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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. Two years ago I bought the stock of an existing S corporation. I just received a notice from the state that the corporation is being assessed unpaid sales tax from three years ago. Since the obligation predates my stock ownership can I ignore the notice?
   

   Unfortunately, you may not simply ignore the notice. You should check with your attorney as to your rights to obtain redress for the debt from the prior shareholder. However, if the notice is correct the debt is the corporation’s and the corporation remains subject to the debt regardless of the change in stock ownership.

2. I play in a rock band. We play a circuit of clubs in the area and part of our gig is that we all dress in period Elizabethan clothes. We each had our get up specially made. Is this cost deductible?
   

   The acquisition and upkeep (cleaning/repairing) of “work clothes or uniforms” is deductible if the clothing is required in connection with a trade or business and the clothing is not suitable for everyday wear.

3. I have a rental property. I refinanced and used the equity in the property to borrow an additional $25,000. I used $20,000 to improve the property and used the other $5,000 to pay personal expenses. Can I deduct all of the interest on the note on Schedule E?
   

   To the extent the debt applies to the rental property, the interest is deductible on Schedule E (subject to the passive loss limitations). The interest allocable to the original acquisition debt and the debt for the equity used to make improvements to the rental property is deductible on Schedule E. The interest on the debt used to pay personal expenses is personal and not deductible.

4. I am going to start a new business. I am going to hire workers and want to classify them as contractors. I will train them, pay them hourly, and will assign them work. They will provide their own vehicles and equipment. Will these workers qualify as contractors for payroll tax purposes?
   

   If by “assigning them work” you will control the manner and method by which the workers do their jobs, IRS will likely classify them as employees. This is especially true as you are providing the worker’s training and paying them hourly. A potential problem may arise if one of the workers is injured on the job or is let go and applies for unemployment benefits. If you wish to have these workers qualify as contractors, you need to reconsider your guidelines and if that is not feasible, you are advised to consider the workers as employees.

5. My two brothers and I are members of an LLC. The LLC operating agreement calls for special allocations of depreciation based on contributions of property. We now want to use the “check the box” rules to be taxed as a corporation and make an S corporation election on Form 2553. Any problems?
   

   There is one very significant issue that should be taken into account. An S corporation must make allocations of profit, loss and deduction based on stock ownership. In other words, there are no special allocations permitted by an S corporation. Such allocations would be construed by IRS as creating a second class of stock and cause the S election to be terminated. Therefore, either the LLC operating agreement should be amended to remove the special allocation or a separate corporate entity should be formed instead of using the “check the box” rules. After the change, the shareholders may agree that compensation for each party be adjusted based on services actually rendered the corporation and that may provide substantially the same tax benefit as a special allocation of depreciation.

6. I am an engineer. I love doing my work but I got fed up with my employer last year. I spent $2,000 in airfare flying to three interviews that did not work out. I spent another $500 in airfare to fly to my fourth interview and got a job as an engineer with that firm. Can I deduct the airfare anywhere?
   

   The cost of all expenses in seeking employment within the same trade or business is deductible whether or not successful. Travel (including lodging and 50% of meals) and transportation costs are deductible as long as the trip relates primarily to seeking new employment. The deduction is taken as an itemized deduction, subject to the 2% of AGI floor.