PA Publishes Sch C Tips for Self-Employed Persons
PA Conducts Systemic Reviews of PA Sch. C Expenses & Deductions
Since 2015, the PA Dept. of Revenue (DOR) has taken an aggressive approach against taxpayers who file PA Sch. C. Allowable expenses must be actual, reasonable, necessary, ordinary, and directly related to the production and marketing of the taxpayer’s products, goods and services. The DOR reserves the right to request additional information with the expectation that the taxpayer can expeditiously substantiate the information that they previously reported on their return.
The DOR will accept various forms of documentation to support the claimed deductions, including general ledgers, Excel spreadsheets, a sampling of monthly statements, receipts, invoices, travel logs and an explanation of how each of these expenses is directly related to the operation of the business.
We have been very successful in representing clients by providing the DOR a detailed summary overview of the expenses and then including detailed substantiation, such as invoices, for the most significant dollar amounts and informing the DOR that support does exist for the other items claimed.
When claiming cost of goods sold or cost of sales, it is important that some type of memo be included with each expense to clearly identify the reason that such expense was incurred should the taxpayer be audited by the DOR.
For vehicle expenses, the DOR will accept actual vehicle expenses or the use of the federal mileage rate. Itemized spreadsheets, travel log books, and other documents that support the claimed expenses are typically accepted by the DOR.
PA allows 100% of business meals, entertainment and travel as opposed to the federal limitations.
To expedite audit exams, the DOR is requesting that taxpayers group documentation by type of expense, circle the exact line item being claimed as an expense for easy identification, use page separators to differentiate between expenses, and include detailed breakdowns of calculations when prorating or amortizing expenses.
And further to make the DOR’s job as simple as possible, and the taxpayer’s life more challenging, it is asking that this documentation be submitted as a pdf file when the return is e-filed. In other words, the DOR is saying to include the documentation with the filing of your return or you may be more susceptible to an audit exam, and if the DOR wishes to audit you, it need not notify you of the initial exam because it should already have the documentation on hand.
Tax Tip: When completing your tax professional’s tax organizer or questionnaire for Sch. C business owners, you should systemically document each item of income and expense you are showing. While this approach should always have been taken, the fact that PA has aggressively been auditing Sch. C businesses makes this a must-do step.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.