Have you ever been audited?
Have you ever been audited?
I've never been audited but I think I'm going to have a red flag on my taxes this year. I do some freelance web development work and will probably write off my home office, some web hosting / domain names, and a wide angle camera lens. The reason for the lens purchase is because one of my clients was a real estate company. They wanted good photos for the real estate website, so I bought the lens to take the photos.
My gross for my freelance work was under $10k and my expenses were very low. However, a friend of mine told me that a lot of amateur photographers will start a photography "business" and write off all of their equipment taking a loss for 3 years. He said the IRS specifically looks for photography expenses. Since my purchase was legit and my profit is high, I'm not really concerned. However, another friend of mine accidentally put the wrong SS number for his adopted son and got audited. He said it took months and many many hours to go through everything with the IRS -- mainly because his wife is self-employed.
So a couple questions:
Have you ever been audited? If so, what was the process like? Do you think the camera lens will be a red flag and anyway to include a note for what the lens was used for?
My gross for my freelance work was under $10k and my expenses were very low. However, a friend of mine told me that a lot of amateur photographers will start a photography "business" and write off all of their equipment taking a loss for 3 years. He said the IRS specifically looks for photography expenses. Since my purchase was legit and my profit is high, I'm not really concerned. However, another friend of mine accidentally put the wrong SS number for his adopted son and got audited. He said it took months and many many hours to go through everything with the IRS -- mainly because his wife is self-employed.
So a couple questions:
Have you ever been audited? If so, what was the process like? Do you think the camera lens will be a red flag and anyway to include a note for what the lens was used for?
Re: Have you ever been audited?
Overall a very small number of returns get audited. You aren't going to specifically be listing "camera lens" it will likely just be listed as Supplies on Schedule C. You can always provide any supplemental information you want with your (paper filed) return.
Re: Have you ever been audited?
Ok thanks. I'll probably just electronically file and not worry about itJamesSFO wrote:Overall a very small number of returns get audited. You aren't going to specifically be listing "camera lens" it will likely just be listed as Supplies on Schedule C. You can always provide any supplemental information you want with your (paper filed) return.
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Re: Have you ever been audited?
A camera lens would be categorized as equipment, not supplies. Supplies are basically things that get used up, like toner, paper and other consumables. Equipment is a type of depreciable asset. A camera lens has a usable life of years. It is not used up or worn out by short term use. All photographic equipment is also specifically described by the IRS as a type of "listed property". Listed property are things that typically have general use outside of business use. The most common type of listed property are vehicles. Other types are computers, and equipment "used for entertainment, recreation or amusement, including photographic, phonographic, communication and video equipment". As you can see, these are the types of things that hobbyists like to buy and use for their own non-business purposes, or are in common personal use like cars. Just as a previous post noted, they are subject to and have a history of misrepresentation, shall we say, by those who wish to take advantage of improperly calling them business assets.
In the OP's case, for example. The OP bought this camera lens for his photo business and it certainly has a legitimate use. It should be reported as an asset and the appropriate depreciation taken. There's no reason for undue concern about it being an audit flag. However, someone could have a sideline business doing photography and also simply be an avid hobby photographer, which seems likely. The IRS concern is that they buy a fancy rig for $3000, use it in part for some business gigs, call it a business asset, but also use it for their hobby photography, where they should get no tax benefit, just like I wouldn't for buying a camera. That's what's behind listed assets and why there are tons of rules that I have no interest in getting into, but a Schedule C filer, like the OP, should familiarize themselves with. IRS Pub 334 Tax Guide for Small Business is a good reference. It's available at irs.gov.
In the OP's case, for example. The OP bought this camera lens for his photo business and it certainly has a legitimate use. It should be reported as an asset and the appropriate depreciation taken. There's no reason for undue concern about it being an audit flag. However, someone could have a sideline business doing photography and also simply be an avid hobby photographer, which seems likely. The IRS concern is that they buy a fancy rig for $3000, use it in part for some business gigs, call it a business asset, but also use it for their hobby photography, where they should get no tax benefit, just like I wouldn't for buying a camera. That's what's behind listed assets and why there are tons of rules that I have no interest in getting into, but a Schedule C filer, like the OP, should familiarize themselves with. IRS Pub 334 Tax Guide for Small Business is a good reference. It's available at irs.gov.
Re: Have you ever been audited?
I have had two desk audits of Schedules A and one of Form 8889 (HSA). They requested and I provided all the documents supporting each entry on each form. All of them ended up OK for me although one of the Schedule A audits took a long time (they requested 2009 docs in December 2010 and finally agreed to my return in June 2012). They have a machine that generates the letters and it can take a long time for them to go through your submissions since they have cut staff significantly.
Stay hydrated; don't sweat the small stuff
Re: Have you ever been audited?
Thanks, great explanation on equipment vs supplies. Do you know how depreciation is calculated? The camera lens was only ~$500 so I may not even bother unless I can depreciate a large portion of it.HouseStark wrote:A camera lens would be categorized as equipment, not supplies. Supplies are basically things that get used up, like toner, paper and other consumables. Equipment is a type of depreciable asset. A camera lens has a usable life of years. It is not used up or worn out by short term use. All photographic equipment is also specifically described by the IRS as a type of "listed property". Listed property are things that typically have general use outside of business use. The most common type of listed property are vehicles. Other types are computers, and equipment "used for entertainment, recreation or amusement, including photographic, phonographic, communication and video equipment". As you can see, these are the types of things that hobbyists like to buy and use for their own non-business purposes, or are in common personal use like cars. Just as a previous post noted, they are subject to and have a history of misrepresentation, shall we say, by those who wish to take advantage of improperly calling them business assets.
In the OP's case, for example. The OP bought this camera lens for his photo business and it certainly has a legitimate use. It should be reported as an asset and the appropriate depreciation taken. There's no reason for undue concern about it being an audit flag. However, someone could have a sideline business doing photography and also simply be an avid hobby photographer, which seems likely. The IRS concern is that they buy a fancy rig for $3000, use it in part for some business gigs, call it a business asset, but also use it for their hobby photography, where they should get no tax benefit, just like I wouldn't for buying a camera. That's what's behind listed assets and why there are tons of rules that I have no interest in getting into, but a Schedule C filer, like the OP, should familiarize themselves with. IRS Pub 334 Tax Guide for Small Business is a good reference. It's available at irs.gov.
Re: Have you ever been audited?
You can depreciate 100% of the camera the first year in many cases.
There are different levels of audits ranging from sending a check unless to disagree, sending additional papers, to interview, to a financial rectal exam.
My one "audit" was because I had mis-categorized an expense that was subsequently not allowed. The letter pointed to my error and directed me to send a check or provide additional info. I sent the check and it was done.
My ex had an accountant before we were married who was creating businesses for her hobbies and trying to deduct her travel, meals, and supplies in pursuit of her interest. He ended up on the bad acct. list and she joined his other clients at IRS HQ learning about the difference between a hobby and a business. Newlyweds received a nice fat bill to pay.
There are different levels of audits ranging from sending a check unless to disagree, sending additional papers, to interview, to a financial rectal exam.
My one "audit" was because I had mis-categorized an expense that was subsequently not allowed. The letter pointed to my error and directed me to send a check or provide additional info. I sent the check and it was done.
My ex had an accountant before we were married who was creating businesses for her hobbies and trying to deduct her travel, meals, and supplies in pursuit of her interest. He ended up on the bad acct. list and she joined his other clients at IRS HQ learning about the difference between a hobby and a business. Newlyweds received a nice fat bill to pay.
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Re: Have you ever been audited?
Nothing to worry about if the return was properly and truthfully filed. As long as you have proper documentation, I wouldn't fret.
Re: Have you ever been audited?
WhyNotUs wrote:You can depreciate 100% of the camera the first year in many cases.
Thats quite true. However then you'll have nothing to deduct the second third and fouth years when you have greater income. And if you close the business or sell the lens you may have to "recapture" some of that. Might be better to take straight depreciation until you know what you're doing
There are different levels of audits ranging from sending a check unless to disagree, sending additional papers, to interview, to a financial rectal exam.
My one "audit" was because I had mis-categorized an expense that was subsequently not allowed. The letter pointed to my error and directed me to send a check or provide additional info. I sent the check and it was done.
My ex had an accountant before we were married who was creating businesses for her hobbies and trying to deduct her travel, meals, and supplies in pursuit of her interest. He ended up on the bad acct. list and she joined his other clients at IRS HQ learning about the difference between a hobby and a business. Newlyweds received a nice fat bill to pay.