Accountant Loses on Deductions for Wages Paid to Daughters

An accountant from Florida lost a Tax Court case Wednesday in which he tried to defend the $18,000 of “wages” paid to his daughters.  The accountant has deducted the $18,000 as “cost of goods sold” on his business Schedule C in 2007.  The IRS disallowed the deduction and the case went to Tax Court.  From the Court report:

Petitioner has two daughters. In 2007 his daughters were 17 and 20 years old, respectively. His older daughter was a fulltime student at Rutgers University from September 1, 2005, through May 9, 2007. His younger daughter was a high school student in 2007. Petitioner’s daughters provided administrative assistance in his accounting business….

The problem is, no W-2s or 1099s were ever issued to the daughters.  The accountant told the court that he paid his daughter’s credit card bills as compensation.  The Court didn’t buy that argument, and disallowed the deduction.

The accountant also had his deduction for “business use of the home” reduced.  He had claimed a deduction for the square footage of a bedroom he used as an office, as well as the square footage of the adjacent hallway and bathroom.  But because the hallway and bathroom were sometimes used for personal purposes, the Court disallowed the square footage of those areas in the calculation of the deduction.

Here’s a link to the entire Court ruling.