This post brought to you by someone on my FaceBook tax forums and by National Tax Security Awareness Week (December 3-7, 2018). This happened back in 2016 but unfortunately stuff like this still goes on today.

Said person was seen complaining that his tax software provider (also my tax software provider) was no longer supporting, wait for it—Windows XP. Yes, that’s right, Windows XP. In case you missed the memo, Windows XP was released in August 2001 (no, that’s not a typo) and Microsoft stopped selling it in 2008. Microsoft stopped supporting it in April 2014. That’s almost two years ago [now four years ago]. What’s the big deal you ask? Well, to put it succinctly, security patches. The “support” Microsoft stopped providing to XP users in 2014 was, among other things, security patches.

I try to run a tight ship and to provide value for my customers, so I’m not constantly upgrading my computers and software. I do, however, take information security and identity theft extremely seriously. Indeed I see them as one of the largest threats to the viability of my tax practice. Identity theft issues erode my customers’ trust in the computers and software that are necessary to my job. Should my practice ever experience a data breach, the costs of complying with the laws concerning customer notification and restitution could make it difficult for me to continue in business (even with good insurance in place). Consequently, I consider it negligent to be running software that is no longer getting security patches.

Given the prevalence of identity theft and the sensitivity of the information used to prepare your tax return it is important for you to consider how your paid preparer protects that information. While it is unlikely that you will get your preparer to divulge all of the details of his or her security plan, he or she should be willing to answer some questions, for example:

  • What version of Windows are you using?
  • Are you running a firewall, anti-virus, and anti-malware?
  • How often do you update your virus definitions and run scans?
  • What are some of the other measures you take to protect my information?

If your tax professional cannot or will not answer these questions it may be time to start looking for a different preparer. I also have concerns about professional preparers who use free internet products to save costs but that is a post for another day.

A gym membership fee is an inherently personal expense since it is desirable to be physically fit regardless of one’s profession. Thus, such expenses are not deductible for tax purposes. In Battle v. Comm’r, T.C. Summary 2007-27, a professional firefighter claimed a deduction for physical fitness dues with respect to his gym membership. He argued that fitness was mandatory since a healthy body was important to the performance of his duties as a firefighter. The court denied the deduction and noted that the taxpayer did not offer any evidence to show that his gym expenses were different from, or were in excess of, what he would have spent for personal reasons.

In Rev. Rul. 78-128, the IRS ruled that a police officer could not deduct health spa expenses incurred to improve his physical fitness. The IRS cited Code Sec. 262, which prohibits deductions for personal, living, and family expenses.

 

Have you heard any Black Friday ads from car dealerships? I heard a couple last week. They were bad, really bad. Lying bad. So here’s a reminder—never take tax advice from someone who is trying to sell you a product!

One ad talked about taking advantage of new Section 179 “bonus depreciation” rules. First, Section 179 is not about bonus depreciation. Section 179 allows you to elect to expense certain property (take the entire deduction in one year) instead of capitalizing and depreciating it (taking the deduction over a set number of years). Second, there are new rules for both Section 179 and bonus depreciation but as with so much in the tax code there are pros and cons for whichever method you choose. The new rules increased threshold amounts in certain circumstances (e.g., the luxury auto limitation, and the amounts available for Section 179 and bonus depreciation) and you can now take bonus depreciation for “new to you” property in addition to “brand new” property. But the new rules are not the only rules that apply to the purchase of business property and how it is treated on your business tax return.

Additional rules? Yes. For example, placing property in service late in the year can affect the amount of depreciation you are allowed to take. But more important (and rarely mentioned in these ads) is the simple fact that whether you elect to expense the property under Section 179 or depreciate it when you sell, trade-in, or otherwise dispose of business property “recapture rules” almost always apply. Eventually you have to account for the depreciation or Section 179 expense you took! Depreciation and Section 179 rarely make taxes go away forever—they usually just “kick the can down the road.”

The second ad I heard said to “let the federal government pay” for some of the vehicle. That is not what really happens under any of these rules (new or old). Section 179, and bonus and regular depreciation are not tax credits (dollar for dollar reductions in your tax bill). They are current year deductions that reduce taxable income; they reduce your tax bill by the percentage of tax you normally pay. So if you are a sole proprietor in the new 22% tax bracket, for every dollar reduction in taxable income you save—twenty-two cents. Let me repeat that. If you are a sole proprietor in the 22% tax bracket for every dollar you spend you save about twenty-two cents in income taxes.

Tax Therapy Mantra: Never spend money to save money on taxes!

Spend money to make money. If your business needs furniture, equipment, or supplies by all means, buy it if you can afford it. And deduct it in the most advantageous way possible (this is where a tax professional can really help you). But if you don’t need it, don’t buy it just “for the deduction.” And don’t sell or trade-in business property without consulting with a qualified tax professional first. If you do, expect unintended tax consequences.