In this episode of How Tax Works, host Matt Foreman discusses what you can deduct as business expenses, giving an overview of the law, regulations, and case law, as well as practical commentary based on his experience.  This episode is for business owners, attorneys, accountants, and their advisors, as well as anyone who has ever wondered either “can I deduct this?” or “should I deduct this?”

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How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.

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Transcript:

**This transcript has been prepared automatically by AI and may contain inaccuracies**

 

Matthew Foreman [00:00:00]: 
Welcome to the fourth episode of How Tax Works. I’m Matt Foreman. In this episode I’ll discuss ordinary and necessary business expenses under sections 162 and 212 of the Internal Revenue Code. This will be a two parter as episode five will be common examples of, I’ll say probably problematic deductions that may not withstand scrutiny from an auditor, whether the IRS or a state tax auditor. You know, I’m not trying to beleaguer points that some people take aggressive ones, but I think it’s important to dedicate an episode to it. Plus frankly they’re, they tend to be funny stories. So I think it’s, it’s worth breaking this one into two. 

Matthew Foreman [00:00:45]: 
How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and it is not legal advice. Please hire your own attorney. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law and guidance to demystify how taxes shape the financial and business choices we all make. Before I get started, a few administrative things. First episodes every two weeks might vary on some days depending on when holidays end up. If you have any questions about anything or just just have topics for ideas, trust me, I have a lot waiting so we’ll get through a lot of them. But you know, you can email me my FRB email address. 

Matthew Foreman [00:01:25]: 
It is very googleable so you can do it. Or if you go to the podcast page, it has a link right to my bio. You can email straight from it. All right, let’s go. You know, what are we discussing today again, Ordinary and necessary business expenses under sections 162 and 212 of the Internal Revenue Code. States generally follow both. But it’s as always, it’s important to say it depends. Right. 

Matthew Foreman [00:01:47]: 
States can do whatever they want. They can what’s called decouple, which is not follow the Internal Revenue Code. They both general. Every state really generally follows but it’s important to note what does and what doesn’t. And there are specific clawbacks and different things they’re doing. So we’re going to start, you know what we’re looking for are expenses incurred in the pursuit of income, either carrying out a trade or business or an activity entered into for profit. Right. Section 162 focuses on ordinary a deduction for ordinary and necessary business expenses that are paid or incurred during the tax year in carrying on a trade or business. 

Matthew Foreman [00:02:23]: 
Section 212 is a deduction for ordinary and necessary expenses. Right. Paid or incurred during the Tax year for the production or collection of income or in connection with determination or preservation or maintenance of property held for the Production of income 212 has been really muted by PL 11597 commonly referred to as the Tax Cuts and Jobs Act. TCJA. I’ll discuss that. Some. They’re all temporary. Theoretically it could come back in full force in 2026, but that’s something we’ll. 

Matthew Foreman [00:02:55]: 
I’ll just say we’ll see what happens. So we’re going to start with ordinary and necessary business expenses. Under section 162, there are four requirements: you need to have a trade or business. One. Two, you need to have the expense itself needs to be an ordinary expense and it needs to be a necessary expense. Three, it must be incurred in carrying on a trade or business. Four, it must be paid or incurred during the taxable year. Right. 

Matthew Foreman [00:03:18]: 
So you can’t pay it one year, deducted the next. There’s. There’s rules around timing and things like that. So we’re going to do it. I’m not really going to go into those in too much detail. I’ll do some timing episodes in a little bit, but want to kind of focus on the requirements. So the key is, you know, for. To be an ordinary necessary business expense under 162, it allows you to deduct in excess of your income. 

Matthew Foreman [00:03:42]: 
I’ll discuss that really, really shortly when I talk about trade or business. But that’s really important, right? For certain things you can only deduct the amount of the income. If it’s a trade or business, you can go beyond that. You can take losses, you can offset other income. You can have operating net, net operating losses in the future. The important thing is, and this is really important, under 162 explicitly says if you are able to deduct it elsewhere, you, you must deduct it elsewhere. You cannot say, oh, it’s 162, don’t worry about it. So it’s important to do it right. 

Matthew Foreman [00:04:09]: 
Inventory cannot sell, you know, cannot be expenses related to inventory cannot be deducted. Under 162. You got to use unit cap rules. So it’s really important. So let’s dig into it. First requirement, the trade or business. Congress, treasury, they, they don’t define trade or business throughout the Internal Revenue Code. They, they use the phrase trade or business a lot. 

Matthew Foreman [00:04:27]: 
And they never define it. Right. This is kind of how it is. So courts have created it. What is a trade orbusiness? The biggest one Groetzinger. I’m going to cite some cases in it. I’ll try to remember to give you the citations of them in case you really want to read them. Grossinger 480 U.S. 

Matthew Foreman [00:04:41]: 
23, 1983 case. Groetzinger bet on dog races. But he, he really, really, really went at it. He, he researched, he read, he, he scouted the dogs, not joking, he wanted to know how they run, how they run in similar, similar temperatures, similar tracks, things like that. So what Groetzinger said, you know, Supreme Court said, look, what is a trade or business, right? Profit motive. Look at the scope of activities. It’s an issue of fact. One thing that’s really interesting to me is a little bit of an aside. 

Matthew Foreman [00:05:11]: 
But being a public official, right, holding a public office, elected office, that itself is a trade or business, you can deduct all your expenses in excess of your salary. So think about that. Members of Congress 7701, 826, they can deduct in excess of their salary. Kind of interesting thing that that exists in my view, right? So let’s go back, right? We’re talking about you need a profit, a profit motive, right? So the key is not that you make a profit, right? Because as I said, you can oftentimes if you have a sort of, you know, hobby or something like that, you can deduct expenses and things like that against your income. But you have to have a profit motive. You have to have a good faith belief that you’re going to make a profit, right? And I think this is really, really important, right? Because it doesn’t matter. You know, people say, oh, I believe I can make a profit. It’s not quite there. 

Matthew Foreman [00:06:03]: 
There’s a question of whether the belief, you know, people say, oh, it doesn’t matter if, if, if I actually can make a profit, I have to have a good faith belief. And that’s true, right? Reasonableness of belief is largely irrelevant. However, however, a mere hope without a plan is irrelevant. And you need to have some level of profit potential, right? You can’t just totally go at it, oh, I can make profit doing this. And you actually have to have a plan. It has to be theoretically possible. You have to charge some kind of money, right? It can take a very, very, very long time to turn a profit. There are businesses that take 10, 15 years, right? Think of Amazon, right? Amazon took many, many years turn a profit. 

Matthew Foreman [00:06:41]: 
Now it’s just cannot stop turning it, right? Ellsworth 21 TCM 145, 1962 case. You’ll notice a lot of these cases are older. What basically happened is they kept going and get answers, move on. There are, there are more cases that deal with this, but they’re very fact specific. There is no requirement that you’ve done it before. A lot of the requirements, you know, people say, oh, if you’ve never done it before, how can you know if it’ll work? And that’s kind of a goofy statement I’ve always found. And that’s an interesting one. So you know, just because you’ve never done it before, it does not matter. 

Matthew Foreman [00:07:10]: 
674 the case is Snyder. 674 Fed. 2nd 1355 10th Circuit case. There, there is some case law that suggests that lack of a profit motive is not an issue. I, I think this is a weird one. It’s a court of claims case. Graceland 5:15 Fed. 2nd763 I would not rely on it. 

Matthew Foreman [00:07:30]: 
That one had some really interesting ones. Basically the way I look at that case is, is they weren’t totally trying to make a billion dollars, but they weren’t trying to lose money. I think that one was not a good case. I would just basically ignore it. But there is some case law that follows that. Again, court of claim is kind of a quirky court anyway. You know, you don’t have to actually hold yourself out as, as doing the trade or business. Right. 

Matthew Foreman [00:07:55]: 
Grossinger was a gambler.. I don’t think he wanted people to know he was a gambler necessarily. Maybe he did. But the key is it’s your source of livelihood, not that you tell everyone that you’re doing it. Someone once asked me, you know, things like. Right. You know, being prostitute, things like that. 

Matthew Foreman [00:08:13]: 
Is that, you know, is, is that a trade or business? Yeah, can be, absolutely. Just because it’s legal doesn’t mean it’s not one. But the key is source your livelihood. Right. The purchase or sale of securities, cryptocurrency, things like that. The key is those can be traders. Right. So. 

Matthew Foreman [00:08:31]: 
So you don’t have to hold yourself out as it. You don’t say, oh, you know, I, I trade in securities during the day and then I do my actual job at night, things like that. Not necessarily. There’s a lot of case law, a lot of case law in the purchase and sale securities. Cryptocurrency is obviously becoming a bigger one and some cases on that. There’s King, which is a tax court case. 89 TC 445 .Chrissy which is also a tax court case. It’s a tax court summary opinion 2017-44. 

Matthew Foreman [00:08:59]: 
You know whether you’re a trader is an issue of fact. Higgins is Supreme Court case 312 US 212. And there’s a TC memo K as well, you know, from Higgins. One of the interesting one is, is managing security investments is not a trade or business. So you know, whether you’re a trader, issue of fact. But just managing the investments is not one. You need substantial trading to be a trader. People often ask, you know, especially in the cryptocurrency. 

Matthew Foreman [00:09:24]: 
Right. You can make a trillion trades in six minutes. Markets 24/7. It’s something they do at night, on weekends. They’re not doing it during the day. Right. You know, that, that, that can actually be fine. There’s a number of cases on that. 

Matthew Foreman [00:09:36]: 
They’re a little older, so they’re not going to directly with cryptocurrency. But I’d be utterly shocked if we don’t start having cases that deal with that in short order. Right. From one of the, the crypto winters. So, so Holsinger T.C. Memo 2008-191 ball at Northrop 80 TCM 184. There was a case pretty recent actually. I don’t have the circuit on it, but. But as a tax court case 161 TC number 11 YA Global. 

Matthew Foreman [00:10:04]: 
It was a securities investment related activities within a limited partnership. The securities investment and related activities constituted a trade or business. They provided funding for debentures, SEDAs and other secure types of securities. The general partners activities were applied to the partnership. So, so people always say, well, what I do is not enough. I just own the partnership. But the underlying partnership, right? If you have an LLC, multiple members, S corp., whatever, same basic rules. The premise, and I think this is important is what your employees do does matter. 

Matthew Foreman [00:10:37]: 
What you do as the owner, right. Can matter because you’re an agent, you’re doing work a lot of times for that business. And I think that that’s really important to note that you’re looking at, you know, the activities of the employees, the owners, all things like that. Interesting one, you know, if you’re. What if, okay, what if I manage real estate? Really common one, right? A lot of people buy real estate as an investment, but what they actually do is they’re like, okay, well you know, real estate tends to lose a lot of money, especially for tax purposes. Early on, you buy a piece of property for half a million, you’re depreciating it over, you know, 30 years or whatever. You’re taking 10, $15,000 of deductions just on depreciation alone, it might be a little less with land, don’t depreciate land. But that’s the idea, right? That’s what you have to think about. 

Matthew Foreman [00:11:20]: 
And, and by saying, okay, you know, you’re going to take it, but you manage it through an agent, you. But you pay they pay tax expenses, mortgage, purchase and sell real estate. You know, there’s a lot of case law on it. Pinchot It’s a trade or business because you have considerable regular and continuous 113Fed. Second 718 second circuit case so here in. I don’t think it was in New York, but New York is in the second Circuit. And I really think it’s important to note regular, regular, you know, considerable regular and continuous activity. There’s a lot, a lot of tr. 

Matthew Foreman [00:11:52]: 
Lot. A lot of tax law using that phrase. It’s a great phrase because you think about it, right? Considerable means a lot regular. You do it consistently, right? You, you’re not doing it. And then continuous probably really builds on the considerable and regular how often you do it. And there’s a lot of them. It’s a question of investor versus again, you know, investor or mere ownership versus considerable regular and continuous. Right? A bunch of cases on that. 

Matthew Foreman [00:12:20]: 
Not going to go through them all. Neil is a common one a lot of people use 46 BTA 197 predates the tax court. So I think that’s a really important one to know that if you’re managing real estate, right, we can lump them together. There’s rules about grouping things. But I also think it’s really important, and this is something I always say is it’s regular, you know, considerable regular continuous hours. Hours. Spend your time, document your time. And that’s really important. 

Matthew Foreman [00:12:46]: 
I’m going to talk about, you know, in the next episode, a little bit about case Cohan v. Commissioner. Cohan v. Commissioner is a really interesting case, very interesting fact patterns about substantiation. So we’ll get, we’ll get into that in a little bit. The other one is, you know, people say, oh, well, you know, I do this. Can I have two? Yeah, you could have 70, right? You can theoretically. I don’t know if you could actually have 70. 

Matthew Foreman [00:13:06]: 
It’s probably a little fatuous on my part, but the taxpayer is the burden to show that you could have multiple ones. Campbell TC Memo 1 1992-66 so a group of businesses can be a unified business enterprise. So you group it all together and you can take deductions that are not on their own, their own business but together it’s part of again a unified business enterprise. Morton 98 Fed. Federal Court of Claims 596 the IRS has said that they will not acquiesce on this. The unified business enterprise. One really interesting especially given the context of like 199A of grouping companies. They’re going to assert Moline Properties 319 US 436 1943 claim and they said this in the Chief Counsel Advisory in 2017 that they’re not acquiescing. They will be very aggressive on what is a unified business enterprise. 

Matthew Foreman [00:13:56]: 
So don’t say, oh I’m going to have a little this, little that, no, no unified one business. You got to be tight on that and that’s really important. And you can be a full time partner in one business and still have another that’s really important. I think that one, the person was a lawyer. Story TC Memo 2012-115 so really there’s a huge variety, huge, huge, huge variety of what can be a trade or business. There are endless, endless examples of what can be. One of my favorites is treasure hunting. That can be a trade or business. 

Matthew Foreman [00:14:25]: 
Right. I don’t know if walking around with a metal detector would work but if you’re digging in lakes or you’re going in the Ocean. Absolutely right. Harrison 72 TCM 1258 so I think that’s a really important one. For a corporate partnership to be a trade or business you look at the activities of the agents and the employees, not the shareholders. Unless the shareholder or the employee or the, I’m sorry, the shareholder, partner, you know, whatever is doing the activities themselves as if they’re an employee. Right. That’s what you have to look at the case on that Mountain Lake 71-1USTC paragraph 930. 

Matthew Foreman [00:15:01]: 
I think it’s 9308. My handwriting is a little messy. There’s Also Pittsburgh Industrial Engineering 9 TCM 1132 going to take a quick minute break, reset a bit, enjoy the music for a few moments. Welcome back. We’re going to move on to the next one and that is the next requirement which is that the expenses must be ordinary and necessary to be deducted. That case, you know, Welch v. Helvering. 290 U.S. 111. Helvering, quick aside, Guy Helvering was the Commissioner of Internal Revenue. I’m not actually sure that was his title. 

Matthew Foreman [00:15:46]: 
That’s what his title would be today. The titles change a bit. So there’s a lot of Helvering Case, right. Gregory, Bunch of other. So you say the other case. Welch, important point there. So ordinary, necessary are really two separate requirements. So it’s two subs. 

Matthew Foreman [00:16:00]: 
Ordinary is determined by the time, the place and the circumstances. Again, that’s in Welch. The obligation has to arise from the business itself and the normalcy of the obligation is crucial and controlling. Crucial and controlling, right. How normal? Right. Ordinary or normal? Right. Dupont, 308 U.S. 488. 

Matthew Foreman [00:16:21]: 
The, the common phrase I always use is regularly, commonly and frequently in that kind of business. Lily 343 U.S. 90. But not necessarily habitual, right? You don’t always have to have it. You don’t have to have that expense all the time. But it must be regularly, commonly and frequently come up in that kind of business, right? So every five years you might have the expense. That’s fine if it’s in that kind of business. But it doesn’t necessarily have to be something that’s every single six months, every week, what have you. can even be a one off expense. But again the question is regularly, commonly frequent, you can be the only company in this business that makes similar payments. 

Matthew Foreman [00:16:56]: 
That’s, that’s permitted. Really hard, really narrow case, you know. United Title Insurance TC Memo 1988-38, right? Let’s say you’re, you know, that was a title insurance company. Let’s say you have a podcast, right? Buy a microphone, you might say, oh no, that’s not a microphone for business, for marketing purposes, what you’re doing for a podcast, that’s probably okay, but you have to watch out for what it is. Mostly these deductions tend to get denied. United Title Insurance is probably an outlier. You see a lot of people like with Avon, they sell Avon and things like that and they deduct all kinds of stuff. No, no, no, no, no. 

Matthew Foreman [00:17:29]: 
Think about what you need to run the business. That’s going to be the key. The second requirement after ordinary is necessary, right? Ordinary and necessary. Necessary is defined as appropriate and helpful. You, you don’t need to be absolutely essential, right? That’s this is Welch again, that that big case. Appropriate and helpful, right? The expense can be necessary even if there are other ways to reach the same result. United Title Insurance again, I talked about that one before. You know, I think that this is, this is a really important one. 

Matthew Foreman [00:17:57]: 
My example, right? People always say, okay look, you have a business, you need an automobile, right? You don’t need the G Wag, right? You don’t need a Porsche, you might need a truck, you might need an SUV, you might need a small car that’s very fuel efficient. You know, the example I always use is think of a veterinarian that works with horses, right? They’re going to have. They’re not. Well, they shouldn’t drive a Porsche sense for their business. They probably want a van or something large where they can bring things with them. That’s fine. SUV is fine. You have to look at what’s reasonable or what’s appropriate. 

Matthew Foreman [00:18:24]: 
If you’re doing this in South Florida, you don’t need to worry about all wheel drive. If you’re doing this in upstate New York, you probably need all wheel drive. There is a significant portion of the year where there can be snow. I grew up in upstate New York, so I know there can be a lot of it, right? So it’s important to think through what’s appropriate for that part of the country for that type of year, right? Appropriate and helpful. Does this thing actually help you? It is not absolutely. You know, again, the, the expense does not have to be absolutely essential, but it must be reasonable. Heininger, if I’m pronouncing that right, 320 U.S. 467 (1943) case. A lot of these cases are in the 30s and the 40s, so they’re a little old. 

Matthew Foreman [00:19:02]: 
But the concept, you know, things like hiring a lawyer, very reasonable, believe me. Everyone should hire multiple lawyers all the time. Probably five or six at any given time. 24/ 7. Right? Very important. If there are other more economical and practical means of attaining the same result, then it’s probably not reasonable. May not be reasonable, right? A.S. Barber 851 U.S. TC paragraph 9813. We have a private plane, right? Should you have one? The question is, look at the commercial, right? Kurzet. 

Matthew Foreman [00:19:31]: 
222 Fed. 8, 30. What I always say for things like a private plane or if you need a car and other things like that, you know, saving time or the ability to not have to worry about whether you have to wait, right? You know, commercial delays, you’re going up a lot. Look at the cost, right? If the commercial plane costs the same amount as a private plane, then there’s no issue, right? Same cost. So they can say, oh no, it should be this. But there are people who have private planes who don’t need them. Someone who may need to fly somewhere or things like that. Have a lot of employees, go back and forth. 

Matthew Foreman [00:20:03]: 
I had a client years ago, they had two offices. One was in Boca, one was in New York. They bought a private plane because 10 to 15 people went up and down every day or two and they found that it was about 120% the expense, but they could control the timing. They didn’t have to worry about having seats. They didn’t have to worry about price fluctuations. As anyone knows, going down and up to South Florida in, in the winter can be really expensive. So look at things like that. A common issue is payments to related parties. 

Matthew Foreman [00:20:30]: 
You know, you have to use what’s called transfer pricing, right. You know, use comparables. What is the correct amount? Ordinary necessary has to be necessary, appropriate and helpful. But also to be a necessary and appropriate amount, you can’t just do $1 billion for a car. Right. You can’t just rent your own car and things like that. That’s, that’s goofy. But of course necessary, appropriate, helpful, no personal expenses. 

Matthew Foreman [00:20:51]: 
Don’t pack them in. This is really important. You know, a lot of people hire their kids maybe, it depends. I’m going to get into that in later time, especially in the next episode. Really going to talk about that a bunch. So carrying on a trade or business, right? That’s the third requirement. The commercial activity must have commenced. Okay. 

Matthew Foreman [00:21:08]: 
So if you haven’t started your business yet, but you’re incurring expenses to get ready, you actually can’t use section 162. Really, really, really important there. So for preparatory startup or pre-opening cost, right. You capitalize those under section 195. But the first $50,000 is deductible. There’s caveats. You may amortize it. It’s only 5 believe a 5 year period. 

Matthew Foreman [00:21:29]: 
So it’s not that long. So you do get to deduct them. But this goes back to a really important early point. If you can deduct it or it’s dealt with elsewhere in the Internal Revenue Code or regs or whatever, you can’t use 162. You have to use the other code section. That’s really important for most businesses. $50,000 is a lot, right. So you don’t have to worry about it. 

Matthew Foreman [00:21:47]: 
But if you’re building out a restaurant, yeah, that, that’s going to be a big amount of money. That’s going to be a chunk. You’re spending 100, $200,000. I’ve seen million dollar build outs. So it’s really important to know about that. Not carried on but remains a mere expectation, right? That’s when you’re knowing whether you’re turning on a business, you’re either carrying out a business or the business is an expectation. A lot of Case law on that ,Ellis Tax Couryt Case 26 T.C.M 450 and Forest T.C. Memo from 2011. The key is when you’re carrying on training. 

Matthew Foreman [00:22:14]: 
Business is when you begin to function as a going concern. Right? We all hear about what is a going concern. I know there’s a common popular accounting blog, Going Concern, Richmond TV 345 Fed 2nd 901 4th Circuit case from the 60s. And that’s the key. That’s the demarcation point for when you start carrying on a trade or business. Right. The first requirement is do you know having a trade or business? Second one is have you actually started the trade or business? So what do I need? That’s the important question, right? What do I need? You’re going to need, you know, things like there are things that you look at it, the context matters. But you’re looking for investors, you’re looking for income, you’re looking for a plan, you’re looking for facilities, looking for a contract, you’re looking for activities, services performed. 

Matthew Foreman [00:22:56]: 
You don’t necessarily have to have sales, you don’t necessarily have to have income. But activities, You’re working, you’re doing things or services, you’re looking for. Customers obviously prefer sales, you don’t need them. Willett78 TCM 74. Haney is a TC Memo from 2007 and Vianello T.C. memo from 2010. Talk about this. And I think that that’s really, really important to know. You know, you don’t necessarily need to have sales. 

Matthew Foreman [00:23:21]: 
Right. There are a lot of businesses that are absolutely undertaking a trade or business but don’t yet have sales, you know, and sales are not necessary. I’m sort of intentionally using that word almost in a punny fashion, but you want to have it. So you want to know what that demarcation point is. But think about it. You’ve raised the capital, you got the documents, you’re going out there, you’re marketing, you’re talking to people. That’s when the business has started. Even if you don’t have a sale yet, right? Everyone you see the business with that $1. 

Matthew Foreman [00:23:47]: 
A lot of times it starts before the dollar, but once you earn that dollar, you probably. That’s when you’ve really started. That’s when you have a. You’re carrying on a trade or business, right. A lot of people ask, you know, what is the relationship to the trade or business? The deduction itself, right? Now, the last one, you know, paid or incurred during the tax year, right. I always talk about this in the context. That’s the Last one of it must be related to the trade or business and it must be paid or incurred during the tax year. Right. 

Matthew Foreman [00:24:11]: 
So it must be related to carrying on the trade or business. Lot of examples of things that I’ve run into over the years that do not relate to the trade or business. I pick on Avon sales people, but a lot of, you know, multi-level marketing, MLM, they, they, a lot of people do it and they, they just throw expenses in. There was a case, I believe it was Avon, not 100% sure, but it was, it was similar someone selling makeup or something like that and all their travel happened to coincide with their, with a daughter’s cheerleading competition. And the IRS went, no, there was, it’s a tax court case. I always use that as example. So yes, you can get caught, you can get audited and people do look at it. I see a lot of Software as a Service, SaaS, companies where people have cars. 

Matthew Foreman [00:24:51]: 
Maybe if you’re driving around, if you drive a lot for it, business owned cars. But look at what those cars are. Do you need the Porsche? I mean everyone needs a Lamborghini, but you know, maybe not the Porsche. Right. Everyone deducts meals that they shouldn’t. Right. You know, they, they, they’re the travel meal, the meal with someone. You know, is this really, is this a relationship to the trade or business? Simply because you’re taught you’re having lunch with your accountant doesn’t. 

Matthew Foreman [00:25:12]: 
And you pay for lunch does not mean the meal is an ordinary and necessary business expense. You have to think about that. Is the purpose of it the business or do you just happen to be college roommates with your account? Right. That’s the question. One of my favorite ones I’m going to talk about a little more is the real estate investor who whenever they go on vacation they look at real estate. Right? Yeah, probably not. And I think that’s an area the IRS can really clamp down fairly easily because they’re going to require you to keep documents. Again, I’m talking about Cohen substantiation. 

Matthew Foreman [00:25:38]: 
That’s a later time paid or incurred during the tax year. Cash or accrual, definitely the least, I don’t say interesting, but of these, but cash or accrual method depends on where you are. You know, how it gets timed out and then, you know, using GAP, General Accounting Principles, things like that. So make sure it’s in the right tax year. You can’t just say, well, you know, I really did it in 2025, but I want to deduct in 2024 because it was like for 2024. Not how that works. You can’t hold from prior year. It doesn’t matter when the credit card bill comes, it matters when you spend it. 

Matthew Foreman [00:26:08]: 
Right. Credit card for tax purposes, for this contact,is as if you’re just paying cash. So that’s really important. We’re going to take one one last ten second break and going to get a drink of water and start off again. All right, we’re back. So. So this is really important. We’re going to switch over to section  212. 

Matthew Foreman [00:26:39]: 
This has all been section 162 up to now. Right. And these are deductions related to for profit activities to 212 really does a lot of mirroring. So I’m not going to go into a huge amount of detail but what you’re looking for is the production or collection of income, the management, conservation or maintenance of property held for the production of income and in connection with the determination, collection or refund of taxes. Right. 212 is not available to partnerships or corporations whether C or S. It is not available for personal expenses. There’s Treasury Regon that 1.212-1F. 

Matthew Foreman [00:27:14]: 
So personal expenses again cannot. You know you’re looking at production, you’re looking at you know income, the production of income or issues relating to taxes. Right. It’s not available for pre opening expenses at all. So, Sorrel 882 Fed. second 44 deals with that. You still need an income motive even if there is no trade or business. Right? This is saying there is no trade or business but you have to have an income motive, right? This is investment activities, things like that. Production or collection of income. 

Matthew Foreman [00:27:41]: 
The income motive is a question of factored in a lot of facts. 162, 212 are very fact heavy. The audits tend to be kind of frustrating because they’re so fact heavy and they’re both so fact specific and I think that’s important, you know. Nelson 37 T.C.M 1204 the factors, lot, a lot of factors. The ones right that, that are positive factors. Business like manner, acquiring expertise. You’re studying the industry, you’re consulting with experts and things like that that can qualify. Effort, time, activities really really important. 

Matthew Foreman [00:28:14]: 
Your intention, your plans, your history and pattern. If you’ve been investing, if you’re doing other things for the production of income but now you’re doing something else, right, your own history really can matter. What you’ve done to this point really can be important. There’s a lot of this is is in the regulations under section 183. Not going to go into why, but 1.183 B-2 and then sub 1, sub 2, sub 3, sub 4, sub 5 keeps going with that. Those talk about it. There’s a lot of case law. Nelson comes up a bunch and that’s really important. 

Matthew Foreman [00:28:45]: 
The contrary factors, right, are really just like you’re missing the things that are positive. Right? Lack of records, lack of plan, lack of strategy. Right. Lack of effort generally. If you’re kind of being lazy about it, then it’s probably not related to a for profit activity. If you’re trying to make money, you got to hustle, hustle, hustle really carries a lot of weight and I think that that’s really important. Lack of effort generally lack of profit focus. But if your focus is tax benefit, that’s bad. 

Matthew Foreman [00:29:12]: 
That’s really, really bad. So there’s a lot of case law on it. Also Treasury Regs 1.1832 before, but also Hawthorne 77 TCM 1330 Nickerson might be Nicholson. I can’t read my handwriting. 962 Fed. 2nd 973. The goal has to be the production of income. The expense must be ordinary necessary. 

Matthew Foreman [00:29:33]: 
Same rule, right? As was in 162. Not going to repeat myself heading up toward the end of this anyway. And the determination, collection or refund of any tax disallowed by 67G through the end of 2025. So the third thing it can be for really no longer applies for the next about 18 months. Little less by the time this comes out. So it’s important to know that that was something and maybe something again. So it’s important. So really right now 212 only deals with the production or collection of income or the management, conservation or maintenance of property health or production of income. 

Matthew Foreman [00:30:04]: 
You know, this is accounting tax prep fees are not deductible again they would be deductible under 162 for a business, but they’re not for 212 for an individual who has a profit motive. And that’s that. That is the end of this. This podcast next in two weeks. In two weeks, right? This was the episode for How Tax Works. Hope you learned something and I guess, you know, hopefully you enjoyed it. Right? In two weeks we’re going to do stories, stories, stories and we’re going to talk about the Cohan Rule.substantiation. What proof do I need is a really, really, really important question. 

Matthew Foreman [00:30:36]: 
So that’s what we’re going to do. And now as everyone has enjoyed, one person told me I hope they listen to this that their their apple watch alerted them that their their blood pressure I’m sorry their heart rate went up when they heard this song. So thank you to all. I hope you enjoy the joke. We are we’re not going to stop making it unless we no longer have the license, but we did license it, so hope you all enjoyed it. Talk to you in two weeks and have a good one