Small business owners must operate in a business-like fashion to realize the tax breaks at their disposal. For instance, if certain requirements are met, they can deduct “ordinary and necessary” business expenses. But entrepreneurs often find themselves in tax trouble when they mix business with personal matters.
The taxpayer in a new Tax Court case, Boles, TC Memo 2019-42, 4/25/19, is a prime example. When he supposedly deposited personal funds in a business account, he was hit with an unexpected tax bill.
Here are the key facts of the case: A self-employed taxpayer, a resident of Oklahoma, had a masonry business. During the tax year in question, he did some masonry work on his house, which had been damaged by a casualty.
Initially, the taxpayer reported gross receipts of about $20,000 on Schedule C for his masonry business for 2010. But a bank deposits analysis for the IRS determined that he received gross receipts of around $30,000 for his masonry business that year. Subsequently, the IRS said even this amount was close to $10,000 short.
At trial, the IRS introduced into evidence most of the taxpayer’s business and personal bank account statements for the second half of 2010. It asserted that all the checks deposited into the business account constituted income to the taxpayer despite claims by the taxpayer that they were payments for other purposes. This included checks deposited by the taxpayer’s nephew who controlled the business account.
Absent other circumstances, the IRS takes the view that amounts deposited into a business account constitute taxable income. It’s up to the taxpayer to rebut the presumption that tax is owed on those amounts. In this case, the taxpayer asserted that that the unreported deposits were related to the sale of damaged property.
But the IRS noted there was no transfer of title to the property. Furthermore, the taxpayer’s own testimony indicated that the difference was taxable income. Result: The Tax Court ruled that the taxpayer had additional income of $10,000.
Lesson to be learned: Don’t commingle funds from any personal activities with the funds in your business account. This account should be “strictly business.” If you use the account as a conduit or just a dumping ground for personal funds, you could face an unforeseen tax liability.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...