What will the IRS require to be Sch C deducted?

[mikeburg]

I have a schedule C client (self employed) who builds & restores furniture at home in his shop with the following tax options:

(1) Deducting home office of $1200 & Mileage (kept a mileage log) $2,000 yields:
(A) Refund $1,100 (no EIC or child tax credit)
(B) Created -0- SE tax

(2) Not deducting home office but deducting Mileage of $2,000 yields:
(A) Refund $1,500 (caused by $700 Earned Income Credit-EIC)
(B) $275 SE Tax paid in for him

(3) Not deducting home office nor Mileage yields:
(A) Refund $2,400 (caused by $1,700 EIC & $200 Child Tax Credit)
(B) $660 SE Tax paid in for him

This is a partially (& temporarily) disable person with a wife (who does not work) & 2 small children so they need all they can get.
His family has given them gifts & loans of $25,000 to help them get by.

(A) Which option would you choose?
(B) Which option will the IRS require we use under audit?

I appreciate any & all input you can give me. mikeburg

[Bob McCoy]

Just to answer the very last question, The IRS requirement is that expenses be included. As a side note I see jockeying on these types of returns, but could not tell you to do that in good faith. Lot of tough times out there. At least they have family members willing to help.

[TaxGuyBill]

I agree. They are required to take all deductions they are eligible for.


On the other hand, are you sure the home office qualifies? If it had any personal use, it's not a valid deduction. :-)

[Burke]

I'll answer question (A). I would choose Option #1, which is the legitimate way to prepare the return. Note the due diligence questions for EIC. It can be considered fraud to manipulate the return figures to maximize EIC by not taking expenses on a Sche C.

[Lion]

You can use any legal method to depreciate his equipment/tools. You don't have to file the DMSH and can depreciate equipment, supplies, repairs, materials, $200. As has been mentioned, make sure his home office/workshop is qualified, or not.

[DaveO]

Even if a home office is fully qualified there is no requirement you take it. Does he make wooden toys for the children in the same space? That alone could disqualify it. The mileage is tougher. Make sure each trip is solely business and not an aside to a personal trip.

I have one of these too and I have strongly questioned his deductions over the years trying to get some income without manipulating the return. Big mileage deduction, new high end cell phone every couple of years, lots of M&E. The end result is no earned income, no EITC and no refund. He get's disability and alimony, guess the ex couldn't abide him either. I just shut up and put the numbers on paper now.

[Roland Slugg]

A taxpayer is under no obligation to deduct all the expenses (or claim all the dependents, or take all the credits) to which he is entitled. If someone can owe less tax or get a larger refund by not deducting certain items, he would be a fool to NOT do that.

Btw, this same question comes up periodically on this forum, and I'm always surprised that some replies ... like some of the ones above ... advocate taking a course of action that is contrary to the taxpayer's best interest.

[TaxGuyBill]

A taxpayer is under no obligation to deduct all the expenses (or claim all the dependents, or take all the credits) to which he is entitled. If someone can owe less tax or get a larger refund by not deducting certain items, he would be a fool to NOT do that.

Btw, this same question comes up periodically on this forum, and I'm always surprised that some replies ... like some of the ones above ... advocate taking a course of action that is contrary to the taxpayer's best interest.

From the IRS website:


I know self-employed individuals have to report all income. My question is about deducting expenses. Are taxpayers required by law to claim all expenses pertaining to their business?

Yes. A self-employed individual is required to report all income and deduct all expenses. Revenue Ruling 56-407, 1956-2 C.B. 564, deals with the issue of taxpayers not taking all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes.

Net earnings from self-employment are included in earned income for EITC purposes. It is defined by cross-reference to the definition of net-earnings from self-employment under I.R.C. §1402(a). This ruling applies equally to the EITC. CCA 200022051 also provides insight regarding deduction of Schedule C expenses.

http://www.eitc.irs.gov/Tax-Preparer-Toolkit/faqs/income

[BP.]

no obligation to deduct all the expenses

Where EIC is concerned, I don't think deducting qualified expenses is merely optional, but mandatory.

http://www.irs.gov/Individuals/Watch...on-EITC-Errors!

"Over or under reporting of income or expenses . . . you are required to take off all business, farm or other income-related expenses from your income."

Of course, it is pretty easy to disqualify OIH.

[Gary2]

I believe the requirement to claim all deductions is specific to business income, i.e., Schedule C, and possibly Schedule E. But I don't believe there's any obligation to claim all expenses that would be reported on Schedule A.

For example, if you know you're getting a big state refund in 2015 for your 2014 state taxes, but you expect to be in a higher tax bracket in 2015, wouldn't it make sense to forgo the state tax deduction (without resorting to the standard deduction) on the 2014 tax return, to avoid having the refund taxed at a higher rate? Wouldn't that be allowed?

[Bob McCoy]

A taxpayer is under no obligation to deduct all the expenses (or claim all the dependents, or take all the credits) to which he is entitled. If someone can owe less tax or get a larger refund by not deducting certain items, he would be a fool to NOT do that.

Btw, this same question comes up periodically on this forum, and I'm always surprised that some replies ... like some of the ones above ... advocate taking a course of action that is contrary to the taxpayer's best interest.

Pub 17 says net earnings from self employment. I would infer from that, they require you to deduct expenses.

[Gretel]

I have no question in my mind that all legitimate expenses need to be deducted especially if EIC is involved.

However, there are 3 exceptions:

Depreciation - I always use the method the most benefits the taxpayer now and in years to come - EIC or not.

Home Office - I see this expense as optional

Mileage - if there is no OIH mileage is also limited, if no log - not allowed (I know poster said TP has log)

What one cannot do is switch back and forth depending on outcome. There needs to be consistency in how and what expenses are reported unless something - like having a log or not - changes.

[Bob McCoy]

I believe the requirement to claim all deductions is specific to business income, i.e., Schedule C, and possibly Schedule E. But I don't believe there's any obligation to claim all expenses that would be reported on Schedule A.

For example, if you know you're getting a big state refund in 2015 for your 2014 state taxes, but you expect to be in a higher tax bracket in 2015, wouldn't it make sense to forgo the state tax deduction (without resorting to the standard deduction) on the 2014 tax return, to avoid having the refund taxed at a higher rate? Wouldn't that be allowed?

What about adjust state withholdings down.

[taxea]

I don't think "playing" with the income and expenses is providing due diligence. Our role is to prepare an accurate return not to "fudge" expenses to get a larger refund whether EIC is involved or not. If you don't take the OIH and the IRS determines there is one you will still have to figure in the allowable depreciation on the sale of the house. Whatever deductions the TP is entitled to take should be on the return.

[ttbtaxes]

I agree that all business expenses have to be claimed.

The EITC is a royal pain in the neck and fraught with pitfalls which is why I won't prepare a return that has an EITC. Haven't for years. If I do preliminary numbers and suspect there is an EITC, I tell the client to go someplace else.