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Wearing the Wrong Shoes to Tax Court Can Cost You

The TaxProf has blogged a Tax Court case that made me groan. And probably any tax professional worth their salt.

The story is of a welder in West Virgina who was "assertive" when claiming unreimbursed employee expenses on Form 2106. Among other things he claimed $600 in unidentified clothing and gloves. In order for uniforms to be decutible they cannot be suitable for general or personal wear. Painter's pants, for example, are specifically listed in IRS publications as not deductible.

Knowing this, what shoes would you wear to court??

Well, our hapless defendent showed up in court wearing his Rocky Wolverine boots, which were included in the $600 deduction. By wearing them to court, he made the judge's ruling a no-brainer. If he could wear them to court they were suitable for personal use and therefore not dedubtible.

Now I don't know if he had a tax professional prepare his return (I would hope not given the further details in the court, edit version available here). But surely our welder hired someone to represent him in Tax Court? Shouldn't that person have advised him of the actual rules and suggested he not wear any of the deducted clothes, including his Rocky Wolverine boots, to court?!!

The devil is always in the details!

Don't Get Ripped Off When You Refinance Your Mortgage

Every day I get bombarded by mortgage refinancing ads: TV, radio, email, pop-up & banner ads.

It seems like they're all saying you can roll up your car loan and non-deductible credit card debt or cash out your home's equity into a new bigger, better mortgage. Then they have the legalese guy muttering too quickly to understand: "Talk to your tax professional for deductibility rules" ... or words to that effect.

Of course they know no one will actually do this until after they've refinanced. I think the ads are misleading. The rules aren't really that difficult.

Make sure you understand the tax rules and how it will affect you before you refinance. Most people will not be able deduct all the interest on the mortgage described in these ads.

For the most part, you can only deduct mortgage interest on loans used to buy, build or improve a qualified residence. That means you can refinance the principal of your old loan plus any other loans used to buy or improve your home. If you use your mortgage to cash out funds to pay off other debt, the interest on that principal is not deductible.

Home equity loans that are less than $100,000 (or the fair market value of the home less any outstanding debt, which ever is less) are fully deductible regardless of how the proceeds are used.

In addition, the mortgage interest deduction is limited on mortgages over $1 million. If your loan is over $1 million the IRS provides worksheets to help you figure out what percentage is deductible.

If the original mortgage for your home closed before October 14, 1987, it might qualify as "grandfathered debt" and special rules apply. Take a look at IRS Publication 936, Home Mortgage Interest Deduction for more details.

Oh, and watch out for point on refis. They are not fully deductible in the first year. You must amortize them over the life of the loan.

Tax Articles

LLCs for Consultants...

After posting Consultants: W-2, 1099 or Corp-to-Corp?, there were a lot of questons about LLCs. I realized I needed a separate page so I just posted Consultants: What about LLCs?

The strange thing about the LLC as a business entity is the IRS doesn't recognize it. So every LLC is actually taxed as a sole-proprietor, partnership or corporation. The good (and bad) news is you have to choose which it will be.

Regardless of how your LLC is treated for tax purposes, it retains its legal status as an LLC.

Consultants: What about LLCs?

If you're a consultant wondering about how to organize your business, you may have read my previous posting Consultants: W-2, 1099 or Corp-to-Corp?. I got quite a few questions on LLCs. I tried to answer each individually but it soon became clear we needed to include more information and the topic deserved it's own page.

What is an LLC?

So just what is an LLC anyway? Although they seem ubiquitious, Limited Liability Companies, or LLCs are a relatively new type of business structure. It is similar to a corporation in that it limits personal liability of its members for the company's debts and obligations. An LLC is organized under the laws of a specific state.

How are LLCs Taxed?

The IRS does not recognize an LLC classification for federal taxes. The good news is that you can decide how you want your LLC to be taxed. Of course, this is also the bad news... :) This means when considering the tax implications of organizing as an LLC you need to understand the options available.

C-Corp vs S-Corp

This question was posted on are recent entry on selecting the business entity type for consultants:

"From talking to a few accountants, they seemed to think that a C-corp was a better deal for many small businesses than the S-Corp because of additional medical reimbursement plans and other fringe benefits.

Can you comment on the benefits of S versus a C for a sole business owner (in California, say)?

Again, this assumes that you don't leave money in the C to be 'double-taxed' - it's either paid out in salaries, or used in pension plans, etc."

Taxes for Telecommuters

If you telecommute for an out of state employer you may want to take a look at this article.

The US Supreme Court let stand a New York district tax court ruling in which an employee of a New York employer was liable for New York state income tax on 100% of his earning even though 75% of the work was done in Tennessee.

It turns out the employee was telecommuting for his own convenience and not that of the employer. As a result he'll have a pretty hefty tax bill to content with.

This article offers some pretty good advice: "If you telecommute or employ telecommuters, consider reviewing the language in your employment contracts. Where appropriate, the contract should clearly state when telecommuting is required by the employer as a condition of employment."

Did you have to pay AMT in 2005?

W-2? 1099? Corp-to-Corp? What's a new software consultant to do?

Pretty much as long has there have been outside consultants, they have been asking this question: W-2? 1099? or Corp-to-Corp?

For the unintiated, any new consultant needs to determine how they will organize their business. And these are the usual options people talk about. You would think it's a pretty straight forward calculation, but it can really become quite complicated.

I made a new posting, Consultants: W-2, 1099 or Corp-to-Corp?, that goes into some detail about the issues you need to consider. Each option has its own advantages and drawbacks. As with most things, it's all about the trade-offs.


Welcome to BizTaxTalk! A new web community to get and give tax help for small businesses.

If you're like most people I know, you hate dealing with taxes. You may do them yourself or you may hire someone to do it for you but you wish you didn't have to have anything to do with them. Not preparing, filing or especially paying them!!

While we can't make taxes go away, any more than we can make death go away, we can try to help one another make it just a little less painful.

That's what this site aims to do. So if you need a some information or a little help translating IRS lingo, post your question to the dicussion forum. If you have some information or want to trade horror stories to help the next guy or gal avoid the same fate, go ahead and make post a new topic.

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