Deductions That Spell Trouble For Small Business Owner Seeking Chapter 7 Bankruptcy
- January 30, 2013
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In a Chapter 7 Bankruptcy matter, the IRS may challenge the amount of taxes due when a debtor seeks to eliminate IRS debt through the bankruptcy. The IRS is likely to challenge certain deductions taken by the debtor against small business income. The first hurdle in an IRS challenge to small business expenses is proof that the purchases you are seeking to deduct were actually made according to IRC Section 274. Two areas the IRS will question, even though allowable with appropriate documentation are gifts and wages to a spouse, child or other relative they claim to employ. In the case of such wages, the business owner must issue W-2’s or 1099’s for the wages paid or included as business expenses. A business owner is also prohibited from deducting wages paid to herself. Credit card interest is allowable only if the card is limited solely to use for business charges. If it is determined the credit was utilized for household or personal items of the business owner, the interest on the cards will not be deductible. Some deductions you absolutely may not take are dues for social, athletic, vacation and lunch clubs, charitable contributions, donations to political causes, penalties and fines to government agencies, personal expenses for yourself, family or home or repairs that add value to your business property or extend the life of the property. Some deductions are allowable but the IRS may still require proof that the expenses are legitimate in order to eliminate IRS debt through Chapter 7 bankruptcy. Allowable deductions include business travel, use of your car for business, business meals and entertainment, education pertaining to your trade, tools and supplies. If you are considering Chapter 7 Bankruptcy and have substantial IRS debt, you should seek experienced legal counsel immediately in order to fully protect your rights. For more information on foreclosure, bankruptcy or other consumer debt related matters in New Jersey visit TheNJBankruptcyAttorney.com. This blog is for informational purposes only and in no way intended to replace the advice of an attorney regarding your specific matter.