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☛ God, Guts, Guns and Taxes – 1-5-18

GOD, GUTS, GUNS AND TAXES

By Richard E. “Rick” Dennis
Jan. 5, 2018

 

by Richard E. Dennis

The American Horse Industry, Avoiding the Pitfalls by Rick Dennis.

While growing up in Alabama in the 1950s, my grand father always stressed these four premises to live by:  “Always put GOD first in your life, have the GUTS to take on life and live successfully, keep a GUN handy in case you need it and always pay your TAXES.”

Paying taxes is a phrase resonating with every working American this time of the year simply due to the fact April 15 is the time we either file our taxes or file for an extension. Like the old adage, “There are two certainties in life: Death and Taxes!”  No one gets out alive and with new tax laws, Uncle Sam can and will tax you in the grave.

However, there are steps we can take to minimize the amount of taxes we pay by simply taking advantage of the built-in deductions and write offs included in the IRS tax code.

In my opinion, one fact of certainty is: “The Internal Revenue Service (IRS) seems to hate horses.”  In my book THE AMERICAN HORSE INDUSTRY, Avoiding The Pitfalls, I devoted an entire chapter to identifying whether your horse operation is a business or a hobby. One of the included items in this book is a chapter that stresses the importance of determining whether or not your horse operation is a business or a hobby as well as other necessary factors to successfully survive an IRS or State audit of your horse operation and yourself.

 

Case-In-Point:

In June 2016, I opened a new bank account at Chase Bank in Covington, Louisiana.  According to the information supplied by the bank officer who opened my account, new Federal and State tax regulations and laws require the financial institution to be the first line of defense in identifying fraudulent money laundering or illegal operations by account holders. Essentially, the bank opens your account with the information you supply them including providing your name, social security number, business name and business Tax Identification Number (TIN), along with a copy of your completed financial questionnaire to Federal and State taxing agencies for verification, authentication of your citizenship and to check for any outstanding tax bills, liens, etc.

Further, the brief financial questionnaire generally encompasses annual income, expenses, net profits for a given period, tax filings, assets and liabilities. In essence, and in my opinion, this is used for a comparison by the Federal and State taxing agencies to perform a brief audit of prior tax filings to determine the accuracy of your prior tax reports, among other items of interest. According to the Chase Bank officer, this is a requirement to open a bank account with Chase Bank. No completed financial questionnaire = no bank account!

 

Maintaining Immaculate Financial Records:

Another aspect stressed in my book is the importance of maintaining immaculate financial records for both your personal and business financial reporting. For the record, I’m in the horse business and I file a Schedule C, along with my personal 1040, which represents my Limited Liability Company’s financial records. In my case and after opening the bank account, I received an arbitrary tax assessment from the State of Louisiana for a tax bill of $41,589.73 for the 2015 year.

Knowing that I didn’t owe the proposed tax liability, I contacted the Louisiana Department of Revenue and inquired about the certified letter I had received and I was informed that an unnamed source had provided to the State that I made $701,400.00 in 2015. I informed the State of Louisiana tax representative that the figure she quoted me was more than my gross annual income. In fact, it was a well-documented and IRS-approved 20-year “carry-forward casualty loss” from Hurricane Katrina back in 2005.

However, I was told I had two choices: 1) Protest the arbitrary assessment through the tax process or 2) pay the amount assessed plus interest and penalty.

If I did not file an objection, I would also be assessed a taxable amount by the IRS to include interest and penalties. The worst that could happen if I didn’t address this scenario is: I would be charged with tax evasion, my bank accounts would be seized, tax liens would be filed on my property and I would face prosecution.

I elected to fight the proposed tax liability and requested a hearing. On the day of the hearing, I represented myself “in-proper-person,” essentially meaning I was my own lawyer. This is not a recommendation that I would make to everyone.

I figured that since I knew my tax records better than anyone, I would be the best person to explain my case at the hearing. On hearing day, I was armed with my Federal and State tax filings from 2005 forward, which completely documented the $769,000.00 20-year carry-forward loss as well as the very well documented IRS approval of the loss. At the hearing I explained, that whoever their “erroneous source” was, he or she failed to recognize that there was a minus sign in the front of my 2015 tax filing amount and the -$701,400.00 carry forward to my 2016 tax year had a minus sign, not a plus sign. Therefore, the amount was a loss and not income.

 

Resolution:

On Jan. 2, 2018 I received a letter from the Louisiana Department of Revenue dated December 29, 2017 stating, “The outstanding liability for the above referenced period(s) has been cancelled based on the information provided. Thank you for your cooperation in this matter.”

Over all, we all have to pay taxes.  My suggestion to all readers of this article is to keep and maintain immaculate financial records with every annual tax filing. I keep all of my annual tax filings instead of merely the three years suggested by the IRS.  If I hadn’t had all of my tax filings readily at hand, the outcome of this saga might have resulted in an ominous ending.

Click for tax letter from state of Louisiana>>

 

Another Happy Ending:


Recently I received a Federal Tax ruling entitled UNITED STATES TAX COURT, Finis R. Welch and Linda J. Waite – Petitioners Versus Commissioner of Internal Revenue – Respondent.  This tax ruling is an extremely good read and involves another individual in the cutting horse industry which resulted in the cancellation of millions of dollars in proposed tax liabilities due to their immaculate records retention.

Click for Stunning Tax Court Victory>>

Click for Center Ranch Tax Ruling>>

Certified Public Accountant (CPA):

For the record, I’m not a certified public accountant. However, I’ve been in business for 33 years with a 48-year professional background including: Criminal Investigations and Prosecutions, Forensic Audit, Risk Management and a 19-year history as a professional in the horse business but I highly recommend the incorporation of a certified public accountant in your life to formulate your tax filings.

 

Determining Whether You’re A Business Or A Hobby:

The key to operating a successful horse business is to determine whether you’re in the horse business for fun or to make a profit as a business owner doing something you love. If the former is your answer, go have fun. If the latter is your answer and you’ve decided to enter the equine industry as a business owner, then I suggest you perform a self evaluation of your proposed or existing business to determine if all of your bases are covered: For example:

1. What is your business entity: a Corporation, Limited Liability Company, Sole-Owned Proprietorship, Partnership, etc.,?

2. Does your business have its own Federal Tax Identification Number (which you should have), or are you using your social security number for this?

3. How are your bank accounts set up? In order to avoid the “co-mingling of Funds Rule,” i.e., mixing personal non-business funds with business funds, you need to have separate bank accounts: one for your personal and one for your business.

4. If your business is like mine, where I receive checks in the mail for services rendered as well as cash payments, are you incorporating the use of a cash book to keep track of these funds, especially if you aren’t depositing the cash in the bank?  If not, I suggest you incorporate one and each time you spend from this “stash of cash,” make a record of it along with maintaining a receipt for spent funds.

5. Are your accounting books immaculate? If not, seek the advice of a Certified Public Accountant to assist you in this matter.

6. Does your horse business have a written “Business Plan?”  If not, I suggest you consult with a Certified Public Account and write one.  Essentially, your business plan is your survivability insurance in the event of audit.  After the key phrase used by the auditors is, “Are you in business to make a profit?”

7. “Intent To Make A Profit” is your key phrase you should memorize in all of your business affairs. During an audit, this separates you and your horse business from being identified as a hobby versus a viable business. It’s OK not to make a profit if you truly intended to make a profit during an annual period. However, you need to consult with a Certified Public Accountant to further explain this aspect of the tax code.

In setting up your business, always show an intent to make a profit by using advertising. I suggest to all business owners that they should have a web site to promote their business on the internet. Also, it’s an impressive marketing tool for prospective clients to evaluate your services.

An immaculate and accurate set of books will allow your tax preparer to utilize all of the items available to you as a business owner to minimize the amount of taxes you pay during an annual tax filing cycle as well as a defense in the event of a tax audit.

“Until Next Time, Keep Em Between The Bridle!”

WIND RIVER COMPANY LLC

Richard E. “Rick” Dennis

Managing Member

Phone: (985) 630-3500

Email: windrivercompany@gmail.com

Email – Personal: windrivercompany.rd@gmail.com

Web Site: http://www.windrivercompanyllc.com

 

 

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15 Comments

  1. Hey man. This is a really good article. I can’t believe you have the guts to name the Bank that started this fiasco lol but of course it’s you lol. I should know better. I’m bad.
    Allison

  2. This is a great article. Amazing information. Thanks for sharing.
    Kim

  3. Rick,
    I can’t imagine being in either of your shoes in a matter like this. I’d be scared to death. What an awesome victory for both of you.
    Michael

  4. Wish I would’ve read your book!! I had an audit and the IRS said my horse business was a hobby because I didn’t have the right records. I lost and I’m still paying. It just made me sick. I just want to sell all my horses and get out. This article is encouraging.
    Amy

  5. I enjoy reading articles on allaboutcutting. I find em the most comprehensive articles in the industry. Thanks to Glory and you for keeping us informed. This one on taxes is off the charts. Great info!!!
    Makayla

  6. Rick,
    What a way to start of the New Year. congrats on your win. This article blew me away.
    Lexi

  7. rick,
    What I love the most about your articles is you always have the facts, dates and backup to prove your articles.
    Kelli

  8. Congrats to both individuals for their wins. Hard to beat the tax man. This article clearly shows all business owners the importance of doing things the right way in our business dealings and our lives. An article with standards to live by. Great info and read.
    Jim

  9. All About Cutting continues to bring the best articles to the journalism world. Glory Ann, you’re in a class by yourself.
    Carol

  10. Mr. Dennis. I have both your books and I’ve learned so much from them. I’ve read all of the articles you’ve ever written and equally have learned from them. You’ve done a tremendous job in your life. It seems your talent is endless. Thank you all about cutting for the always great news.
    Natalie

  11. Rick,
    Another fact-filled article. Mega-filled article on tax law.
    John

  12. Love this article. Lots of info. First article I’ve ever read about people winning against the IRS. All I can say is WOW!!!!
    Kathy

  13. When I first saw this I was amazed. Beautiful article!
    DJ

  14. Love your articles!!
    Lisa Menerick

  15. As your article details, the primary function of your accountant is to minimize tax liability and exposure to tax court. How you set up your accounting should coincide with y our written business plan. This article should be a prerequisite read for any small business owner. Thanks.
    Rick I.

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