If you are using your tax professional only for tax preparation services, you are short-changing yourself. An experienced tax professional is an excellent resource for tax planning strategies. One such case in which an experienced tax professional may be of a significant benefit is when an individual begins a new business venture. Often times the new venture experiences losses in the early years. If the business owner fails to comply with the factors that the IRS uses, the business may be denied its tax deductions because the IRS finds that the activity was not engaged in for profit. To make matters worse, the IRS may impose penalties on the taxpayer.
In the case of Strode v. Commissioner, TCM, Dec. 60,333(M), an attorney conducted an international consulting business from his home. The IRS determined that the consulting activity was not engaged in for profit and, therefore, was not a trade or business. As a result, all expense deductions related to the activity were disallowed by the IRS. The factors favoring the IRS were (1) the activity was not conducted in a business-like manner; (2) no evidence showed that the taxpayer was qualified to act as an international business consultant; (3) no evidence showed that the taxpayer spent substantial time on the activity, or that he employed qualified, competent people to carry on the activity; (4) the activity continually produced losses, and there was no indication that this would change; (5) there were no occasional profits from the activity; (6) the taxpayer had substantial income from another source, his job as an attorney; and (7) the activity yielded considerable pleasure to the taxpayer. In addition to the IRS denying the attorney his claimed tax deductions, the IRS also imposed accuracy-related and substantial understatement of tax liability penalties on Mr. Strode.
Had Mr. Strode consulted with an experienced tax professional when creating his business, he would have undoubtedly been in a better position to substantiate his tax deductions and would very likely have avoided the imposition of the IRS penalties.
If you want to learn more about setting up a new business, 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.