The federal income tax has been with us for more than 100 years so you’d think that every question you could think of has been answered. You’d be wrong.
Here are 4 questions I’ve received from readers that haven’t been answered by the IRS. Tax pros have offered some well-reasoned responses that I want to share.
Apple Watch
If you buy one, does it give you a business deduction? Are you going to argue it’s purely for business (highly unlikely)? Will the IRS treat it like a computer (which is listed property that must be used more than 50 percent for business to qualify for favorable write-offs) or like a cell phone (exempt from listed property)?
Can or must you document business use? And how do you do that?
Are you limited to deducting up to the basic cost of $350 or can you write-off a $17,000 gold edition if you buy one?
You probably can show some business use (e.g., receiving notifications about meetings, Passbook flight check-ins). And you probably can write-off some part of the cost.
I leave it to you and your tax pro to decide how much.
COBRA for the Self-Employed
You leave a job and start a business, continuing health coverage from your old company through COBRA. This coverage can last for 18 months as long as you continue paying the premiums.
Can you deduct the premiums as an adjustment to gross income (the “self-employed health insurance deduction” on line 29 of Form 1040) rather than as an itemized deduction?
Self-employed individuals are allowed to deduct premiums for their coverage without itemizing. The law states the health insurance plan must be established for the self-employed individual.
So, can COBRA premiums be treated as having been paid to a plan established for the self-employed individuals? That’s the unanswered question.
There are some good arguments to support an above-the-line deduction for COBRA premiums by self-employed individuals. One is that the IRS says (PDF) self-employed individuals can deduct Medicare premiums, and clearly this isn’t a plan established for self-employed individuals.
Websites
The majority of small businesses have websites, and many have invested money to make them mobile-friendly.
Are the costs of creating a website immediately deductible or do you have to amortize them so that you write them off over a number of years? Does it matter whether your website acts as a brochure or an online store?
Some argue that the brochure-type website is an ordinary advertising expense that is immediately deductible.
In contrast, the cost of an eCommerce site may have to be amortized.
What does your tax pro say?
Self-Employment Tax for LLC Members
General partners pay self-employment tax on their distributive share of partnership income, regardless of their services for the business. Limited partners are exempt from self-employment tax (with some exceptions).
Should members in limited liability companies (LLCs) be treated like general partners or limited partners for self-employment tax?
This question has gone unanswered by the IRS since a moratorium on regulations issued in 1997 expired on July 1, 1998. The 2014-2015 IRS Priority Guidance Plan lists the treatment of self-employment tax for LLC members as one of the issues to be resolved. To date, there has been no guidance. This project expires this June.
The IRS indicates that self-employment tax applies when members provide services to the business. Tax pros suggest that members who function like limited partners, solely providing capital and no services, may not owe self-employment tax.
Members who provide services face the challenge of deciding whether all or only some of their distributive share is subject to self-employment tax.
Conclusion
Tax breaks are vital in determining how much business owners keep from the profits they generate. Consult with a tax professional to make sure you’re claiming all the breaks you’re entitled to but recognize that your advisor may not have all the answers.
Apple Watch Photo via Shutterstock
The US tax code is terrible. These are only a small sampling of the potential questions an SMB owner could face in a given year.
This just goes to show that there are so many things that must be ruled out. Rules must be made regarding these matters to prevent confusion.
I find it particularly interesting and bothersome that for nearly 20 years the IRS has dodged providing guidance on the self-employment tax issue for LLC members who do not actively participate in the LLC’s business. Thank you for helping to keep this issue in the public eye.