Wednesday, July 14, 2010

Good News

Generally, individuals can deduct outlays made seeking income, whether in carrying on a trade or business or only conducting an activity for profit. The major “grace” connected with Doug’s writing activity—or for that matter with your expression activity—stems from IRC §162. Ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business are allowed as deductions or graces.

The meanings of “trade or business,” “ordinary and necessary,” and “carrying on” are all important. In a hierarchy of importance of these aspects for the freelancer of expression, the meanings of “carrying on” and “trade or business” exceed the importance of the meanings of “ordinary and necessary” because their scope is broader.

If expenditures aren’t made “carrying on” a “trade or business” the question of whether or not they are “ordinary and necessary” becomes moot. They can’t be deducted to create a loss that can be used to offset other income—related or unrelated to the freelancing income, or carried to other tax years to recoup or save taxes. On the other hand, if expenditures are made while carrying on a trade or business, they still must be ordinary and necessary. But that’s an expenditure by expenditure evaluation, almost always a barrier that is much narrower.

An anecdote tells of a taxpayer asking a revenue agent to cite the law requiring him to pay additional income taxes. Supposedly the taxpayer jests that the revenue agent will die of eye fatigue and confusion trying to find it in the code.

Well, I have news, bad and good. The bad news is that the taxpayer got it wrong. Almost invariably it works the other way around. The revenue agent generally worries only about the all-inclusive income provision (IRC §61). All income is taxable unless saved by some legislative grace. Taxpayers bear the burden of coming within the terms of some grace or other.

The good news? You don’t have to worry about arrows pointing every which way and not knowing how to find the way to go. I’ll show and tell you ways to bear that burden in the following postings. So don’t pout and say “It’s too much, I surrender.” Stick with me here and see if what I say won’t work for you.

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