Tuesday, February 6, 2007

Clueless Professional Accountant (CPA) Says You Can’t Deduct a Gift to Your Mother

In an earlier post, It's tax time so ... beware of bad advice from the real-life Sammy Segar CPA, I warned about bad advice from tax professionals, using a comparison to Segar, the fictional CPA in my book. Another real-life Segar type turned up as if on cue when BusinessWeek published an interview with me.

A New York CPA sent an email to the magazine, which, cut to its high concept, protested that I didn’t know what I was talking about. The magazine, to check whether it had disseminated wrong information to millions of readers, forwarded the email to me.

But Mr. NY CPA was wrong on all counts.

Too many to go over all of them here, but let’s look at one – a point I made because my interviewer was not a magazine staffer but a freelancer.

Suppose she had to hire a babysitter to be free to do the interview with me, I said, and suppose the babysitter called at the last minute to say that she couldn’t make it. My interviewer could ask her mother to watch the baby, and if she presented her mother with a little gift in gratitude, the cost of that gift (up to $25) is a legitimate business expense deduction.

Oh, no, wrote Mr. NY CPA. That’s not allowed. You can’t deduct a gift to your mother.

But, the IRS says: if you give a gift in the course of your trade or business, you can deduct all or part of the cost of the gift. The IRS doesn’t say, unless the gift is to your mother.

In the same interview I advised that incorporation is expensive, complicates the life of a self-employed, and is usually unnecessary.

Mr. NY CPA disagreed with that. Of course you should incorporate, he wrote, so that you can deduct the premiums you pay on your $50,000 life insurance policy. And so that you can deduct the $5,000 you are paying to your babysitter.

Well, few indies have a $50,000 life insurance policy. And for those who do, the tax savings from deducting life insurance premiums do not outweigh the costs and hassles of incorporating.

And, to benefit from the babysitting deduction, the indie must have a kid, and pay a babysitter $5,000 -- on the books!

The tax code is not written for indies. It’s written for the corporate world and the employees who inhabit that world. To correctly interpret those laws so that they fit the situations of independent professionals is a lot of work. Sammy Segar doesn’t want to work that hard. He’d rather stay in the dark ages and not move into the 21st Century where the US holds 33 million self-employed and growing.

Once again, I remind you: Until the Sammy Segars get it together, stay on your toes. Check out the advice you get.

If you’re unsure read SELF-EMPLOYED TAX SOLUTIONS or email your question to me.

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