Sch C Rent

[erchess]

Client should be an employee and for 2012 he will be treated as one but anyway for 07 and 08 he got treated as self employed and charged rent for a workshop and tools with no breakdown between the two. Would you report this as cars and machinery, other rent, or in the misc section of Sch C? By the way rent in this situation is not one way. He rented an air compressor to the employer lol. I do seem to pick up the odd situations.

[Koss]

Rent

I might try to allocate it somehow, between the equipment and the premises, thereby splitting the amount between lines 20a and 20b of Schedule C.

But the allocation shouldn't be arbitrary, or just made up out of thin air. I guess I would try to get some facts from the client in order to come up with something reasonable.

Clearly, it doesn't make a difference in the bottom line. And in theory, it shouldn't make a difference in an audit, either. If it is a valid business expense that does not have to be depreciated, and the expense can be substantiated, an IRS auditor should not disallow it just because it was entered on the wrong line.

That's the theory, anyway. In practice, I think that it certainly does matter in an audit, in the sense that if lots of stuff is in places where it obviously doesn't belong, it lowers the overall credibility of the return, the taxpayer, and even the preparer.

And in an audit, if the documentation for a particular expense is weak, questionable, or incomplete, the auditor may be less likely to cut you some slack if the expense is "on the wrong line." Let's say you have an amount on the insurance line, and the taxpayer or preparer takes the position that it was a data entry error. The amount is actually cell phone bills, so it should be under utilities. (What? You mean not everyone agrees that cell phone expenses are utilities? Well, okay. But it certainly isn't insurance.)

But then you also have to tell the auditor that you don't have all the cell phone bills. You have a year's worth of bills from AT&T, but for the first three months, the business had cell phones with AT&T and Sprint, and the taxpayer hasn't been able to get copies of the Sprint bills yet. So the amount on line 15 is not only in the wrong place, but it also doesn't match the total you get when you add up the phone bills.

The auditor might just take out a ruler and start measuring the length of the taxpayer's nose during various stages of the interview.

If the total of the phone bills actually matches the amount entered for insurance, then it suddenly seems very credible that it was just a data entry error. And if the phone bills add up to 85% of the amount on the line for utilities, then the idea that there might be a few bills missing seems equally credible. When you put the two together, it starts to sound a little far-fetched.

But on your fact pattern, it's very subjective, and you could probably put it on either line, or split it somehow.

BMK

[erchess]

Further Information

The expenses are of the same two kinds for both years. There is the rent of his work shop and tools and there is the expense of his worker's comp insurance. I'd have sworn it was illegal for an employer to charge workers for their worker's comp insurance but oh well.