However, there is a special rule all business owners should be aware of.  Meals furnished to employees can be 100% deductible pursuant to IRC 274(e) if they furnished to employees on the emloyers facility.    We discuss this law with our clients all the time.  These sorts of meals should be tracked separately on the taxpayers general ledger.  So meals that our brought into the business or delivered and the food is for the employees would qualify as 100% deductible.  Don’t forget this one when you are preparing your tax returns.

When this question comes up with our clients, we ask questions about the worker to determine if they should be classified as an employee or a independent contractor.  In helping our clients determine if they have an employee or independent contractor we look at the following items:  (1) Are they going to be working exclusively for the client?  (2) How many hours are they going to be working?  (3) Will the business provide them with an office, business card, computer, telephone, cell phone and supplies?  (4) Does the business provide instruction to the individual on when they will work? (5) How will the worker be paid?  There are many other factors to consider.  There are other issues to consider when treating an individual as an independent contractor.  For example, does the business have proper insurance coverage for the workers irregardless of their treatment?  Does the business feel there are risks in treating an individual as a independent contractor when they could sue the business and request over time wages.

Also note that recently the IRS and the Department of Labor have signed a memorandum of understanding to share information and collaborate on the issue of employees who have been misclassified as independent contractors.  We feel this is the governments way of finding out about misclassifications and going after past payroll taxes which haven’t been paid.  To support that our thoughts seem correct the IRS also recently came out with an opportunity for employers to voluntarily comply with misclassification of independent contractors and has created a process for the change and the past taxes to be correctly quickly.  You can read about the voluntary compliance program at http://1.usa.gov/q72pYw.  Make sure you retain proper tax counsel to assist you with this area.

So, we suggest you consider these items and speak with your attorney and / or your CPA to determine proper classification.

As always the application of tax law is based on the specific taxpayer issues, and attributes.  Please discuss your situation with your tax advisor.

After speaking with the taxpayer we determine that the IRS was correct.  The taxpayer didn’t own a home and thus didn’t pay any mortgage interst.  Furthermore, the taxpayer had taxable income of about $60,000 and thus the $25,000 of charitable deductions was incorrect also.  We asked the taxpayer why these deductions were on her tax returns.  She stated that the tax preparer put them there so she could receive a refund.  She however, didn’t review the return before she signed it and she was excited to receive a large refund.  It wasn’t a surprise that when she tried to contact the tax preparer about a year after the return was filed, they couldn’t be found.  This was a perfect example of a bad tax preparer.  However, there is also some fault of the taxpayer as she didn’t properly review the tax return.

We are glad that the IRS is finally requiring all tax preparers other than attorney’s, CPAs and Enrolled agents to be licensed and pass a competency exam.  I can’t believe the IRS never made everyone register with them prior to being able to prepare tax returns.  So, make sure you properly review your tax returns before you sign them under penalty of perjury.  For more information on the IRS registered tax  preparer rules, look at the following link.

http://1.usa.gov/dQ8kWI