Actor Danny Trejo, 78, star of films like Machete and Con Air has recently filed bankruptcy. He currently owes the IRS in excess of $2M due to a Federal Audit.
In addition to his acting roles, Trejo operates several for-profit enterprises in the Las Vegas Area including Trejo’s Tacos and Trejo’s Coffee and Donuts. The audit went back several years.
According to a news outlet, he “mistakenly” took several deductions “over the years”. He even joked that he never knew that dog grooming services weren’t a “legit expense”.
Let me leave you with this.
I’m writing about this case to explore a couple of subjects with you. I recently had a new customer who owns an extremely successful and older business down in the Loop ask me what he could deduct.
In general, we can deduct anything that’s “ordinary and necessary to the production of income” for our businesses. But that isn’t the end of the conversation.
IRS tax law is written in double negatives. They say that nothing is deductible unless they specifically say that it is and that everything is income unless they specifically say that it isn’t.
When you have questions about specific deductions please call. A good rule of thumb is that if it seems like a stretch, it probably shouldn’t be deducted.
Believe it or not, dog grooming can be a deductible business expense. The dog must be a trained guard dog, be the type of dog that could actually guard something (not a Chihuahua), and live on the premises being guarded.
The second concept is the Statute of Limitations. The IRS has the ability to open a return for audit up to three years from its original due date for any reason whatsoever.
But if they can prove fraud inside those three years they can go to a Federal Judge and ask permission to go back as far as they want. Cases like Mr. Trejo’s normally start in a standard audit situation and then spread to additional enterprises and subsequent years.
How can you stop this from happening? The only answer is to do reasonable tax returns in the first place. If you do, they’ll have no reason to knock on your door in the first place.
I haven’t had one of my returns audited at the Federal Level in twelve years. Think about that. Am I just incredibly lucky? Hell no. Remember that I’m sitting here doing income tax returns.
My point is that we do them correctly. As such, there’s no reason for them to waste their time knocking on my client’s doors.
One last thing. Please remember that no means no.
I recently had a case where a client asked if she could rent her own house to her own business and not pick up the income. She had read about the Augusta rule, where you can rent out your personal residence for up to fifteen days every year, without claiming the income.
The rule comes from people who live in Georgia renting out rooms in their homes to tourists coming to see the Masters Golf Tournament. And yes, it’s certainly true that this can be done.
But the point is that it must be done in a bona fide, arm’s length transaction. Thinking that you can rent your own house to yourself, take a deduction at the company level, and not pick up income on your personal return is nonsensical, ridiculous, and preposterous.
Please realize that when I say no, I’m just trying to keep you out of prison.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions LTd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
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