Business Expenses Making your Taxable Income Too Low triggering Audit??

[BackcountryAquity]

My MIL has filed our taxes with TurboTax for the past 6 or 7 years.  Before that, she worked at H&R Block.  My husband and I are both Independent Contractors filing Small Business expenses.  My husband does in home furniture repair and has very high mileage every year.  My MIL has not been using any of our others expenses for deductions because "it would make your taxable income too low and trigger audit."  We have liability insurance, business license, supply expense (wood, polyfill, tools, etc), cell phone expense, property tax (does this count, I work from home), other deductions such as church contributions and standard $600 donations.  Is this valid?

For the past few years, we have been having to pay the State of Alabama every single year.  If we don't claim the above on the federal return, could we claim them on the state return to lower what we owe the state?? We had to pay over $800 last year.  

Thank you so much!!

[ColeenD3]

You must claim all your expenses. Not doing so is a type of tax fraud, due to the possibility of manipulating income for EIC purposes.

Even if you are not eligible for EIC, the rule stands. Keep good records and if the IRS comes knocking, you can show them that every expense is legitimate.

I know self-employed individuals have to report all income. My question is about deducting expenses....

Yes. A self-employed individual is required to report all income and deduct all expenses. Revenue Ruling 56-407, 1956-2 C.B. 564, deals with the issue of taxpayers not taking all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes.

Net earnings from self-employment are included in earned income for EITC purposes. It is defined by cross-reference to the definition of net-earnings from self-employment under I.R.C. §1402(a). This ruling applies equally to the EITC. CCA 200022051 also provides insight regarding deduction of Schedule C expenses.

SE income and expenses 

[Rick19744]

A few comments:

• There is no income threshold that determines whether a taxpayer will be audited.  There are millions of low-income taxpayers
• The issue that I see is in determining whether you and your husband have a business or a hobby.
• There has to be a true intent to make a profit.
• An activity is presumed carried on for profit if it produced a profit in at least three of the last five tax years, including the current year.  This is just a presumption used by the IRS and not a definitive test.  However, if your schedule C's continue to show losses, there is a risk that the IRS algorithm may trigger  an audit or at least a notice.
• What you need to focus on and get some direction, is whether you have a trade or business and are entitled to take the deductions.

[BackcountryAquity]

My husband does furniture repair in people homes. He has very high mileage and some supply expenses. It brings our taxable income pretty low. Even if we don't show much profit, it is not a hobby but main source of income.  The program is telling me standard deductions are our best bet so I guess itemizing is not really an issue. Thank you for your response. 

[BackcountryAquity]

I guess it is a trade. 

[Rick19744]

If you indicate that your intent is that the activity is a trade or business, and your intent is to make a profit, then you should be reporting all expenses.

Just keep in mind, that the IRS may question the activity. 

However, if you have support for the expenses and support that this is your main income, then most likely the IRS will accept that position.

Just keep in mind the hobby loss rules may come into question.

[fanfare]

The "Standard Deduction" is completely separate from the expenses you list on Schedule C to offset business income.