Business Tax - To Deduct or Not Deduct?

[Deleted]

I am helping my DD with her 2011 taxes. She has a business but 2011 her gross was very low compared to the prior year. She was involved in a messy divorce & the soon-to-be-ex was actively destroying her client base, stole equipment, lots of bad stuff that thrashed her business earning capability.

She's pretty much recovered now, spent money on marketing and new equipment to get back on track, but 2011 would be a net 'loss' based on income versus expenses.

What I would like to know is whether it is legally required to report all the expenses of the business, or if she can elect to not report expenses and just report income? This would give her an advantage with EIC, so it actually returns money to her, which is why I want to check if it is okay to not claim all expenses.

And yes, she should have an accountant, but she is over $40K in debt to me for the debacle of the divorce & resulting thefts etc + the business not having a net profit means there is really no more money available to her to pay professionals for last year (except for the other, more serious issue I posted separately). That girls marriage has been nothing but a financial drain on me since day one! While a costly exit, I am so glad it is over!!!!

So, I would appreciate if you guys/gals can keep me on the straight and narrow with the tax preparation question since we have to muddle through this without an accountant. ;D

[mwcpa]

"What I would like to know is whether it is legally required to report all the expenses of the business, or if she can elect to not report expenses and just report income"
Yes
www.irs.gov/businesses/small/article/0,,id=109807,00.html
www.irs.gov/publications/p535/ch01.html#en_US_2010_publink1000208634

"This would give her an advantage with EIC, so it actually returns money to her, which is why I want to check if it is okay to not claim all expenses"

EIC fraud, is what is proposed, is one of the biggest problems in our tax law.
www.irs.gov/publications/p596/ch05.html
"If your EIC for any year after 1996 was denied and it was determined that your error was due to reckless or intentional disregard of the EIC rules, then you cannot claim the EIC for the next 2 years. If your error was due to fraud, then you cannot claim the EIC for the next 10 years. The date on which your EIC was denied and the date on which you file your 2010 return affect the years for which you are prohibited from claiming the EIC. The following examples demonstrate which years you are prohibited from claiming the EIC. "

my advise, prepare your tax filings honestly.... remember, in the end, winners never cheat and cheaters never win....

[Deleted]

Thanks mwcpa. Not trying to cheat at all - I don't have experience with her scenario or business tax filings, so want to make sure it is done correctly. The small business guide info that I ordered from the IRS gave all sorts of information on all the deductions you can take, but I could not find any tie ins to EIC and the effects on that to figure out if this was okay or not okay. I have to do her taxes in chunks because she was somewhat records challenged last year, so before I had her documents for expenses Turbo shows a higher refund & I can see that it is the EIC thing doing that.

[mwcpa]

google search EIC fraud..... it is a serious matter...... and given the other stated issues in another q&a you started why would you want to bring any extra exposure to her.... do the right thing, have her submit a truthful return, even if it means a smaller EIC (read the line above the signature on page 2 of the 1040.... it starts "under penalties of perjury....")

the penalty if one gets caught gaming the system and it was fraud, then for the next 10 years, no eic, even if they otherwise would qualify.... in my opinion, the small reward today is not worth the huge cost in the future (and they would be on IRS hit parade and can expect audit, after audit.... you never want to put yourself on the IRS radar.... )

[taxref]

From the old MSN Tax Corner, this was a subject that came up every so often.

My understanding is that a taxpayer can do this (ie: understate business expenses to artificially create a proft or increase a profit) only if the taxpayer receives no tax benefit from doing so. Those tax benefits would include the EIC. Consequently, understating expenses to qualify for or increase the EIC would be considered EIC fraud.

On another issue, if the same tax return was ever used in a credit application it could well be construed as bank fraud.

[Deleted]

Agreed - I want her taxes clean for sure. I am glad you are here to give extra insight since she's in a bit of a spot with lacking income now. Previously her taxes had been done by a CPA, so we do not have experience with doing the actual tax forms/filings. I would prefer not to be doing it, but she is too deep in debt to keep digging that hole! Thanks!!

[mwcpa]

If her income is really low, the IRS does offer "free" help...

www.irs.gov/advocate/article/0,,id=106991,00.html

If you are not sure of things, feel free to come back here.... many of us can point you in the right direction....

[TheOtherMe]

As do places that offer to prepare tax returns for low income people. These are usually VITA/AARP sites or offered through local colleges.

I'm not sure if they would help with a business return. I think it would depend on the site.