James Avery, an attorney with a law practice specializing in personal injury, got into the sport of car racing back in 2008 when he purchased a thirty-year-old Ferrari. He then placed a sticker with the name and telephone number of his law practice on the car and began racing it on a semi-regular basis.
The problem came when he tried to deduct $355K in racing expenses over the next five years as advertising expenses for his law practice on a Schedule C. He was audited for the years in question and only $51K of the expenses were allowed.
Rather than let it drop, this attorney then took the matter to tax court. When asked for substantiation on the deductions, the attorney was unable to produce anything at all for over $167K of the deductions.
When asked if the “advertising” led to any business for his practice, Mr. Avery was only able to provide one instance that led to a consultation. The attorney further argued that the “advertising” was a “great conversation starter”.
The court didn’t find any of his arguments compelling and fully upheld the audit findings. He was ordered to pay tax, interest, and penalty on over $303K in disallowed deductions.
When I read cases like this, I wonder if these people are able to walk and chew gum at the same time.
Tax Law is written in double negatives. It says that everything is income unless they specifically say that it isn’t, and nothing is deductible unless they specifically say that it is.
In order for expenses to be deductible, they must be ordinary and necessary to the production of income for the enterprise. They must also be properly substantiated. You can’t just “make up” numbers and expect to fool the Service.
Thinking that racing activities that don’t produce income for a personal injury law practice are deductible, is nothing more than the height of hubris. How this attorney was able to argue this in tax court with a straight face is beyond imagination.
I’m surprised they didn’t throw this guy in the can.
Let me leave you with this.
The labor markets have again proven their resiliency. US Employers added 339,000 jobs last month and the Unemployment Rate rose to 3.7%.
It’s obvious that The Federal Reserve’s actions in raising their benchmark Fed Funds rate to over 5% has not yet had its desired effect of cooling the overall labor markets. Economic data from March and April had shown that things were slowing down.
The question now becomes what’s next?
Many economists throughout history have noted that it takes upwards of three or four years for the American Economy to respond to interest rate hikes. But this was under “normal” situations.
What’s abnormal about our current situation is the unprecedented speed at which the rates were raised. Normally it would have taken the Fed at least two or three years to raise the rates as much as they have in a little over the past year.
Many have predicted that they will stop. Others have said that they will maybe do one or two more rate hikes this year.
I wish that I had a crystal ball. If I did, I wouldn’t be sitting here doing tax returns.
One thing is certain. No matter what happens, we need to be ready for any eventuality.
Save your cash. Trim any fat on your payroll. Be conservative on large purchases.
We all hope that eventually we’ll have a soft landing. But if we don’t, we need to be ready.
We’re all going to get through this. Let’s get through it together.
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Chris Amundson
President
Accounting Solutions Ltd.
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888-310-0300
www.AccountingSolutionsLtd.com
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