Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Oct 28

    In what may come as a shock to many of you, the country is broke and is looking for additional revenues. You should know, it will be looking in every nook and cranny to replenish the federal coffers. What you may not know is the Internal Revenue Service seems already to be engaged in revenue-finding-missions. Among the objects of their affection – in the tax audit – are sole proprietors filing Schedule C, and substantiation requirements for every possible deduction.

    The IRS now views the Schedule C as the repository of all manner of evil taxpayer intentions to reduce their tax liabilities (and, from the perspective of the IRS, federal revenues). IRS agents are reportedly beating the bushes of sole proprietors primarily to reduce, or eliminate, claimed deductions as unsubstantiated to increase both income and self-employment tax liabilities.

    All deductions are a matter of legislative grace, and that grace comes with a price: at a minimum to maintain books and records to support the expenditure, and, in many cases, to meet more exacting substantiation standards than the Code imposes as a condition to deductibility in various circumstances. One might not think of charitable contributions as a source of major contention with the IRS, but in the case of non-cash contributions, the taxpayer is technically required to establish, both the fair market value of the property and the property’s adjusted basis. In some cases, the Code requires an appraisal of property (where the value exceeds $5,000) contributed to a charity.

    However, the property’s adjusted basis comes into question in two cases: first in most cases where the property is inventory in the hands of the donor, and secondly, if tangible personal property that is unrelated to the charity’s exempt function, the amount of the contribution is limited to the donor’s adjusted basis in the property. For example, if a taxpayer donates used clothing to a charity that does not distribute them to poor or indigent individuals, the deduction is limited to the lesser of your basis or fair market value. Now, it may seem like common sense that the current value of almost all used clothing is less than what was paid for it but technically, a claim for a deduction of such items requires some proof of both the fair market value and the cost basis of the property.

    And such was the case I recently read about in Surgent’s Tax Issues Newsletter where a taxpayer was denied a claimed $850 deduction for clothing donated to charity. Yes $850! The return was under audit and the taxpayer submitted photographs of all the clothing donated and matched them up to the current list of retail prices published by The Salvation Army and recognized by the IRS– but that wasn’t enough. The auditor wanted purchase receipts of each item to establish the cost basis. Even if the taxpayer was in the 35 percent tax bracket, the amount of tax at issue was only $298. The IRS correctly assumed the taxpayer would throw in the towel rather than incur additional time, effort and costs to substantiate the deduction. So, the IRS pressed the issue hard enough to deny any deduction. Hooray, the deficit was reduced $300!

    From a practical standpoint, trying to establish the cost of most any item of personal property even shortly after its purchase, much less a couple of years down the road, is extremely difficult. So, nothing prevents the IRS from using similar audit strategies where larger sums of money are involved.

    Echoing the motivation Willie Sutton once famously gave for robbing banks, the Internal Revenue Service knows where the money is.

  • Oct 14

    Q. My husband and I sold our home on Fowl River that we purchased in 1973 for $459,000, and reinvested the profits in a smaller condo in town. Will we be required to pay the new 3.8% Medicare surtax (now referred to as the net investment income tax) on the gain? I understand it applies when your income is above $250,000.

    A. The 3.8% net investment income tax applies to the lesser of the net investment income for the year, or the excess of modified adjusted gross income over the $250,000 threshold. However, it does not apply to items, such as the gain on the sale of your personal residence, which do not have to be reported on your tax return.

    Do you have a question for the Taxpert that you’d like to see answered in a future Taxing Times? Or perhaps just an issue you’d like the Taxpert to address? Send the Taxpert a note to Taxing Times, 1050 Hillcrest Rd., Ste A, Mobile, AL 36695 or an email to taxpert@CPAMobileAL.com.

  • Oct 3

    It never ceases to amaze me: I observe business people and salespeople allowing customers (and money) to leak out of their business. Many times without even realizing it.

    For example, I watch people go to Chamber, or other networking, events with the sole purpose of collecting as many business cards as they can. Somehow they seem to feel, the more cards they collect, the more contacts they can make, the more business they will generate. And they will be everywhere, at every event tangentially connected to their business. Others may view them as the king or queen of networking.

    Yet the business, the referrals, aren’t coming and they ask, “Why aren’t I getting referrals?”

    There could be several reasons such as forgetting to ask, focusing on the wrong people, having no system in place, or putting pressure on customers or referral partners unknowingly.

    Here are six things you can do to increase your referrals.

    Ask. Yes, it starts here. If you don’t ask you may get a few haphazard referrals, with the emphasis on few. If you learn how to properly ask your customers and partners for help, some will enthusiastically promote your product or service. In my experience, you’ll never get all of your customers to give you a referral, but you don’t know which ones will be ambassadors for you until you ask. Note: Referral partners don’t have to be customers. They could be friends, vendors, or others in a supportive group, who have, over time, come to know, like, and trust you.

    Make people comfortable giving you referrals. It’s important to remember that your customers don’t like to feel like they are selling their friends to you. For many, offering an inducement or a bribe in exchange for names not only makes them uncomfortable, but may cause them to question the quality of your goods or services.

    You may have customers or referral sources who would like to refer, but don’t know how. By giving them easy ways to refer their family and friends without making it feel like you are paying them, you will receive more and a better quality of referrals.

    Show appreciation. Remember to thank your referral partner or customer for the referrals. If privacy allows, let them know when a referral works out and give them an update. One of my favorite ways to do this is with a handwritten card. People like to be appreciated. When you take the time to do something so few do these days, send a handwritten card – NOT a text, NOT an email, NOT a tweet, a handwritten card – your referral source will be pleased and more willingly refer you the next time.

    Focus on the right relationship. You don’t have the time to have a great relationship with everyone you meet. It’s impossible! That’s why you have to focus your energy developing the right relationships. For example, would you spend the same energy on a customer who has only purchased one entry level item from you in the last year, as you would a CEO who purchased your product for every employee at her company?

    Put systems in place. You already know that you don’t have time to build quality relationships with everyone; however, you can put systems in place such as follow up procedures to help nurture and develop relationships so that you can have more of those quality relationships referring you.

    Grow referral partners. Being an active member of a closed networking group, like BNI, gives you the opportunity to develop relationships with potential referral partners without the distraction of direct competitors. Unlike other networking opportunities, BNI encourages your efforts to build quality relationships with referral partners. Those trusting relationships can develop into your most prolific referral partners.

    Generating referrals takes a well-designed system and consistent effort to operate reliably. But the pay-off is worth it. Referrals are one of the highest probability and most profitable sources of new customers.