Federal Income Tax Archives

Charitable Deductions for Defective Inventory

Manufacturers and retailers frequently face the challenge of handling defective or obsolete inventory that cannot be sold. This situation often results in waste. The inventory has some utility or value, but the benefit of repurposing or rehabilitating the inventory is often outweighed by the cost of handling or repurposing the inventory. Examples are easy to…

Tax Disputes When You Have Too Many Records

There are quite a few tax court cases involving taxpayers who did not have sufficient records to substantiate their tax positions. This is probably more than half of the cases that end up in the U.S. Tax Court. But what about the opposite situation where there are too many records? How is one to contend…

What is a Bona Fide Loan for Tax Purposes?

It is often said that a taxpayer is free to structure their affairs as they see fit and can even do so in a way to minimize or avoid paying taxes. While this is true, it is equally true that the IRS is not bound by the taxpayer’s characterization of transactions. The IRS has a…

Taxes and Flow-Through Entities in Divorce

When a marriage involving owners of a flow-through entity is on the rocks, the intertwining of personal and business finances can create significant tax complications. This is especially true when one spouse is more involved in the business operations than the other. There are more than just tax issues to consider in divorce. But taxes…

A Government Step Transaction Doctrine

When taxpayers weave together various tax rules to produce a favorable outcome, the IRS will often cite various judicial doctrines to avoid the result or to unwind the transaction. This can include economic substance, the step transaction doctrine, etc. These doctrines allow the IRS to effectively reverse the tax treatment of transactions when multiple tax…

From Commingled to Contested: The IRS’s Audit of Tax Deductions

The common idea that business expenses are deductible while personal expenses are not is an oversimplification. In reality, the tax rules are more nuanced. Some personal expenses are deductible, and the line between personal and business expenses is often blurry. This complexity is further compounded by the fact that many businesses, particularly small ones, fail…

The Tax Treatment of Pre-Start-Up Costs

Can you deduct costs incurred while investigating whether to start a business? What if you spend several years researching, planning, and preparing to launch and you incurred costs during these years to do so? Are these expenses deductible in the years before your business officially begins operations? Does the answer change if the business actually…

Tax Planning With Disproportionate Distributions from S Corporation

There are several rules one has to meet for a legal entity to qualify as an S corporation. One of the rules is the requirement that shareholders of S corporations get identical distributions. Because this is a qualification to be an S corporation, one might think that the consequence of violating this rule is that…

Dealing With IRS Audit of a Hobby Loss Activity

The IRS is a silent partner in every business venture. It is quick to take its share of profits when a business venture succeeds. The IRS is often not a good business partner. It often refuses to share in the losses during the down times. This unequal treatment often comes up when the taxpayer reports…

Can a Failed ESOP be Saved by Installment Sale Rules?

Imagine a building with two entrances. Once you’re inside, does it really matter which door you used to enter? This analogy often applies to tax disputes when there are overlapping tax laws. The IRS frequently argues that taxpayers are bound by their initial choice of tax treatment–insisting they stick with the “door” they first entered…