Tax

Nobody wants to spend their whole life looking over their shoulder, wondering if the IRS will audit them. Luckily, there is a statute of limitations on IRS audits and tax assessments. Once the limitations period expires, the IRS can’t audit your return or assess any additional tax.

You may have heard that the statute of limitations on audits is three years. That’s generally the case, but not always. Depending on the circumstances, the IRS could take far longer to audit your return—and sometimes forever.

Unless another limitations period applies, the IRS has a maximum of three years to audit your return and impose a tax assessment. The three-year period starts to run on the later of

• the due date of the return (usually April 15 or March 15 for calendar-year taxpayers), or
• the day you file your return.

As a practical matter, the IRS usually audits returns 12 to 18 months after taxpayers file them.

But the IRS has much more time to audit your return if you engage in certain bad conduct.

For example, the IRS has six years to audit your return if you underreport your gross income by more than 25 percent or fail to report more than $5,000 in foreign income.

A five-year limitations period applies to certain employers who claimed the Employee Retention Credit (ERC) during 2021. H.R.7024, which passed the House 357-70, could extend the ERC audit time to six years.

There is no limitations period if you fail to file a return, or if you file a false or fraudulent return with the intent to evade tax. This is true even when your tax preparer, not you, committed the fraud.

If you’re under audit, the IRS will ordinarily ask you to agree to extend the limitations period long before it ends. You do this by signing a consent form. Most taxpayers agree to do this. If you don’t, the IRS will close the audit and typically impose an immediate assessment.

If you want to discuss IRS audits or the statute of limitations, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 12, 2024

When you rent a bedroom in your home and that rental unit creates a tax loss, can you deduct the loss?

Yes, if you meet the four technical requirements listed below:

1. You used the bedroom as a hotel unit because it was regularly available on a vacation rental site like Airbnb for occupancy by paying customers and you never used it for any personal purpose during the year (or after conversion to rental use).
2. Your average rental period is for seven days or less, making it a hotel room because you rented the bedroom to what the tax code calls “transients.” (For example, if you rented the unit 25 times for a total of 77 days during the year, that’s an average rental of 3.08 days. You rented to transients.)
3. Your rental unit is not a tax code-defined rental property because the average period of customer use of the unit is for seven days or less.
4. You did all the work on the bedroom rental, and no other person helped you. Therefore, you materially participated in the hotel unit rental activity.

You rented your bedroom as if it were a hotel and materially participated in the rental. Assuming you were in this activity to make a profit, you qualify to deduct all of your expenses of rental against the rental income. If that creates a loss, you deduct the loss against all your other income.

If you want to discuss the tax implications of bedroom rentals with me, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 8, 2024

Tax law often discriminates against company owners, granting them no or fewer fringe benefits.

But you, the owner, are not discriminated against when it comes to supper money.

It works like this:

• The supper money fringe benefit is for defined employees.
• The IRS supper money rule states that the term “employee” for this purpose means anyone who receives supper money.

That means you can take this benefit for yourself, even as a sole proprietor. You also qualify for this benefit if you operate your business as a corporation or a partnership.

Caution. Even though you, as the boss, technically meet the “employee” definition, we recommend that you use this rule for your personal meals only in situations where you also provide the meal allowance to other employees who stay late and work with you.

The Deduction

The supper money fringe benefit provides you and your employee(s) with tax-free meal money and gives you, the employer, a tax deduction for 50 percent of the meal money.

Example. You and your employee work overtime to complete a task. You take $56, and you give the employee $56 for dinner. If you meet the four rules below, then you as the employer deduct half of the $112. The $56 is tax-free to both you and the employee.

Two Things to Know

The supper money fringe benefit was 100 percent deductible before the Tax Cuts and Jobs Act (TCJA), which reduced the deduction to 50 percent for tax years 2018–2025.

What happens in 2026? It gets worse: the TCJA eliminates all tax deductions for supper money. The money remains tax-free to the employee, but not deductible by the business.

Four Rules for Success

The regulations allow supper money as an excludable fringe benefit when the benefit satisfies the following four conditions:

1. You provide the benefit only occasionally.
2. You pay no more than a reasonable amount.
3. The meal enables the employee to work overtime.
4. You do not calculate the benefit based on the number of hours worked. For example, a $30 allowance per hour of overtime is a no-no. You can’t do that. The way to provide the benefit is to give a discretionary meal allowance, such as $56.

Consequence of violation. If the payment of supper money does not meet the four rules, it is taxable compensation to the employee and subject to withholding and payroll taxes. (This makes for unhappy employees.) But the employer may be less unhappy because compensation creates a 100 percent deduction, albeit while also creating employer payroll taxes.

If you would like my help with your supper money payments, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 5, 2024