Tuesday, July 13, 2010

Blood From A Turnip

Our prospective Vietnam traveler, Doug, who was mentioned in prior postings, works as an administrator for wages (“W-2” income ). His employer pays him what’s left over after withholding federal employment and withholding taxes, among other amounts. Law requires his employer to withhold and pay over taxes on behalf of Doug. Almost everyone is acquainted with working for wages and has complained about withholdings. It’s not that the government doesn’t trust us, but it’s a pay-as-you-go system. And of course, they don’t trust you.

So Doug has income. The critical question now, though, is whether Doug’s prospective costs in traveling to Vietnam to get pictures to use in a potential picture book relate to activities that generate his wages. The answer is no, the two activities don’t relate. At most his wage income facilitates Doug’s going, but that’s all. There’s no link between his administrative job and his potential trip to gather photographs. Any income related to a picture book is only speculative.

On the other hand, suppose Doug has previously written other things and sold them or won prize money for his writing. Maybe he uses those revenues to fund his trip. Now we begin to see a closer connection. Maybe Doug pitches his picture book idea to an agent or editor and he gets positive feedback, and he has a contract, implied or otherwise. His writing is an activity, separate and apart from administrating for an employer, and has a closer connection to his prospective picture book-making activity. So now, assuming Doug finances his trip to Vietnam from revenues from his writing activities, is he home free in deducting those expenses?

One of the IRS auditors who sent many taxpayers my way to appeal his extreme exactions (and extractions) of more tax had a morbid sense of humor. He’d say, “Invariably my taxpayer will pick the thing up and turn it over. You know, trying to figure it out. It looks sort of like a misshapen hourglass, don’t you think? And instead of sand it has that dark-red, almost purple, viscous fluid in it. The thing just sits there on my desk, across from me and close to them, while I go through their bank statements, receipts, and canceled checks. Taxpayers become bored. ‘What’s this?’ they eventually say, picking it up.”

“And what do you tell them?”

“Blood from a turnip.”

As you can imagine, timid taxpayers don’t laugh at such morbidity. Nevertheless, those engaged in expressive activities like you need to know that hidden traps can humor sinister auditors when all you want to do is to deduct the costs of creating a book design or a picture book trip.

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