The IRS disallowed a taxpayer ordinary and necessary business expense deductions because the business was not actually operated in the year for which the expenses were claimed. The taxpayer indicated expenses were incurred in carrying on a software business.
However, there was no evidence of business activity during the year in question. As a result, the expenses were not allowed and the IRS imposed a negligence penalty on the taxpayer for his failure to keep adequate books and records to substantiate the claimed expenses.
Points of Interest
- One of the requirements to avoid losing the protection of limited liability, also known as piercing the corporate veil, is to hold meetings and keep accurate records.
- Records must also be kept of resolutions creating all classes of stock, all written communications to the shareholders, the most recent annual report, and names of shareholders.
- IT IS IMPORTANT TO KEEP RECORDS. Granted you will not be legally bulletproof with them, but without them you are a sitting duck.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors