Expensing Hunting through business LLC

[fwafwow]

My super anti tax, good old boy CPA always said, the richest people he knows, pay the most taxes. I got audited once and it sucks. Lots of this stuff can be a penny wise and a pound foolish.

^^^this. Audits suck. Going to Tax or District Court if the audit doesn’t work out sucks a$$. Some super rich folks in the late 90s thought they learned a few ways to reduce their taxes. Son of Boss, CARDs and BLIPs were some of the technique names. In the end it didn’t work out well for the taxpayers or the accountants. Similar story playing out now with syndicated conservation easements.

 

[ResearchinStuff]

Real life story.

When my wife and I got married, the bank gave us $50 for opening a joint checking account. They sent the irs a 1099 for that $50, but either did not send me one, or usps lost it in transit (I had another 1099 3 years later get lost by usps and show up in late April bent and ripped with tire tracks on the envelope).

I was audited for not claiming all my "income" about 4 years after we were married. With all the fees, fines, and interest, that "free" $50 cost me 2300+. Eff with those bastards at your own risk, they do not play around.

Hopefully Daddy cans them all and shutters that agency here in a few months.

 

[ODB]

Im curious with the folks getting audited, I take it you are not single-member LLCs that run your P&L through your personal income?

 

[ResearchinStuff]

I didn't even have an llc when I was audited.

 

[fwafwow]

Similar to a post made by @Marbles above, the existence of an LLC does not make an activity a business, or the costs and expenses deductible. And as @StuckInTheEast mentioned, if something is a deductible expense, it's not free - the benefit is only equal to the tax rate times the cost. So think about all of the effort (and expense) you have to go to in order to even put on the show that you have a new business - whether it's selling sawdust in Ziplocs, or paying to create and maintain an LLC or other entity. Sure, you could say there wasn't much cost in either of those examples, but that's going to haunt you if you are ever explaining your "business" start-up and other costs to an agent.

 

[StuckInTheEast]

I'd sure love to hear some input on this from someone who actually knows how the IRS flags someone for an audit or has had that duty.

Its not like they actually know exactly what your buying, they just see a handful of categories and dollars you claim to have business expenses for in each category. Your not itemizing individual expenses...it just clothing, equipment, advertising, mortgage interest, etc, etc... You don't have to prove any individual write off unless your audited.... So when you own an auto repair shop for random example...and you buy a side by side as shop equipment to "tow non running vehicles around your lot"...or a mid sized kubota tractor to " move snow and maintain your gravel overflow parking lot".... and both pieces of equipment stay at the shop full time far as the IRS will ever know...yet they typically reside in your home garage...but do get used for those stated business purposes on occassion... how are they going to prove your lying.
I'm not condoning this, nor have I done it...just may have seen it done.
Where's the burden of proof? You get audited, both pieces of equipment are on company premises when audit occurs...how can the IRS claim they aren't legitimate expenses without having long term surveillance records on you using them for other purposes? Sure
they could be used for personal use...so could any tools, clothing, most any type of equipment.
I know guys that have rentals and flip houses...they buy or even build a personal home and write off every last penny of materials and subcontractor work...because who is ever gonna be able to prove those materials and expenses didn't go into their flips and rentals?
This kinda stuff is why I tend think a flat tax is more logical.
I'm just thinking out loud here...fully open to commentary...Im no business or tax expert of any kind.

 

[fmyth]

Im curious with the folks getting audited, I take it you are not single-member LLCs that run your P&L through your personal income?

At the time of my audit I had multiple businesses. Several in LLC's, one in an S Corp, one in a P.C. and a dozen rental properties. They examined the bank statements and books for everything I was involved in.

 

[fwafwow]

In my prior life, I never handled audits, so my comments below may be of limited practical value. Unfortunately this is a topic that I geek-out a bit on. My candor doesn't mean I support the IRS.

I'd sure love to hear some input on this from someone who actually knows how the IRS flags someone for an audit or has had that duty.

My only way for me to answer this would be to Google it. My belief is many of the flags are automated - and based on memory of second-hand comments - big changes from one year to the next, home office deductions, hobby losses, etc. were things that raised your audit risk. Things or methods may have changed, and a CPA would have much better feedback.

Its not like they actually know exactly what your buying, they just see a handful of categories and dollars you claim to have business expenses for in each category. Your not itemizing individual expenses...it just clothing, equipment, advertising,

I think each of the above is true, but depending on how they are flagging, any one of those, or some ratio, could be an issue. It's not like humans are reviewing every return. At least at first.

mortgage interest, etc, etc...

This one is different, as your mortgage interest might be tied to a form sent to the IRS. It is for a personal residence at least.

You don't have to prove any individual write off unless your audited....

True. The return is largely based on the honor system. Which is part of the reason the Form 1099-K and PayPal concerns are, IMHO, overblown.

So when you own an auto repair shop for random example...and you buy a side by side as shop equipment to "tow non running vehicles around your lot"...or a mid sized kubota tractor to " move snow and maintain your gravel overflow parking lot".... and both pieces of equipment stay at the shop full time far as the IRS will ever know...yet they typically reside in your home garage...but do get used for those stated business purposes on occassion... how are they going to prove your lying.
I'm not condoning this, nor have I done it...just may have seen it done.
Where's the burden of proof?

This may be the key. The IRS doesn't have to prove you are lying, you have to substantiate your deductions as legitimate.

You get audited, both pieces of equipment are on company premises when audit occurs...how can the IRS claim they aren't legitimate expenses without having long term surveillance records on you using them for other purposes?

I think this goes back to you having the burden to substantiate. But if you are far enough along that there is a site visit, I would think things have not gone well.

Sure
they could be used for personal use...so could any tools, clothing, most any type of equipment.
I know guys that have rentals and flip houses...they buy or even build a personal home and write off every last penny of materials and subcontractor work...because who is ever gonna be able to prove those materials and expenses didn't go into their flips and rentals?

Some of the above might rise to the level of fraud, but even if not the case, there is a trade-off of allocating home materials as part of a rental. If written off as the latter, there is no basis increase when the home is sold. I know that's just an example and narrow, but it is a broader example of how people think they are getting something, but they don't perhaps appreciate the bigger picture (and all of the risks).

This kinda stuff is why I tend think a flat tax is more logical.
I'm just thinking out loud here...fully open to commentary...Im no business or tax expert of any kind.

At the risk of getting too far off topic:

• it's been a long time since I looked at flat taxes, but when I did, it seemed like there were nuances as to what would really be flat or not, and common deductions/exclusions we have now and would they really go away (like 401k, medical insurance premiums paid by employer, home interest deductions, etc.)
• like other Federal agencies in the news, I think there is lots of room for improvement in efficiency and cutting waste (and worse), but for those of us who wish for better government, that may have downsides to those who are shading outside the lines, or worse.

 

[ohoopee]

I am an Enrolled Agent and I represent people in Audits. One aspect I have not seen mentioned is
what a real audit can uncover. They will see every financial aspect of your life. Once had an auditor
notice a couple checks out of hundreds that went to a wholesaler. Auditor was able to find a side
business based on a couple of checks. A flick of a cheek muscle can alert the good ones!!! lol. Most of the auditors I have dealt with were smart, efficient and fair. Also, never lie to an auditor.