Discussion:EIC and Business Income
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Discussion Forum Index --> Tax Questions --> EIC and Business Income
Www.cpa1.biz (talk|edits) said: | 30 January 2007 |
| Almanacers,
I just started dealing with EIC. A client of mine came into today and had only a thousand of W-2 income and the rest (about 5,000) in self-employed handy man income. He had all these expenses that dealt with his self-employed handy man business that almost wiped house his schedule c income to zero. by doing that, he had very little EIC. Could I have told him to not claim any expenses on hid sch C. so that all of his EIC for at least 6,000 (1000(w2) + 5,000 (sched. C) could have given him more EIC? Thanks, Brian | |
| 30 January 2007 | |
| no, he needs to claim his real expenses. If he didn't keep a mileage log, though......... | |
Www.cpa1.biz (talk|edits) said: | 31 January 2007 |
| This is kind of silly. The client gets rigged because he claims expenses.
I just heard from another tax preparer to do a schedule C-EZ and show only the income. | |
Death&Taxes (talk|edits) said: | 31 January 2007 |
| Claims expenses? Or did he actually spend the money? | |
| January 31, 2007 | |
| Brian - I understand your feelings about this situation and that it could be considered as unfair that the EIC is reduced when the taxpayer deducts more expenses on Sch C. But when you don't deduct the actual expenses incurred by the self-employed taxpayer, you are in effect committing fraud. | |
| 31 January 2007 | |
| Brian, I would be extra careful about this. I'm not sure where to find the cite right now, but I believe there are rules against not claiming expenses in order to qualify for EIC. -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
Bottom Line (talk|edits) said: | 31 January 2007 |
| Agreed - doesn't seem fair but that's the tax code. One of the weird things about EIC is that it is a bell curve. TP gets the most at around $12,000 in income. | |
| 31 January 2007 | |
| This situation fully exemplifies why the earned income credit is the most abused credit there is. TP's are smarter than we think I know how to manipulate this. | |
| January 31, 2007 | |
Clarification on the maximum EIC and earned income ranges:
Brian - Stand up and listen! Per Publication 596, page 29, it states the following: "When figuring your net earnings from self-employment, you must claim all your allowable business expenses." This is one area where tax preparers can receive stiff penalties from the IRS by not claiming the allowable expenses in order to increase the EIC. It's not worth jeopardizing your practice and reputation. | |
| 31 January 2007 | |
| This has been a frequent subject since the beginning of the EIC. As Deback has pointed out, the rules require that the correct expenses be claimed. | |
Mtmckeecpa (talk|edits) said: | 31 January 2007 |
| Last year, Proseries had a "Paid Preparer's EIC Checklist". Two questions on that checklist included questions about Self Employed....did you report all income and did you report all expenses.
Don't what is included this year but you may want to make that checklist part of your working papers. Fax checklist to client and have them complete and sign off. | |
Www.cpa1.biz (talk|edits) said: | 31 January 2007 |
| Thanks guys,
I am not going to do prepare the return. I was just kind of upset that this person is not getting that much EIC for starting his business. I will check out the pubs and the checklist with Proseries. Thanks again. Bj | |
| January 31, 2007 | |
| BJ - You can't let yourself get upset with the tax laws. Your job will be more enjoyable if you just accept the laws as they are. I trust that you've read Publication 17 and Publication 334 by now. Hope you're having fun! | |
| February 1, 2007 | |
| How about the situation in which a sole prop. has net profit for the year but carryover losses wipe it out? Result is no E.I.C. Seems totally unfair to me. (And JR will add, "Whoever said taxes were fair?") | |
| 1 February 2007 | |
| I have had IRS deny a Schedule C when the client didn't have a 1099-Misc, or a good source for the income, when it increased the EIC he was getting. This was done prior to the release of any funds. One had a 1099-Misc, one didn't. We sent in the 1099-Misc, and it was accepted, the other had no proof of the income received and the Sch C was taken off the return by the IRS. | |
| 1 February 2007 | |
| How about this avenue of thought. I've thrown this out there on other discussion forums. It is explicitly clear that as preparers, we must report all income and expenses for our sch c clients.
Is there an issue in explaining/educating <calling it what you will> our clients to the workings of the bell curve. TP has this income for current year. If TP reviews the bell curve structure and next year the net income was in this range, you would have received this much more. Now, following year, intelligent TP brings in sch c income that shows earnings that generate max EIC. or Sub s or c corp has losses and owners w-2 income can't be $40,000 or $50,000, but is closer to $30,000. In reality in these situations, $23,000 or $24,000 of w-2 income is acceptable. Married TP with 2 kids, EIC is pretty good at $23,000. client c-corp still generates a loss if following year client only takes $23,000 w-2 income. gives hime extra couple of grand, but he has the ability to control his income. Is that fair? probably not. Is it legal? Not sure. Is it stealing/cheating? I don't think so personally. If he's struggling and he could either take a $23,000 salary a year vs a $28,000 salary yet the $23,000 salary actually nets him about the same with the government subsidy EIC. Should he go for it? | |
| 1 February 2007 | |
| EIC is a hot button issue for the service, so tread carefully.
Regarding educating your clients on the bell curve, it's not a problem. You have to do your due diligence though. If the next year the sched C maxs the EIC and you have reason to believe the schd C is being manipulated, you have problems. Regarding the C Corp, you've got the "reasonable salary" issue; albeit, the IRS is on the other side. I'd document the reasons for the reduced salary in board minutes preferrably at the beginning of the year and not part of December tax planning. Regarding the S corp...I'm not sure if the net income flowing to the return would be considered investment income and be over the threshhold, thereby eliminating the credit altogether. | |
Frontiertax (talk|edits) said: | 29 February 2008 |
| I have a client (head of household) with two children who has W-2 income of $60,000 and a loss from her farm (partnership) of -$45,000, leaving her $15,000 AGI. For the past two years, she has received the EIC, with similar income numbers and sources. For 2007 her EIC has been rejected by the IRS. It seems to be because the 45K loss is not taken into consideration in the "earned income" calculation, leaving her too much income to qualify for the credit. Is it just a matter of time before the IRS comes knocking for the past years' EIC? | |
