John R. Bullis: Engineer’s music business expenses partially allowed
May 28, 2018
Aaron K. Nicholson found his engineering work to be stressful so he started a music business. He produced two full-length albums in 2013 and 2014. He tried to sell the albums on the Internet.
In 2013, he filed three Schedules C, Profit or Loss from Business with the total gross receipts of zero and the total expenses of $48,000.
In 2014, he reported six Schedules C with total gross receipts of zero and $21,000 of expenses.
He did Schedules C for Musician, Photographer, Music production, etc.
The expenses include what he paid his children as well as travel and other expenses. He had lots of records and photos, but it was not well organized.
He said traveling inspired him, that is why he claimed expenses for meals with his children and their spouses, hiking, camping and travel related expenses.
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IRS found he was not entitled to the loss deductions because he "failed to substantiate the expenses" and the expenses were not ordinary and necessary business expenses.
He did not agree with IRS so he went to Tax Court. The Tax Court held he did adequately substantiate most of the expenses.
The court limited his expenses for contract labor, web hosting, vehicle expenses, equipment and repairs, CD purchases and some other expenses.
But the court held payments to his children, expenses for travel, meals and entertainment, expenses for hiking and camping trips and most vehicle expenses were not ordinary and necessary business expenses.
IRS had charged him with accuracy-related penalties for both years. The court held he did not offer a meaningful defense except he said he relied on TurboTax to prepare his returns.
The court said there was no evidence he reasonably attempted to be sure of the correctness of the expenses he claimed.
The court also found he did not try to comply with the tax code and sustained the penalties IRS charged.
The key to business deductions is they are to be ordinary and necessary to the business operations.
It seems a waste of time to go to court with records that were not organized and to claim expenses that only helped "inspire" him.
If the business activity were music production, it was not explained why he filed so many Schedules C. Usually one form would be enough if the expenses related to the main business.
He said the photos were for possible use as art to use in the album covers.
Did you hear? "The greatest dreams are always unrealistic," by Will Smith.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.