Spencer v Commissioner, T.C. Memo. 2022-8 | June 7, 2022 | Marshall, J.| Dkt. No. 17106-19S
Short Summary: This case involves the disallowance of taxpayer’s deductions regarding (1) contract labor expenses, (2) car and truck expenses, and (3) repairs, and maintenance expenses for not meeting substantiation requirements. In tax years 2016 and 2017, Brandon Spencer (Spencer) operated Home Comfort Transportation LLC (Home Comfort), a business that offered non-emergency transportation services to medical patients. As part of its business, Home Comfort purchased and maintained vehicles and had full-time and part-time drivers who were paid by check and cash, respectively. Cash compensation payments were not documented. Additionally, Spencer retained receipts for vehicle rentals, purchases and tolls, invoices from repairs, an insurance statement, and vehicle registration records. On his tax returns for years 2016 and 2017, Spencer claimed Schedule C itemized deductions for Home Comfort’s expenses, including contract labor and vehicle-related expenses. The IRS selected Spencer’s returns for examination and IRS issued a notice of deficiency (IRS CP3219A Notice) to him. Spencer filed a petition with the Tax Court and, after concessions by the IRS, the issue remaining for trial regarded deductions for expenses for contract labor and vehicle-related expenses.
Distinguished physicist, Albert Einstein, once said, “The hardest thing in the world to understand is the income tax.” Likewise, the constantly growing Internal Revenue Code is difficult to understand. But perhaps it is even more difficult to understand when one cannot read, or one is suffering from a debilitating illness. In a recent memorandum opinion, the Tax Court dealt with a taxpayer who (1) argued that a deduction qualified under either Section 162 or 165, and (2) argued that he should not be subject to the addition to tax under Section 6651(a)(1). While the taxpayer’s inability to read and illness excused the assessment under Section 6651(a)(1), the taxpayer’s arguments to claim a tax deduction ultimately failed.
Sections 162 and 165
As a general rule, a trade or business shall be allowed a deduction for all of the ordinary and necessary expenses paid or incurred during the taxable year. Expenses are “ordinary” if they are ordinary, usual, or customary or is related to a transaction of common or frequent occurrence for a given type of business. Additionally, expenses are “necessary” if they are helpful and appropriate to the taxpayer’s business, though the expenses need not be essential.
You had a great idea and now you’ve put it in motion as a business. And while income recognition is easy to determine, qualified business deductions can be a bit harder. So… what are the most common tax deductions for small businesses?
Any materials you utilize for marketing your business and the cost of developing these can be deductible. This can be advertisements in print or media, brochures, branded promo items, events or trade shows. Non-branded gift cannot be deducted.
Business insurance that is intended to protect your business as well as medical insurance that is paid by the business for its employees. Auto related insurance falls under a different set of guidelines. A portion of your vehicle expense can be taken related to the business use of the vehicle, unless standard mileage is taken instead.
Depreciation and Section 179 expenses on capitalized business assets such as computers, office furniture, tools and equipment, and the like. Leasehold improvements and other real estate related capital expenses cannot be taken under Section 179. Special depreciation rules have been approved by the IRS in certain years that speed up depreciation life in qualified assets.
Travel to business-related conventions, seminars, or similar meetings can be tax deductible. This can include deductions for your transportation, lodging, and 50% of your meal expenses while on business. Learn about how to do this, as well as some of the IRS restrictions.