Archive | Internal Revenue Service

A winning tax picture for money-losing artists

You are an artist, or a photographer, or a writer who is trying to make money from your venture but usually don’t succeed. Can you still claim losses on your tax returns?

I’ve often told clients that the answer is yes, if you are conducting yourself in a businesslike manner, attempting to make a profit, and document, document, document your profit-oriented activities. I also warn that an IRS auditor’s skepticism about whether someone has a business tends to rise in direct proportion to the number of years the taxpayer loses money in that venture.

Now, in a case picked up by The New York Times, a Tax Court judge has come down on the side of an artist who lost money in 18 of the past 20 years.

In Tax Court Memo 2014-202, Susan Crile, whose work is in the Metropolitan Museum of Art, the Guggenheim and other museums, successfully defended herself against the IRS’s contention that her work as an artist was a hobby, and also succeeded in showing the court that her work as an artist was a separate activity from her job as a university professor.

While Tax Court Memos cannot be cited as precedent, this is still a big deal for creative professionals and for educators with sideline activities in the same field in which they are experts. The IRS has often gone after those activities as being either hobbies (in which losses cannot be deducted) or un-reimbursed business expenses (in which case the losses that can be taken on a return may be significantly reduced.)

As Peter J. Reilly pointed out on Forbes.com, the court sided with Crile that her art qualifies as a business activity, but she may find herself on the short side of an examination as to what expenses she can actually deduct.

The Tax Court put off to a future date the IRS’s challenge of her expenses. However, it noted that, “Petitioner’s theory for claiming deductions seems to have been that most experiences an artist has may contribute to her art and that most people with whom an artist socializes may become customers or otherwise advance her career. The trial established that a significant number of the deductions she claimed were not, within the meaning of section 162(a), “ordinary and necessary expenses” of conducting her art business but were “personal, living, or family expenses” non-deductible under section 262(a). The latter expenses appear to have included telephone and cable television bills, newspaper and magazine subscriptions, gratuities to doormen in her apartment building, taxicabs to the opera, museums, and social events, restaurant meals with friends and acquaintances, and international travel to gain inspiration from paintings in European museums.”

I’d call that a foreshadowing of bad news coming for Ms. Crile. Watch this space for an update.

“The Situation” is in a not-so-good tax situation

Did you know that “Jersey Shore” reality show personality Michael Sorrentino, aka “The Situation”, and his brother Marc, grossed almost $9 million in a variety of ventures over four years? Me neither, until I read the U.S. District Court indictment, reported inThe New York Times,charging the brothers with conspiracy and filing false tax returns. Michael was also charged with failing to file a tax return for 2011.

The full amount that the government might try to collect isn’t clear, because the indictment charges the brothers with failing to report all of their income and, as the press release from the US Attorney’s Office puts it , “fraudulently claim[ing] millions of dollars in personal expenses as business expenses, including payments for high-end vehicles and clothing, personal grooming expenses, and distributions – or direct payments – from the businesses to personal bank accounts.”

The brothers face potential penalties of up to five years in prison and a $250,000 fine on the conspiracy charge, and up to three years in prison and a $250,000 fine for each filing of a false tax return. Failing to file a tax return could cost Michael as much as a year in prison and a $100,000 fine.

These are, of course, merely accusations, and the brothers are considered innocent unless and until proven guilty. But this is surely not A Situation that The Situation planned on being featured in.

No more free lunch at Google or Facebook? The IRS is thinking about it . . . .

Employees at Google, Facebook, and other Silicon Valley high-tech companies have long been able to take advantage of free or heavily discounted meals and snacks at company cafeterias. The idea is insidious but simple: don’t give workers excuses to leave the building–or their desks.

Now comes the IRS, possibly preparing to tell the tech world there really is no such thing as a free lunch.

As The Wall Street Journal reported, and other folks like Paul Caron picked up on, the IRS is looking at taxing employer-provided meals as one of its top priorities going forward.

That means the Service may be looking at whether those meals should be taxable fringe benefits, instead of the freebies that they currently are.

In general, employer-provided meals are untaxed if they are “for the convenience of the employer.” In this case, the issue may come down to how convenient it actually is for the employer to have employees eating in-house, vs. the convenience that employees get from not having to go out for lunch, or dinner, or anything else.

Does all this mean that the IRS might start going after the folks responsible for developing the latest cool apps and search codes? Probably not. It’d be a lot more efficient for the IRS to go after the employers themselves, charging them with failing to withhold taxes on unreported taxable fringe benefits.

Watch this space for more…or just Google the topic.

Get some reward points when you opened a bank account? Surprise! They’re taxable income!

Did you open a new bank account recently and get rewards points that can be used to buy merchandise? If so, good for you.

Did you know that those points are going to be taxable income? Not so good for you.

In Shankar v. Commissioner (143 T.C. No 5), the Tax Court ruled that the points you get for opening a bank account are taxable income, because they are in essence the equivalent of interest on the money that you deposited into the account. As Forbes Magazine points out, the value of the points becomes taxable when they are actually turned in for something of value.

Banks are expected to issue Form 1099, showing the value of the points, when depositors convert the points into merchandise, whether that’s an airplane ticket, clothing, or even (presumably) a toaster.

If you really have time on your hands you can get a copy of the case by typing “Shankar v. Commissioner” into your web brower and clicking on one of the PDFs that will probably show up at the top of your search request.

By the way, none of this affects the tax-free status of frequent flier points that you get from airlines. So there is that.

Forbes columnist Tony Nitti makes even taxes entertaining

The IRS, bless ‘em, gave us new rules in the summer of 2014 covering how a shareholder in an S Corporation can establish the right to take losses on his tax returns.

This involves looking at ways the shareholder can show that he has debt basis in the corporation…and at the phrase, “debt basis,” most normal citizens’ eyes will rightly glaze over.

But Tony Nitti, a terrific contributor to Forbes, does a great job of explaining what’s going on in this long piece, including a Q & A that begins, “Please remind me why I should continue to read this?”

I leave it to Mr. Nitti to explain why shareholder basis in an S Corp matters.

Oh, and just for fun, here’s a link to another Nitti column in which he surveys the “tax lessons” to be learned from watching part or all of Fox’s marathon 522-episode airing of “The Simpsons” (already showing and continuing through September 1). Undoubtedly he wrote this so he could take a business deduction for the beer and pizza he consumed during his own viewings.