One of the
accountants recently told me that a client had asked whether he/she should
set-up a separate bank account for their business.
The short answer
is: yes.
It is not
always about taxes. An attorney might recommend that your corporation have
annual meetings and written minutes – or that you memorialize in the minutes deferring
a bonus for better cash flow. It may seem
silly when the company is just you and your brother. Fast forward to an IRS
audit or unexpected litigation and you will realize (likely belatedly) why the
recommendation was made.
I am skimming
a case where the taxpayer:
· Had three jobs
· Was self-employed providing
landscaping and janitorial services (Bass & Co)
· Owned and operated a nonprofit that collected
and distributed clothing and school supplies for disadvantaged individuals
(Lend-A-Hand).
The fellow
is Duncan Bass, and he sounds like an overachiever.
Since 2013, petitioner, Bass & Co …, and Lend-A-Hand have
maintained a single bank account….”
That’s different.
I cannot readily remember a nonprofit sharing a bank account in this manner. I
anticipated that he blew up his 501(c)(3).
Nope. The Court
was looking at his self-employment income.
He claimed
over $8 thousand in revenues.
He deducted almost
$29 thousand in expenses.
Over $19
thousand was for
· truck expenses
· payment to Lend-A-Hand for
advertising and rental of a storage unit
He handed the
Court invoices from a couple of auto repair shops and a receipt from a vehicle
emissions test.
Let’s give
him the benefit of the doubt. Maybe he was trying to show mileage near the
beginning and end of the year, so as to establish total mileage for the year.
Seems to me
he next has to show the business portion of the total mileage.
Maybe he
could go through his calendar and deposits and reconstruct where he was on certain
days. He would still be at the mercy of the Court, as one is to keep these
records contemporaneously. At least he would
field an argument, and the Court might give him the benefit of the doubt.
He gave the
Court nothing.
His argument
was: I reported income; you know I had to drive to the job to earn the income;
spot me something.
True enough,
but mileage is one of those deductions where you have to provide some documentation. This happened
because people for years abused vehicle expenses. To give the IRS more
firepower, Congress tightened-up Code Section 274 to require some level of
substantiation in order to claim any vehicle
expenses.
And then we
get to the $9,360 payment to Lend-A-Hand.
Let’s not
dwell on the advertising and storage unit thing.
I have a bigger
question:
How do you prove that his business paid the nonprofit anything?
Think about
it: there is one checking account. Do you write a check on the account and
deposit it back in?
It borders
on the unbelievable.
And the Tax
Court did not believe him.
I am not
saying that the Court would have sustained the deduction had he separated the
bank accounts. I am saying that he could at least show a check on one account
and a deposit to another. The IRS could
still challenge how much “advertising” a small charity could realistically
provide.
As it was, he
never got past whether money moved in the first place.
