In Case of Audit ... Legal Resoning behind Some Business Building Expenses
We have been trying to figure out the twin problems of child-care when we need to work beyond predesignated school or daycare hours and dealing with cleaning the office and the rest of the house given that we are both (Donna and I) are working as hard as we can on building the business and expending all the energy we have to move things forward.
We recently had a book appear in our path that has proven to be a true godsend. While we were at the library in Crystal on a mission to pick up a book on contracts we stumbled across this absolute gem of a reference manual for people in our industry and life situation.
The book is: Edwards, Paul and Sarah (2002). The Entrepreneurial Parent. New York: Jeremy P. Tarcher/Putnam. ISBN 1-58542-163-4 Hennepin Public Library Code 3 1972 10248 8544 Dewey Decimal code 658-1141 E 2002
( I am including all this detail in case I need to find it again)
Here is what is interesting. We are finding that many people in the professional services and consulting arenas that are working from home in partnership with a spouse have many of the same challenges that we do and that there are those who are finding effective solutions to some of the most pressing problems faced by people in our situation. We have been trying to figure out how to account for service needs that are critical, but seem to live in a confusing nether land of clarity. Examples are childcare when we are working and cleaning services in the office and around the house since we don't have time to do it.
This book offers some useful insight and documentation that clarify whether calling these expenses business expenses is appropriate. Based on the research that this book pointed me to 90% of Entrepreneurial Parents who are running businesses similar to ours are using baby sitting and or house cleaning services and dealing with them as business expenses.
It seems fair that we would do the same. So as cash flow allows we will.
Additionally we found a web reference that talks about a law that allows employers to provide for the child care expenses of employees and have that be a deductible expense. The caveat is that we need to be willing to offer this benefit to all workers who might have a need - not just the owners. See the following article which I was only able to retrieve from the Google cache:
S corporation denied deduction for owner's child-care expenses
This is G o o g l e's cache of http://www.thefreelibrary.com/S+corporation+denied+deduction+for+owner's+child-care+expenses-a0159078528 as retrieved on Jul 30, 2007 08:55:16 GMT.A started a window-washing business through wholly owned S corporations. A's wife (B) began working in that business two years later. During the relevant years, approximately 24 and 31 individuals worked in the business.
B was employed by the S corporations to wash windows one or two days a week and to provide clerical services for approximately 10 to 15 hours per week. Although the S corporations did not formally pay her any wages during either year, she actually received $4,480 and $5,000 during the respective years. A was employed by the S corporations essentially as their general and operations manager, but also washed windows. The S corporations formally paid A no wages during 2001, but paid him $6,800 in wages during 2002.
When B was working, A and B left their children with either a day-care service or a neighbor. They paid their neighbor in cash and the day-care service with a check drawn on one of the S corporation bank accounts. The S corporations claimed deductions for the children's day-care expenses.
Analysis
The taxpayers assert that the S corporations are entitled to deduct the daycare expenses under Rev. Rul. 73-348, 1973-2 CB 31, which allows a Sec. 162 deduction for the corporation's day-care payments for an employee's preschool children while at work, because B could not have worked unless day care was provided to her preschool children.
We are unpersuaded by this argument. While Sec. 162 allows a corporate taxpayer to deduct the ordinary and necessary expenses of its business, the mere fact that B might not have been able to work for the S corporations unless day care was provided to her children does not necessarily mean that the payment of A and B's day-care expenses is an ordinary and necessary expense of the S corporations. While the Service ruled in Rev. Rul. 73-348 that a taxpayer could deduct the daycare expenses related to the children of its employees, the ruling notes that the expenses were "directly related" to the taxpayer's business.
On the basis of the record at hand, we cannot find that A and B's day-care expenses were directly related to the S corporations' business or, in other words, that those expenses were an ordinary and necessary expense of the S corporations. Indeed, the only individuals whose children's day-care expenses were paid by the S corporations were the sole owner of the S corporations and his wife. Thus, we hold for the Service.
FRANK SETTIMO, TC Memo 2006-261
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| Title Annotation: | EXPENSES |
|---|---|
| Author: | Settimo, Frank |
| Publication: | The Tax Adviser |
| Date: | Feb 1, 2007 |
| Words: | 416 |
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