The IRS can disallow deductions just because your business isn’t set up properly

How you set up your business entities can make a big difference in how much tax you pay.  As with much in life, a little forethought now can save (or earn) lots of money in the future.

A recent court case involving an attorney named David Morowitz drives that point home.  Mr. Morowitz set up an S-corporation for his solo law practice.  When he brought on a new partner (Patrick Barry), all they changed was the ownership and the name of the S-corporation.  Because Morowitz had preexisting cases from before the ownership change, he and Barry arranged for Morowitz to pay those expenses separately.

When Morowitz tried to deduct the expenses for the preexisting cases on his own return, the IRS said no because unreimbursed expenses of an S-corporation are not deductible to the shareholder.  Had he set up the entities to better match his business plan, all of those expenses would have been deductible.

Instead, he tried to challenge the IRS in federal district court, compounding his business entity choice error with potentially costly litigation.  He lost.

Don’t make the same mistake as Mr. Morowitz.  If you’re not sure if your business entity choice makes sense for your business, call us at 208-288-1671 or email Roy at roy@nelsonprogroup.com.  We can evaluate whether your business entity is aligned with your business practices and if you need to make any changes to ensure you don’t miss out on otherwise deductible expenses.

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