Dave T/furnishedowner - is it similar to expenses that my employer pays me? For example, the IRS allows me to deduct certain job-related expenses as long as I am not reimbursed by my employer for those expenses.
In this case, furnishedowner had expenses that he was reimbursed for by the owner. In this case he should not claim those as expenses in his business. Did I get it right?
Dave T/J 1dias,
Yes, I think you both are probably right. The tax attorney said that part of the state’s perception might just be how things are called on our books. A matter of semantics.
I didn’t know that labeling was that important. So maybe I was waving a red flag at the bull, instead of just tiptoeing through the arena.
Furnishedowner
wow, scary stuff. it is scary just thinking about being audited.
i’m happy to pay taxes. I wish i paid a million a year :biggrin that would mean i made atleadt 2 million
johnnyMB,
I have been audited twice before by the Feds, so it doesn’t seem so scary now. Once was for excessive child care costs. I was a single parent then working a ton of hours in a hospital, so I was able to document how much childcare I had to have paid.
The second time was my tax accountants error. He depreciated some land and they caught it. It cost me a few hundred bucks, and I still think that endorsed agent should have paid the tax and penalties for me.
This STATE tax audit blindsided me. I have just heard that the local small business agency people here are very angry about small business owners here in town being harassed by the state tax people. So I am not the only one who is in their gunsights.
Yes, you are right–I want to owe a million in taxes on profit too!.
Furnishedowner
An update on the ongoing tax problems…
I got the letter from the state tax people stating that “Your business is daily, weekly, and monthly furnished rentals.” They added up every rent since Jan. 2004 that fell under the 30-day requirement. They audited right through June 30, 2008.
This also meant that anybody who rented from us on June 5th, or 10th, or 15th, then became a short-term rental, even if they were still in the unit now 7 months later.
So I re-audited all their findings and confirmed that we rented short-term last year for 1.06% of gross revenue. This includes people who got fired, left early, canceled their stay. So obviously we are not a hotel! We will pay the 7% tax on those short term rentals, and charge it in the future.
I met again with our big-city tax guy. He is on the 22nd floor of the highest building in town with a a $250/hour view. He says we will have to pay the “compensated expenditures” tax. The tax on tax. There is case law supporting the fact that if we charge a repair to an owner of a leased house, then we must add tax. Now we are sending the plumber’s bill, etc. directly on to the owners if we can.
The shocker from the audit is that they consider a portion of our leases to be “property management” and subject to 7% fees for services gross receipts tax. These leases are percentage leases where the owner gets a portion of the rent and we get a portion. Other leases are a fixed amount, say $500/month, then we rent out the house for $1800-$2100 and we pay utilities. They are asking for a lot of tax on this one.
The attorney agrees that we are appealing that ruling, and that “A lease is a lease, is a lease.” I have come up with several property management agreements from local firms and they look way different from my leases.
The next step is the District Tax Appeal Meeting. Supposedly our previous auditors and their boss will be there, as will higher-up state tax officials. And the attorney and me.
I visited our local Small Business office. They said that if this case goes against me, they will get a letter from the Mayor and apply some political pressure. This lil’ furnished rental house biz supports 5 full-time employees and if I have to shut down or un-furnish those people will be out of work.
Furnishedowner
Here’s an update on the state tax audit that was started last summer.
We went ahead and paid the items we couldn’t or didn’t want to dispute–the 7% tax on the 1% of rentals that had fallen under 30 days, the compensated expenditures tax, and 1 quarter’s state employment tax that the CPA had overlooked in error.
The tax attorney filed an appeal on the BIG tax, the one where they thought we were doing property management. He argued it very well in a letter. He said that all the home owners that we leased homes from will have to amend their taxes as well, as they did not report gross rents. Also that my relatives stayed in some of those leased houses, and that the owners had no knowledge of any of the sub-tenants. In other words, we DID LEASE those homes! We do not yet have an answer from the state. It could go either way, and the state is very hungry just now.
The bright spot in all this is that it has made us scrutinize those leased contracts and the profit like never before. Consequently, we learned that some just weren’t generating enough income. We have not re-upped those leases. We are down about 8 leased homes now. We are able to function with less staff. Our office expense is at an all-time low. Stress is down. We are still meeting bills, but cleaning less. I like having to deal with tenants more than I like dealing with owners.
We have paid principal and stopped the interest meter running. We may be able to plead out of penalties since we had no intent to do wrong and we threw open our books. Our auditor said we were “very cooperative.”
Once there is a ruling, the business will be more clearly defined. Are we fish or fowl? We are not regular rentals, not property management, and not a hotel.
Furnishedowner
It is over, it is over, it is over! I think.
The state tax department finally sent a letter stating that they (contingently) will abate $10, 585.24 in taxes. As long as we send them the $1,378.08 penalty for flouting the tax laws.
So there is now a legal state tax opinion that it is okay to rent out furnished rentals, that they are not property management even if leased from other owners. Just like we told them.
Our big city tax attorney did a great job, our CPA danced an ever faster tango to avoid getting any mud on the hem of her dress. We could have avoided that final penalty payment with a letter from her. But she would not do it.
Sometimes you just have to pay and move on. When you live in a small town you don’t pick fights with people whom you are going to see at the supermarket or the 4th of July parade.
I have a whole filing cabinet drawer devoted to the tax fight. Now I can seal that sucker up and get on to happier things–like making some money.
Furnishedowner
Remember that bribes go a long way.
Maybe if you are Bobby or JR Ewing. =D
Congratulations on bringing this ordeal to a satisfactory close.
Thanks, Dave T.
Looks like it finally nearly over, except for the $1800 attorney’s bill that just came in. I don’t mind paying it.
Funny how we hate attorneys until we need them. Like hating the dentist until we get a toothache. This has been a big toothache because I didn’t know if it was just a cavity, or was I going to lose my whole jaw.
Furnishedowner