Tax Ethics for the Self-Employed 1

[KornGeek]

I recently began doing some contracting work as a side business. I've been researching the tax implications and have seen a lot of advice.

Much of the advice includes writing off cell phone and ISP bills, car expenses, mortgage, computers, etc. However, I only use these things a relatively small percentage for my business. Mostly they are used for non-business related purposes.

It seems that most people recommend taking advantage of any loophole, and getting "creative" when filing taxes. I've even seen advice along the lines of "you can fudge numbers by telling your accountant something other than reality, and he'll gladly assist you."

I don't want to get stuck paying so much in taxes that it isn't worth my time to be self-employed, but at the same time, I want to pay my fair share. I expect certain things from the government (education, police and fire protection, etc.), and I understand that they need tax revenues to provide these things.

What are your views on the ethics and practicality of real vs. fudged numbers for your taxes, especially for the self-employed?

 

[edfair]

Getting creative can get you into trouble with the IRS. But a good accountant will probable insist that you push the limits more than you would otherwise would.
A cell phone used for business wouldn't be out of line. An ISP for dialup would probably be OK unless you are downloading stuff, in which case DSL would probably be justified.
Car expenses are good. Just keep records. Get something like a day-timer to record business mileage and take the IRS mileage deduction. And nothing is in the laws that prevents you from stopping at the grocery store while you are still on the corporate trip as long as it is on the way.
Deducting a part of the mortgage is like waving a red flag in front of a bull.

The computer might be pushing the issue, but once you need to keep better records a computer and accounting software would be OK. I sometimes write off multiples but always with valid uses.
And use an accountant. They tend to push the envelope more than CPAs.

I don't like fudged numbers. They intefere with my sleep. It also helps that I've spent a day with an IRS auditor. Nice guy, but it still cost more money than I had free at the time. And not from fudged numbers. He opened the books back about 12 years and was contemplating going back 13 more, then decided it wasn't worth it.

Ed Fair
Give the wrong symptoms, get the wrong solutions.

 

[zeitghost]

Praise be!

HMCR can only go back 6 years in the UK... deep joy!

Unless they suspect fraud...

 

[edfair]

This happened to be a corporate pension plan and they can go wherever they want. Corporate return would have had something like a 5 year limit. No problems with the amounts, just the timing of deposits. So there were some excise taxes, some penalties and some compounded interest. And paperwork, 3 forms per year in question. Then another office that processed the returns became forgiving and returned 2 years worth of accumulated money. Cost a couple of hundred dollars but an "immediate" deposit to the plan. To the extent that he wanted a copy of the deposit receipt within a week.

Ed Fair
Give the wrong symptoms, get the wrong solutions.

 

[sleipnir214]

In terms of ethics, every taxpayer has the ethical responsibility to pay the least amount of taxes he legally can. Just keep in mind that there is a fine line between tax minimizing and tax evasion, and shady accounting practices is the absolute quickest way to end up on the wrong side of the line.

Talk to a tax professional, either an accountant or a lawyer. Or both.

My most general advice is that you religiously document everything and that you never throw those documents away.

But talk to a tax professional, either an accountant or a lawyer. Or both.

I don't know any more, but at one time you could deduct part of a mortgage as a business expense. There were a bunch of prerequisites, though, like the business area of the house being kept completely separate from the living area, the business area having it own door to the outside of the house, etc. Then you could reduce your tax burden.

But talk to a tax professional about this, either an accountant or a lawyer. Or both.


I also strongly recommend that if you have not done so already you incorporate your business. This can financially separate you from your business. It adds to the amount of paperwork you have to do, but can keep you from having to give up your house due to problems with the company.

Talk to a tax professional, either an accountant or a lawyer. Or both.




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[dkediger]

A tax professional can advise you the best. In the meantime, try IRS Pub 587 - Business Use of Your Home (Acrobat Format) for some light reading.

 

[Itshim]

One thing I think should be mentioned, if you go to a CPA or accountant to file taxes for you, it is not the accountant's job to verify the information you supply. If you are then subsequently audited it is your job to prove the expenses, and the only time the accountant can get into trouble is if they 'knew' they were filing a false tax return.

BTW - I think the IRS participates in numerous unethical acts, but that's a different story.

 

[edfair]

I'm not sure about the "ethical responsibility" to pay the least amount even though Judge Learned Hand proclaimed that it was not a requirement that taxpayers so order their lives to pay the maximum, or something like that.

When I was getting in a position to incorporate 3 of my CPA customers advised me to use an accountant, not a CPA. Had to do with the CPA requirements to follow some very strict IRS regulations that would have increased my tax liabilities.

My accountant suggested that I not try the partial mortgage deduction as it was a "red flag" due to prevalent fraud and the fact that it screws up the tax situation when the house is sold. But that was years ago.

And incorporating is good. Severs you personally from some liabilities of the corporation. Has some tax advantages once you start passing money thru but probably not worth it until the $100K mark.

Ed Fair
Give the wrong symptoms, get the wrong solutions.

 

[sleipnir214]

If you assume that you can better use your money to improve the lives of yourself and your family than the government can, then yes, you have an ethical responsibility to pay the least taxes you legally can.

And I've heard the same thing about taxes, mortgages and the sale of houses. And I've heard also that expensing to the business part of a mortgage is a very good way to get audited. For most people its not really worth the trouble to try to expense to the business part of your mortgage. The only ones I know of who do it are people who have built houses specifically to support larger home businesses.



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[langleymass]

One of the best things you can do is this:

Make the company a corporation. Make yourself a stockholder. Pay yourself a dividend. Dividends are not touched by the giant scam known as Social Security.

 

[dkediger]

No, but then you start getting into quarterly tax filings for both the corporation and the stockholder!

 

[edfair]

Suspect that dividends without salaries is going to be more of a red flag than writing off part of the mortgage.

There are cross-checks on the value of stock and how it is acquired.

My quarterlies are not bad. Probably less than an hour a quarter including the state stuff. Annual filings are about the same. Corporate tax return is probably 20 to 25 hours, the pension plan probably 6 to 8 hours. The property taxes, sales taxes, and business licenses take as much time as the federal stuff.

Ed Fair
Give the wrong symptoms, get the wrong solutions.

 

[KornGeek]

If you assume that you can better use your money to improve the lives of yourself and your family than the government can, then yes, you have an ethical responsibility to pay the least taxes you legally can.

This is an interesting point of view, but wouldn't it be better to say:

If you assume that you can better use your money to improve the lives of yourself, your family, and your country than the government can, then yes, you have an ethical responsibility to pay the least taxes you legally can.

After all, don't we have an ethical obligation to work together to make our country function?

 

[sleipnir214]

If you assume that your country is best served by paying the least taxes, I guess then you can add "your country" to the list.




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[KornGeek]

My point is that our obligation to our country should be considered as well, and might swing the vote away from paying minimal taxes. I think our obligations to self, family, and country are all important.

 

[sleipnir214]

The money I keep benefits the country, too. And since the money I keep benefits my family directly and the country indirectly, it seems that keeping the maximum money in my possession is the way to go.



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[KornGeek]

Fair enough.

It could also be argued that paying the (legal) minimum is ethical because if the country needs to take more money, it is the government's responsibility to raise the minimum.

I realize I'm flip-flopping back and forth here, but mostly I'm using this to think through the issue, and I'm unsettled in my mind on which way I lean.

 

[langleymass]

Taxation is theft.

 

[zeitghost]

<Taxation is theft.>

Can't disagree with that... )

 

[sleipnir214]

I can.

There are certain functions we require a government to fulfill. For example, the preamble to the U.S. Constitution reads, in part, "to provide for the common defense". Providing for the common defense requires money -- money to buy tanks and guns and money to train and keep trained those hard-eyed folk who will wreak havoc on those who attempt to do us ill. And the only way governments get money is through taxation.

I've heard the arguments by analogy which compare taxation to being mugged. But the fatal flaws of the analogy are that your elected representatives enacted the tax (which means a majority of you and your fellow constituents implicitly agreed to the taxation) and that you get something back from taxed (again, going back to "provide for the common defense").



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