When It Hurts To Be Married – Tax Debt

May 21, 2018 Leave a comment

When it hurts to be married tax debtFor obvious reasons, I’ve changed the names and identifying circumstances. If you know a couple with these names, I promise they are not the people in this story.

Marybeth and Jack met when they were both in college and started living together after they’d been an item for a little over a year. Sharing one apartment cut down on their expenses. This allowed Marybeth to quit her part time job. She used the extra time to start a business installing and maintaining small vegetable gardens for people who wanted ultra-fresh veggies but were too busy to tend a garden. To Marybeth’s surprise, her business took off, and to keep up with customer demand, she had to hire another person. She got so busy and was making so much money, she sees no reason to continue working on a university degree. She did so well, she was  able to pay for the rest of Jack’s education, including law school. No student loans involved. Just cash payments. Life was good.

Fast forward 10 years … It’s now 2016. Jack and Marybeth have an 8-year-old daughter, Claire. Jack has a law degree and a steady job with  a salary of $89,000 and benefits,  but Marybeth’s business is in trouble. In 2012 she started doing commercial landscaping jobs. In 2015 she  got a couple of big contracts that required going into debt to purchase equipment and pay salaries. One of the contracts was with a residential developer I’ll call Procrustean Homes. Procrustean went under and ended up in a Chapter 7 bankruptcy. Marybeth had put a total of $183,000 into the project, expecting to get back $357,000. Instead, she got nothing except the $150,000 line of credit she still had to pay off.

One of the reasons Marybeth felt confident enough to bid the project with Procrustean is that she’d had her best year ever in 2015, making a net profit of $448,935. This was a substantial increase over her prior year income, and the quarterly estimated tax payments she’d made were not nearly enough to cover the tax due when her 2015 tax return was due in 2016. So Marybeth and Jack both signed a joint tax return with a liability to the US Government of $93,441. Which they couldn’t pay. Marybeth reported a net operating loss of $22,359 for 2016. If she had been filing as a single person, she could have carried the loss back to 2015, which would have helped with the debt. But here’s where filing status comes in.

Marybeth and Jack have been presenting themselves to the world as spouses for years, even though they never got a marriage license. They’ve also been filing tax returns as though they’re married. During the time when Marybeth was working and Jack was a student, and even after Jack started working as a lawyer, the couple paid lower taxes if they checked the Married Filing Jointly box on their tax return. They just kept doing the same thing, year after year. They even came to think of themselves as married.

Fast forward again to 2018. Marybeth has scaled back her business and is beginning to recover, but she still has not been able to make a dent in the 2015 tax liability. Jack is now making a salary of $105,000 per year plus benefits, but this has to be used to cover living expenses and taxes on Jack’s salary.  The couple still has to make their $3262 per month payment on their house and pay the $2800 leases on their cars. Claire is in private school. And so forth.

The IRS has already levied on Marybeth’s and Jack’s bank account, but they’ve moved to a new bank and think they can breathe easy for a little while. Then one day Jack gets his pay check, and it’s only a fraction of what it should be. The IRS has levied on his salary. Since he signed that joint tax return back in 2015, he is “jointly and severally liable” for Marybeth’s tax debts. Jointly and severally liable means the IRS can collect up to the whole amount due from either Jack or Marybeth. This doesn’t mean they can collect more than the amount owed. For example, they can’t collect 25% from Marybeth and $100 from Jack. But they sure can collect 100% from Jack, and they will if something is not done to stop the process.

Jack and Marybeth could have greatly reduced their problems by using Single filing status in 2015. Using Married Filing Jointly in the past certainly complicates the situation.

To Be Continued.

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How to Deduct Entertainment Expenses Part 2

March 6, 2012 Leave a comment

Can I deduct my wife´s dinner?

Ian is a software engineering consultant who works for a small firm of which he is a 25% owner. He much prefers working at his computer to going out on the town, but occasionally he finds it necessary to take clients or prospective clients to dinner.

“I can talk about software technology all day,” he told me, “but I´m a bumbling buffoon when it comes to socializing. The only way I manage to get through those ordeals where I´m supposed to wine and dine a client is to take Susan [Ian’s wife]. She´s just incredible. She can talk to anybody about anything. So … since the client would have a terrible time with just me there, can´t I deduct my wife´s dinner?”

The rule is that the cost of the dinner for both the host’s and the customer’s or client’s spouse is deductible if it´s not practical to entertain the client or customer without his or her spouse. But Ian needs Susan at dinner, regardless of the presence or absence of his client´s wife. Can Ian deduct the cost of Susan´s meal, even if the client comes alone? IRS would be likely to challenge this — the greater the amount deducted for Susan´s meals, the more likely it would be of interest to IRS.

For deductions of this sort that do not fit neatly within a section of the Tax Code or Treasury Regulation, you would want to have extra documentation. For example, Ian´s firm might want to record minutes of a meeting where they discuss the need for Ian to entertain clients and prospects, together with Ian´s difficulties in social situations and Susan´s social skills. If the other partners in Ian´s firm agree that Susan´s presence at client dinners will be very likely to help the firm increase sales and retain existing clients, it would be difficult for IRS to argue convincingly that the cost of Susan’s meals is not an ordinary and necessary business expense.

When is entertaining not entertainment?

In general, the deduction for meals and entertainment expenses is 50% of what you actually spend (75% for the transportation industry). But in some cases, the cost of a meal looks a lot more like a regular business expense than an entertainment expense.

Allan has a weekend business leading walking tours in Manhattan. A regular feature of each tour is a box lunch or snack pack for each participant, included in the price of the tour. In Allan´s case, the cost of lunch and snacks is 100% deductible, as Costs of Sales or Customer Supplies.

Likewise, for film or music critics, travel agents, food critics, certain costs that would ordinarily be 50% deductible as entertainment expenses are 100% deductible as regular business expenses. As always for costs of activities that people generally do for fun and pleasure, it is important to have abundant documentation of your profit motive and the relationship between the activity and the business. Calling yourself a film critic because you view lots of movies and tell your friends about them is probably not going to fly

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How Government Regulation Stifles Creation of Jobs

January 10, 2012 Leave a comment

This is a blog entry posted by a Hungarian entrepreneur: http://www.arcticstartup.com/2012/01/09/this-is-why-i-dont-give-you-a-job

He explains that he would not hire a woman, because the cost of required maternity leave is prohibitively expensive; nor would he hire someone over 50, because he would not be able to fire the person if the person did not perform the work adequately.

This is an extreme example of the harmful effect of government interference with the right of employers and employees to enter into agreements.

When laws raise barriers against small businesses rather than creating a system that fosters the freedom of business owners to contract freely with people who wish to work for compensation, the end result, when the barriers get too high, is a situation in which the only thing keeping the economy going at all is the black market.

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