Is your Schedule C business a Hobby in the Eyes of the IRS?




by April Thiel, CPA, Senior Manager at Gordon Advisors, P.C.



Many small businesses are organized as a sole proprietorship and file a Schedule C on the owner’s personal 1040. What happens when your expenses exceed your income and you incur losses? Can you still claim those tax deductions? The answer is; you can deduct them if you can show that you are truly running a business and not merely engaging in a hobby.
Taxpayers are allowed to deduct ordinary and necessary business expenses. In order for the IRS allow the deduction as a business expense, you need to make sure the activity or business is considered “engaged in for profit”. You need to make a profit in at least three of the last five tax years in order for your business to be considered for profit and not merely a hobby. In addition to that requirement, here are a few (not all inclusive) factors to consider:

Do you depend on the income from the activity?
Do you conduct business in a professional way? (A website, business cards, letterhead, etc.)
Does the time and effort you put into the activity indicate your intention of this being a business?
Do you expect to make a profit?
Do you have the necessary knowledge to be successful in the business?
Do you treat it as a business?

The IRS is trying to ensure that you are not merely turning what is a hobby, into a deductible loss. Here are a few ways you can help substantiate your legitimate business expenses: keeping good records, hiring some professionals, write a business plan, keep business and personal expenses separate & ensure your income and expenses are matched properly. The IRS scrutinizes this area intensely and will audit and disallow your expenses if they believe you are not truly in business. Contact a Gordon Advisors tax advisor today to discuss.

De Minimus Safe Harbor Election – What it means for you.







by Carmen S. Jaeger, Senior Manager at Gordon Advisors, P.C.

For business owners, Section 162 of the Internal Revenue Code is no stranger, whether you know it or not.  This code section allows you to deduct all the ordinary and necessary expenses you incur during the taxable year to carry on your trade or business.  These costs would include certain materials, supplies, repairs, and maintenance.  We like this section!

Section 263(a) and underlying regulations require the capitalization of costs of acquiring, producing, and improving tangible property, regardless of the size or the cost incurred.

The ambiguity of these laws has often left taxpayers in a quandary in regards to whether certain expenses were to be immediately deducted or capitalized.  We were guided by often conflicting case law or administrative rulings on specific factual situations.

In 2013, Treasury issued the final tangible property regulations which are effective for taxable years beginning on or after January 1, 2014.  Included in these regulations is a “de minimis safe harbor” election, which allows taxpayers to deduct in accordance with IRC Section 162, amounts under a certain threshold paid to acquire or produce tangible property.

Most recently (Notice 2015-82), the IRS has increased the threshold for the safe harbor election.  For tax years beginning on or after January 1, 2016, the threshold was increased from $500 to $2,500 per invoice or item for taxpayers without an applicable financial statement.  The threshold for companies who have an applicable financial statement remains at $5,000.

What does this mean for a business owner?  Hopefully this means less accounting, less time, less ambiguity, more direction, and more deductions!  In simple terms, a business can deduct (not capitalize) any expense less than the threshold amount.  This will hopefully lessen the burden of tracking smaller items on your depreciation schedules, while potentially providing a bigger tax deduction in the year of the purchase.

Also, it is important to note that even though the increased threshold is effective for tax years beginning after January 1, 2016, the IRS has stated that they will provide audit protection to eligible businesses by not challenging the use of the $2,500 threshold for tax years ending before January 1, 2016.

To make the election, you need to attach a statement to the timely filed original tax return (including extensions) for the taxable year in which the de minimis amounts are paid.

If you have questions, or need additional help on determining if and how these regulations apply to you, we are here to help.  Please call us!

Michigan Sales and Use Tax on Cloud Computing Services


Businessman drawing a Cloud Computing diagram on the whiteboard

by Jill S. Knop, CPA, Senior Manager at Gordon Advisors, P.C.

The Michigan Appellate Court, on October 27, 2015, has upheld a Court of Claims decision impacting taxability of cloud computing services. In the Auto Owners Insurance Company case, it was decided that the use of cloud computing services was not subject to use tax in the State of Michigan because the software had not “been delivered by any means” to the user. There is an opportunity for those who have paid tax on such services to file for a refund of those taxes. Please contact us to discuss and for help claiming your refund.



What’s New for Businesses This Tax Year?

Here’s some new information for business taxpayers in the 2015 tax year:

W-2 Reporting of Employer Health Costs

The Affordable Care Act (ACA) requires certain employers to report the cost of coverage under employer-sponsored group health plans. This reporting is done on W-2 forms. Reporting the cost of health care coverage on Form W-2 doesn’t mean it is taxable. The reporting is for informational purposes only to help employees understand the cost of their coverage.

Currently, this reporting is optional for employers that submit fewer than 250 W-2 forms. But it’s mandatory for employers that submit 250 or more W-2 forms. Compliance requires employers to supply the appropriate reporting codes, which flow to the required W-2 reporting boxes. To further complicate matters, certain types of coverage (such as major medical) currently must be reported, while other types are optional or don’t need to be reported.

W-2 forms must be distributed to employees by February 1, 2016. But gathering the requisite information will be time consuming for most companies. Fortunately, your tax and accounting advisers can assist with W-2 reporting of employer health costs. Be sure to contact them as soon as possible if you need help.


Year-end tax planning for 2015 is particularly challenging because Congress has yet to act on a host of tax breaks that expired at the end of 2014. It’s uncertain at this time whether the “extender” provisions will be extended by Congress on a permanent or temporary basis (and whether any such extension would be made retroactive to January 1, 2015). For businesses, these tax breaks include:

1. 50% bonus first-year depreciation for most new machinery, equipment and software,

2. An expanded annual expensing limitation under Section 179 (up to $500,000 for 2014),

3. The research tax credit, and

4. The 15-year write-off for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.

Discuss the status of these extenders with your tax adviser before year end.




© Copyright 2015. Thompson Reuters.  All rights reserved. Brought to you by: Gordon Advisors, P.C.

2015 Year-End Tax Planning Tips for Small Businesses

Virtually all small business owners are frustrated with our current tax system. In fact, five out of today’s Top 10 small business concerns relate to state and federal tax issues, according to the Small Business Problems and Priorities survey released by the National Federation of Independent Business (NFIB), a small business advocacy group. Small businesses are most frustrated by the complexity of the tax code and the disparity between effective tax rates of small vs. large businesses. Tax reform will undoubtedly be a hot button during the 2016 presidential race.

Meanwhile, business owners who engage in proactive planning can take some of the “bite” out of their taxes. Here are some simple strategies for you to consider during the fourth quarter of 2015. These maneuvers require action before year end, so don’t delay.

Defer Income and Accelerate Deductible Expenses (or Vice Versa)

The majority of small businesses are organized as so-called “pass-through entities” that don’t pay corporate-level income tax. If your business is a sole proprietorship, partnership, limited liability company or S corporation, your share of the business’s income is reported on your Form 1040 and taxed at your personal rate.

The individual federal income tax rates are scheduled to be the same for 2016 as they are for 2015. Therefore, deferring revenue into 2016 while accelerating deductible expenses into 2015 makes sense if you expect to be in the same or a lower tax bracket next year. In that case, this strategy will, at a minimum, postpone part of your tax bill from 2015 until 2016.

On the other hand, if your pass-through business is thriving, and you expect to be in a higher tax bracket in 2016 (say, 35% vs. 28%), take the opposite approach. If possible, accelerate revenue into 2015 and postpone deductible expenses until 2016. That way, more income will be taxed at this year’s lower effective marginal tax rate instead of next year’s higher rate.

If your business is a C corporation, you need to consider the 2016 corporate income tax rates. They are also scheduled to be the same as in 2015. So if you expect your corporation to be in the same or a lower bracket in 2016, postpone revenue into next year while accelerating deductible expenses into this year. If you expect to be in a higher tax bracket in 2016, try the opposite approach by accelerating taxable income into 2015 and deferring deductible expenses to 2016.

How to Juggle Income and Expenses (for Cash-Basis Entities)

Juggling year-end revenue and expenses is fairly simple if your small business uses the cash method of accounting for tax purposes. The cash method gives you flexibility to manage your 2015 and 2016 taxable income to minimize taxes over a two-year period. Let’s look at some specific cash method strategies to consider if you expect business income to be taxed at the same or lower rate next year.

First, before year end, use credit cards to pay recurring expenses that you would otherwise pay early next year. You can deduct the charges in 2015 even though the credit card bills won’t be paid until next year. This favorable treatment doesn’t apply to revolving charge accounts issued by retailers, however: You can’t generally deduct business expenses charged to your retail store account until you pay the bill.

Another trick is to pay expenses with checks and mail them a few days before year end. The tax rules say cash-basis entities can deduct the expenses in the year checks are mailed, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, send checks via registered or certified mail to prove they were mailed in 2015.

The tax code also allows you to prepay some expenses for next year, as long as the economic benefit from the prepayment doesn’t extend beyond the earlier of:

1. 12 months after the first date on which your business realizes the benefit, or

2. The end of 2016 (the tax year following the year in which the payment is made).

For example, you can claim 2015 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.

On the revenue side, the general rule is that cash-basis taxpayers don’t have to report revenue until the year they receive cash or checks in hand or through the mail. To take advantage of this rule, put off sending out some invoices for work completed in late December so that you won’t get paid until early next year. (Of course, you should never do this if it increases the risk of not collecting the money.)

If you expect to pay a significantly higher tax rate on next year’s business income, try the reverse of these strategies to raise this year’s taxable income and lower next year’s. For example, a cash-basis taxpayer who expects to be in a higher tax bracket in 2016 might ship before year end (and invoice) products scheduled for delivery in early January in the hope that customers will pay by December 31 and hold off on sending checks to vendors until after January 1.

Take Advantage of NOLs

These business tax planning strategies also can be used to create (or increase) a 2015 net operating loss (NOL). This occurs when a business’s expenses exceed its income. You can then choose to carry a 2015 NOL back for up to two years in order to recover taxes paid in earlier years, which may be a welcome boost to your cash flow. Or you can choose to carry the NOL forward for up to 20 years, if you think your business tax rates will go up and the NOL deduction could save you more taxes in the future.

Meet with Your Tax Adviser

These strategies only scratch the surface of proactive tax planning moves. Business owners who assess matters before year end have many more tax-planning strategies at their disposal than those who wait until after the start of the tax filing season.

© Copyright 2015. Thompson Reuters.  All rights reserved. Brought to you by: Gordon Advisors, P.C.