ORP, OR LLC
JANUARY WIN OF THE MONTH Business vs. Hobby Audit CASE SNAPSHOT Client: A woman who worked as a W-2 employee Type of IRS Issue: IRS disallowed expenses related to client’s two businesses Tax Year in Question: 2017–2018 IRS Claimed Liability: Inability to claim business loss during startup
Did you know that many lifestyle changes, such as having a baby, changing jobs, getting promoted, or tying the knot, change your tax liability? Reviewing your withholdings on your paycheck may help you lower your liability from the previous year. Any time your income increases, your tax liability goes up along with it. In fact, any type of household income change has an effect on your tax liability. So, if your spouse gets a new job or promotion, changes must be made. Even if you get married and both you and your spouse are employed, check your tax withholdings! Also, if you have a baby (or adopt one), your tax liability is going to change. For 2021, the Child Tax Credit has changed to aid those growing families or families with children who may be struggling during the pandemic. If you have undergone any changes that will require an adjustment to your W-4, you must fill out a form either on paper or online at any time during the year. But there are other ways to lower your tax liability from the previous year, too! By contributing to a retirement account (either a 401(k) or an IRA account), you can lower your taxable income, thus lowering your tax liability. Even though all contributions to your workplace 401(k)s must be made by the year’s end, you can still contribute to your traditional IRAs all the way through the deadline for filing your taxes on April 15.
Don’t let your tax liability come as a surprise after you file your taxes! Be sure to update
your credentials regularly to know what to expect during this year’s upcoming tax season!
Savings: $6,000 PLUS the declaration that both businesses could operate and report taxes as a business, not a hobby!
A woman who worked as a W-2 employee had been selling health supplement products for several years while reporting losses on her Schedule C for several years. During 2018, she started up an additional health-related business and reported an operating loss the first year. These losses flagged her return, and subsequently, she was audited. The client came to IRS Trouble Solvers during the early stages of the audit. We assisted the client with gathering and formatting the documentation necessary to support our position and represented her in front of the IRS. During the audit, the auditor determined that the activities were “hobbies” and disallowed all losses on the startup business, as it had not yet produced any income. When it came to her other health supplement business, the IRS only allowed deductions to the extent that there was income. IRS Trouble Solvers appealed the audit results by using the eight factors the IRS considers when determining whether the activity is a business or a hobby. After successfully supporting our argument with documentation and records, the audit was overturned and the appeals officer agreed to allow both businesses to continue to be treated as a Schedule C business. While they did reduce some of the operating losses, we were able to claim some penalty abatement as well as some adjustments in the tax owed. Now, our client is able to continue with both of her businesses, is treated as a Schedule C business, and is enjoying a savings of over $6,000.
1. Preheat oven to 350 F. 2. In a pan over low heat, melt 1 oz butter. 3. Add leeks and carrots and cook for 15 minutes, until softened but not colored. 4. Stir in flour and cook for 1 minute. 5. Gradually add chicken stock, stirring until sauce is smooth, then let simmer for 10 minutes. 6. Stir in mustard and heavy cream, then add cooked chicken and parsley. Transfer to a large ovenproof dish. 7. In a pan, melt remaining butter. 8. Put a single filo sheet on a board and brush with melted butter. Scrunch up pastry sheet and place on top of chicken mixture. Continue until pie is covered. 9. Bake for 20–25 minutes, until the filo is golden and chicken mixture is bubbling. DIRECTIONS Inspired by GoodHousekeeping.com
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