Saturday, December 2, 2006


H.L. Mencken so accurately observed, "Nobody ever went broke underestimating the taste of the American public."

Similarly, as a tax professional I have learned to never overestimate the intelligence of the average taxpayer. A seemingly intelligent client will often surprise me with the oddest "bass-ackwards" logic (although at this point nothing surprises me anymore). During my 35 years in "the business" I have heard a lot of real zingers.

Many, many years ago, when I was still an "apprentice" tax preparer, one of Jim Gill's clients came in and proudly announced that his employer had offered to reimburse him for job-related travel, but he turned it down because then he would not be able to deduct business travel on his Form 1040 (back then employee business expenses were deductible in full "above-the-line" as an Adjustment to Income).

Jim avoided the temptation to tell the client that he was a complete idiot, and attempted to explain, with great patience and tact (two traits that are an absolute necessity for tax preparers) that taxes are only pennies on the dollar, and it is much "more better" for someone to give you $1.00 tax free than it is to be able to save 30 cents in taxes. You have not saved 30 cents - you have lost 70 cents!

Many tax pros, myself included, tell of the otherwise savvy cash-basis small business client who wants to deduct an uncollected fee.

"I've been sending this SOB invoices for months, and he totally ignores them. The last invoice was returned undeliverable. I don't think I will ever see the $500.00 the bastard owes me. Deduct this loss as a bad debt on my return."

At least 95%, if not all, of small business clients are on the cash basis, or at least some kind of hybrid system that includes the cash-basis reporting of income. Income is taxed when the cash is actually in the hand of the client, and not when the client bills for the product or service. I have to once again be patient and explain that you cannot deduct a loss of money you never received.

The client did indeed suffer an "economic" loss - he provided goods or services in good faith and was not properly compensated. However, he did not suffer a "tax" loss. If he did not previously report the uncollected fee as income he cannot claim a bad debt deduction when it becomes uncollectible. If it is any consideration, out-of-pocket expenses related to the goods or services provided to the deadbeat can be deducted as normal business expenses.

While several clients joke about claiming their cat or dog, others are serious when they ask to deduct similarly absurd items.

A sales executive told me that because he travels extensively for business he can deduct the cost of paying an outside service to mow his lawn (a neighbor told him he could do it). I had all I could do to keep from laughing in his face.

Several clients include the cost of suits, haircuts and shoe shines on their list of employee business expenses ("my boss requires me to wear a suit to work each day" or "if it weren't for my job I would let my hair grow"). Of course I totally ignore these items.

Actually, as for the cat and dog issue, medical deductions have been allowed for the costs of a guide dog or other animals aiding the blind, deaf and disabled, and a business deductions has been allowed for dog and cat food for guard dogs and cats who chase mice away from the business location. I tell my clients who want to claim a pet that they must turn it into a Morris (the 9-lives cat) or Moose (he played Eddie the dog on "Fraser").

Hey, I shouldn't complain (and I'm really not) - if my clients knew all about tax law they probably wouldn't need me!


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