gabriele's "C" statement brings up another question. I said he was a sole proprietor which leads one to think I'm talking about a "C," but actually I've been filing him on Shedule E for a couple of years. When he was driving trucks he had two or three rent houses as a spare-time thing, but the trucking company closed up and the rentals is all he does now. He's bought a dozen more fixer-uppers in the past two years and it looks very much like a business to me. He, of course, doesn't want to pay SS on anything and claims that it's [i]not[/] a "business."

Does anybody know where to draw the line on that? A certain number of houses (I really can't believe it depends on that) or the percentage of his time devoted to it? He's really active in it--does almost all of the repair work, etc. himself. When do you go from "E" to "C"?

[jainen]

It doesn't matter

It doesn't matter how many rentals he has. What matters is what kind of service he provides. If he just offers the homes for use, that's rent. If he cleans the rooms and does the laundry and cooks their meals, that's a business.

[Black Bart]

What he does.

Well, he does offer the homes for use. He does not clean the rooms, do the laundry, or cook their meals. But he does work full-time at maintaining those homes for rent, acquiring other houses, paying bills and various office work, collecting the rent, and drives a pickup truck around town all day taking care of this "non-business." Doesn't that seem sort of non-passive to you?

Wonder what an IRS auditor would say? I'm not so sure they wouldn't try to assess SE on this.

[Gretel]

Don't we need to separate two things here.

Rental and everything involved in this.

Not rental yet (new properties to be fixed up). I believe if he buys more than 2 or 3 places and fixes them up he might be in business with SE tax due. But, maybe, this applies only if he sells them again and won't use them himself for rentals?

[jainen]

Not in the least

>>Doesn't that seem sort of non-passive to you?<<

Not in the least. All rentals are passive by definition, because the income comes from the use of the property, not how much driving around he does. Sure he has to work to maintain the places. He might even find it useful to form a separate business just for that function. But taking care of the property is not providing services to the tenants.