EIC for Self Employed client

[Unregistered]

I have a young, single client with one daughter; the daughter claimed as a dependent by her father. But my client can claim her for EIC purposes.

She started a small business and had a net profit of only $169, but enough to qualify for $60 in EIC. (She has no W-2 income; she lives off of child support, her parents' gifts and some govt assistance).

Now, if I play with her business expenses and remove some of her business deductions, she has higher net profit from the business ($1018), but gets back $171 from the IRS because of EIC.

If I continue playing around and take NO business deductions, she has income of $1949, pays some SE tax, but still eligible for a refund of $346 (because of EIC)!

So my question is can she "decline" to take business deductions so she can get a larger EIC? It seems like she would be tricking the EIC system a bit. It almost seems unethical. But then, I think, the IRS cannot MAKE her take business deductions if she doesn't want to. Right? Am I missing something?
Should she claim zero business deductions to get the larger EIC?

Thanks in advance for your opinion and experience. I really appreciate it!

Carol in Ohio

BTW, I ran into this situation a year ago with another client. This client had a little W-2 income and three Sch C's, but we claimed zero business deductions and she had over $900 in EIC (and a $500 refund after SE tax). She was happy! No problem from the IRS (so far!)

[Gene V]

Eic

From Pub. 596 page 27 CAUTION When figuring your net earnings from self-employment, you must claim all your allowable business expenses.

One thing you could do, if you have any depreciation, is to take the max allowable life.

[Gretel]

Car Expenses

Another area I would take advantage of is for car expenses. If she uses her personal car for business and doesn't keep records of her mileage, no deduction allowed.

[Unregistered]

Thanks for the ideas!

Thanks for the clarity of a document and page number in your answer, Gene V. It was very helpful. It appears she must claim all business deductions (and get a lower EIC)

Great suggestions Gene V and Gabriele. I'll look into them.
I really appreciate it!

Carol

[taxmandan]

Deductions

Just make sure the deductions are reasonable and NECESSARY.

[Unregistered]

Another area I would take advantage of is for car expenses. If she uses her personal car for business and doesn't keep records of her mileage, no deduction allowed.

I have several problems with that approach:

1. If they're not keeping records in a business like manner perhaps the income is line 21 and the deductions are 2% misc on schedule E. No earned income for EIC.

2. Overstating SE income is SS fraud, not just tax fraud.

3. How is that different ethically than throwing away the receipts for other expenses and not claiming them once they've maxed out for EIC?

[Gretel]

Car Expenses

As all of us, I too have clients who keep records of everything but their mileage. I never had the idea of not calling this a business. IRS will gladly disallow car expenses.

I had an elderly lady as client who has a day care business. She loves children but has a hard time of record keeping. Keeping mileage is far above her head. Ethically, I didn't have any problems not taking any deductions for her car expenses.

I think, you can not just judge situation and not knowing all twists and turns. In general you are right, but just that: in general.

[Bees Knees]

The difference is, when poor records means the IRS can get you for more tax, that is OK.

But if poor records means a bigger EIC refund, that is not OK.

[Jesse]

EIC Checklist

But if poor records means a bigger EIC refund, that is not OK.

Two questions asked on my EIC checklist that I go thru line by line and make my EIC clients sign:

"Has all income, whether taxable or not taxable been disclosed?"
and
"Has all legitimate business expenses been disclosed?"

and explain that this is asked because I don't want the numbers to be "played" with to come up with the best earned income credit.

[OldJack]

§179 deduction

There are some numbers that you can play with. One on Sch-C that comes to mind is the decision of how much code §179 to expense. Sometimes playing with the §179 deduction will reduce profit to maximize EIC.

[ecb34691]

s179

Old Jack you got it right. Played with one today on whether to 179 or do normal 7 year.