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Company Vehicles, Cell Phones, and Office Snacks: What’s Actually Tax-Free for Employees

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Have you ever had to explain to a client that the $35 gift card they gave each employee for the holidays must be reported as taxable compensation, but the $35 holiday ham they gave last year was completely tax-free? Welcome to the world of fringe benefit taxation, where seemingly identical gestures of employee appreciation can produce dramatically different tax consequences.

This counterintuitive example comes from Episode 18 of the Tax in Action podcast, where host Jeremy Wells, EA, CPA, continues his deep dive into IRC Section 132’s fringe benefit provisions. Building on a previous episode discussing no-additional-cost services and qualified employee discounts, this episode covers two benefit categories that touch nearly every business with employees: working condition fringes and de minimis fringe benefits.

Many employers want to provide benefits to their workforce, but the line between tax-free perks and reportable compensation often comes down to surprisingly specific details. Understanding these distinctions helps tax professionals guide clients toward meaningful benefits without triggering unexpected tax consequences.

When structured correctly, these benefits are deductible for the employer and excludable from the employee’s taxable compensation. Get the details wrong, and what was intended as a thoughtful perk becomes reportable wages subject to income, employment, and state taxes.

Working Condition Fringes Help Employees Do Their Jobs Better

The concept behind working condition fringes is straightforward. If an expense would be deductible under IRC Section 162 (ordinary business expenses) or Section 167 (depreciation) had the employee paid for it personally, the employer can provide that benefit tax-free. Some common examples include company vehicles for service technicians, professional development courses, business travel, and other things employees genuinely need to perform their jobs effectively.

But practitioners need to pay close attention to ensure the benefit relates specifically to that employee’s role with that employer. As Wells explains, if the expense instead supports outside professional activities, such as consulting privately, serving on an external board, or running a separate venture, the employer’s payment doesn’t qualify as an excludable working condition fringe. The employer would essentially be subsidizing something that benefits the employee’s outside activities rather than their own business operations.

Who Counts as an “Employee” (And Who Doesn’t)

The definition of “employee” for working condition fringes is broader and narrower than you might expect. It includes current employees, partners performing services for a partnership, directors of the employer, and even independent contractors performing services for the employer. This expanded definition allows businesses to provide qualifying benefits across different working relationships without triggering taxable compensation.

However, the definition is more restrictive than what applies to other fringe benefit categories. Former employees, spouses, and dependents can qualify for no-additional-cost services and qualified employee discounts discussed in Episode 17, but don’t make the cut for working condition fringes.

One additional group does qualify: bona fide volunteers at nonprofit organizations can receive working condition fringes without it being treated as compensation. This provides helpful flexibility for tax-exempt entities, though Wells emphasizes that understanding what organizations can provide to volunteers without converting them to compensated workers requires careful attention to the rules.

No Discrimination Rules Apply

Unlike many benefit programs, working condition fringes come with no nondiscrimination requirements. An employer can provide a company vehicle to one employee while not offering similar benefits to others. Highly compensated employees can receive working condition fringes that aren’t available to rank-and-file workers. This flexibility allows businesses to target these benefits where they’re most needed operationally.

Substantiation Requirements Still Matter

The absence of nondiscrimination rules doesn’t mean working condition fringes don’t have documentation requirements. If IRC Section 274 imposes strict substantiation requirements on a particular type of expense, those same requirements apply when the expense is provided as a working condition fringe.

Wells points to club memberships as a prime example. IRC Section 274(a)(3) disallows deductions for membership dues in clubs organized for business, pleasure, recreation, or other social purposes, such as country clubs, chambers of commerce, civic organizations, and similar groups. When clients argue these memberships generate business connections, Wells notes “just because something seems like it should be deductible, or it seems unfair that it’s not deductible, that’s just simply what the law says.”

An employer can still pay for such memberships, but they must include the value in the employee’s compensation and deduct it or exclude it from compensation and forgo the deduction entirely.

When providing cash advances for working condition fringes, employers must require employees to use the cash for specific deductible activities, verify correct use with receipts, and return any unspent cash. This differs significantly from de minimis fringes.

Getting the Details Right with Company Vehicles

Employer-provided vehicles are a common working condition fringe benefit. We’re not talking about business owners using vehicles for personal transportation, but true company vehicles like the trucks driven by HVAC technicians, the vans operated by plumbers, and vehicles used by pest control professionals.

The excludable portion is the total annual value of the vehicle multiplied by the percentage of business-use miles. “Even though it’s company owned, there still needs to be a written, contemporaneous mileage log,” Wells says, emphasizing a critical point. Digital tracking counts, but the documentation must exist.

When an employee keeps the vehicle overnight to make an early morning service call, that commute home and back to work counts as personal use. The substantiation requirements don’t relax simply because the employer holds the title.

If multiple employees share vehicles throughout the year, their combined legitimate business mileage counts in both the numerator and denominator of the business-use calculation. But if specific employees use designated vehicles during identifiable periods, the organization must maintain records separately.

Other Working Condition Fringes

Product testing is another excludable category with specific requirements. Employers must limit product availability to the testing period, require return of products afterward, and collect detailed employee reports. Notably, directors and independent contractors don’t qualify for this particular exclusion, so employers must report test products provided to them as compensation.

Job-related education qualifies as a working condition fringe when it meets requirements under IRC Section 127. Wells devoted Episode 7 entirely to deductible education costs, which provides deeper guidance on this topic.

Business travel expenses, including flights on employer-provided aircraft, can be excluded when legitimately deductible. But personal elements, such as tickets for children, personal destinations, or accompanying family members without documented business purpose, are includable in income.

For clients in higher-risk environments, enhanced security for company vehicles can qualify as working condition fringes. The key is documented specificity: general safety concerns don’t suffice. There must be evidence of actual threats, such as death threats, kidnapping risks, or recent violent incidents, and security must be part of a comprehensive 24-hour protection program.

De Minimis Fringe Benefits: When “Too Small to Count” Actually Counts

While working condition fringes help employees perform their jobs, de minimis fringes address the smaller perks that boost morale and show appreciation. The standard seems simple: if a benefit’s value is so small that tracking it would be unreasonable or administratively impracticable, employers can provide it tax-free.

But don’t let “too small to count” suggest this category operates without rules. The de minimis standard contains specific requirements, and one absolute prohibition that catches many employers off guard.

The Individual Employee Test

Frequency matters when determining whether a benefit qualifies as de minimis, and the analysis focuses on each individual employee. “Providing a daily meal to a single employee is not a de minimis fringe benefit with respect to that employee,” Wells explains, “even though if we were just looking at the number of meals provided annually to all employees, it might be a relatively small number.”

The exception comes when tracking individual frequency becomes administratively difficult. Wells offers the copying machine example. If an employer ensures at least 85% of use is for business purposes, any personal use qualifies as de minimis. Nobody expects employers to count every personal page, so these rules eliminate that administrative burden.

The Absolute Cash Equivalent Prohibition

Here’s where many well-intentioned employers stumble: cash and cash equivalents are never excludable as de minimis fringes. No exceptions. The rationale is, it’s never administratively impracticable to account for cash.

This creates counterintuitive outcomes that confuse clients. The holiday ham or turkey is the textbook de minimis fringe, literally cited by Congress when explaining IRC Section 132. But when one employer switched from holiday hams to $35 gift certificates for local grocery stores, the IRS ruled those certificates were cash equivalents and thus no longer excludable.

“Even though in terms of frequency and amount, it might appear de minimis, I can specifically and administratively identify how much was spent so that is never going to be excludable,” Wells emphasizes.

Office Snacks and the TCJA Changes

Coffee, donuts, and soft drinks in the office are another classic de minimis fringe benefit. So are occasional meals or meal money provided specifically for employees working overtime, with emphasis on “occasional” and the overtime connection. Company parties, picnics, and group meals (including guests) also qualify.

These categories generated confusion following the 2017 Tax Cuts and Jobs Act. “I saw a lot of social media posts claiming the legislation made office snacks, donuts, and soft drinks nondeductible and includable. Neither one of those is true,” Wells says, clarifying an important misconception.

What actually changed is pre-TCJA, these items were 100% deductible. Post-TCJA, office snacks and occasional meals became 50% deductible. They’re still deductible, just at half the rate. They remain fully excludable from employee compensation.

What did become nondeductible after 2025 are expenses for employer-operated eating facilities—essentially cafeterias that charge employees for food. But basic office snacks are 50% deductible for employers and still tax-free for employees.

Employer-Provided Cell Phones

Cell phones occupy an interesting position, potentially qualifying under both working condition and de minimis rules. The key is why the employer provides the phone.

If they provide it so the employee can be on-call outside normal hours, then the business use qualifies as a working condition fringe and personal use as de minimis. As a result, the entire value is excludable for the employee and deductible for the employer.

However, phones provided to boost morale or included in employment contracts as compensation don’t qualify. The phone must serve the employer’s operational need for employee availability.

Holiday and Special Occasion Gifts

Employers can provide occasional, non-extravagant gifts for holidays, birthdays, achievements, illnesses, or family crises as excludable de minimis fringes. Wells notes these should be “one off or occasional, maybe annual. Probably not more often than that.”

But the cash equivalent prohibition applies fully here. A $35 gift basket is excludable. A $35 gift card to the employee’s favorite restaurant must be included in compensation. Same dollar amount, same thoughtful intent, completely different tax treatment.

Common Pitfalls and Non-Excludable Benefits

Wells identifies several benefits that commonly trip up employers who assume they’re tax-free:

  • Season tickets to sporting or theatrical events cross the line into reportable compensation, though a single occasional ticket might qualify as de minimis.
  • Commuting use of employer-provided vehicles remains personal use that must be tracked and potentially reported, even for company-owned vehicles used primarily for business.
  • Private country club or athletic facility memberships don’t qualify as excludable fringes, despite potential business networking value.
  • Group term life insurance on a spouse or child creates taxable compensation, as only coverage on the actual employee qualifies for favorable treatment.
  • Personal use of employer facilities like a beach condo or hunting lodge generates reportable income. Wells notes clients often want to rent cabins for “strategic planning” retreats, but “it would be a stretch to say that was an actual business expense.”

The Documentation Imperative

Throughout the episode, Wells emphasizes that “documentation is key.” Even without nondiscrimination requirements, written policies and records protect both employers and employees.

Best practices include:

  • Maintaining detailed records of what benefits were provided, when, and to whom
  • Tracking benefit values even for seemingly trivial items
  • Ensuring you’ve satisfied substantiation requirements under IRC Section 274
  • Documenting eligibility criteria in writing

“It’s always best practice to clearly document in writing who earns what kinds of benefits,” Wells advises, “even if there are no nondiscrimination rules for the particular kind of benefit.”

Turning Fringe Benefit Rules Into Client Value

Working condition fringes and de minimis benefits offer employers meaningful ways to support their workforce beyond traditional compensation. Company vehicles enable service technicians. Cell phones keep employees connected. Office coffee makes the workplace pleasant. Holiday gifts acknowledge contributions. When structured correctly, these benefits are deductible for employers and invisible on employee W-2s.

For tax professionals, mastering these distinctions creates immediate value for business clients. Every employer wants to provide meaningful benefits. Guiding them toward tax-efficient structures while avoiding pitfalls demonstrates expertise that justifies advisory relationships.

Listen to the full Tax in Action episode for Jeremy Wells’ complete analysis, including additional examples and nuances not covered here.

The End of Data Entry and What It Means for Your Tax Practice

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Elizabeth Beastrom left public accounting 30 years ago because she was sick of rekeying data into tax returns. Now, as President of Tax and Accounting Professionals at Thomson Reuters, she works to make sure no accountant has to do that mind-numbing work ever again.

“I was a lazy CPA,” she admits with a laugh during this episode of the Earmark Podcast. “I didn’t want to spend my time doing work that I didn’t think was necessary.”

In this conversation with host Blake Oliver, Elizabeth and Kirat Sekhon, Thomson Reuters’ Head of Technology, map out their vision for automating the entire tax workflow, from gathering documents to delivering returns. They want listeners to know that AI-enabled firms are going to outcompete everyone else, and the shift from compliance to advisory isn’t optional anymore.

Why Tax Firms Can’t Keep Doing Things the Old Way

The numbers tell the story. Fewer people are taking the CPA exam while more accountants retire every year. Meanwhile, tax complexity keeps growing, which means more demand for services with fewer people to do the work. Throw in private equity firms buying up practices and pushing for efficiency, and you’ve got a perfect storm.

But it’s not just about headcount. The new generation of accountants expects modern tools that actually work together—not the clunky desktop software their predecessors put up with.

“They expect to use intuitive and connected tools,” Kirat explains, “so they have a better experience while they deliver value to their customers.”

So why has tax software stayed stuck in the desktop era while cloud accounting tools have taken off? Kirat points to two reasons. First, tax calculations are hard to get right, and once you build something that works, nobody wants to break it. Second, accountants themselves haven’t pushed for change. When you’re working 80 to 100 hours during busy season, the last thing you want is to learn new software.

“The term SALY—same as last year—still comes through,” Elizabeth notes. “You found a way to do it and you like to replicate that. Change is hard, especially when you have to introduce that to the firm when you’re working 80 to 100 hours a week.”

But resistance to change is becoming dangerous. Elizabeth’s own exit from the profession 30 years ago shows what happens when the work becomes too tedious. Back then, she discovered she loved the advisory side, including talking to clients, understanding their businesses, and making recommendations that actually helped them improve. But she was stuck doing data entry.

“I would spend time talking to my customers,” she recalls. “Some of my best inputs came from the people in accounts payable or accounts receivable. I would get a detailed understanding of their process.” But then she’d have to go back to rekeying tax data, and the contrast was too much.

Building the “Bookends” Around Tax Prep

Thomson Reuters isn’t trying to fix one piece of the tax workflow; they’re automating the whole thing. Their strategy focuses on creating what Elizabeth calls “strong bookends” around their core tax engines (GoSystem Tax, CST, and UltraTax).

The front bookend came through their acquisition of SurePrep three years ago. Practitioners dump all their client documents into the system, and SurePrep automatically classifies them, pulls out the relevant numbers, creates a binder for review, and fills in the tax software. No more manual data entry.

“That’s a huge time savings when you don’t have to spend time doing all of that manual data entry,” Kirat says, “and they can actually focus on the return.”

The back bookend arrived with SafeSend, acquired earlier this year. It handles return delivery, e-signatures, and payment collection, eliminating what Elizabeth remembers as the nightmare of printing, mailing, and faxing documents back and forth 30 years ago.

What’s different about Thomson Reuters’ approach is they’re keeping these tools open to work with competitors’ software too, not just their own tax products.

“It is an open, curated ecosystem,” Elizabeth emphasizes. “If customers find value in part of their workflow, we want to make sure we connect to it.”

Beyond just automating existing steps, they’re trying to eliminate unnecessary work entirely. Take the client questionnaire—that paper organizer Blake’s mom still fills out by hand every year. Thomson Reuters wants to “kill the questionnaire” by using AI to pre-populate information from prior returns and only ask for what’s actually new or missing.

The next frontier is what Kirat calls “agentic AI,” systems that don’t just handle one task but orchestrate entire workflows. These AI agents can use multiple Thomson Reuters products in sequence, making decisions along the way to get a return from start to finish with minimal human intervention.

But everything the AI does needs to be auditable. Kirat stresses that any AI handling tax work must show exactly what decisions it made and why.

“Our customers expect the work product of an accountant to be 100% accurate,” she explains. “Without providing that audit log with the decisions and choices and confidence levels, we’re missing the mark.”

Blake agrees enthusiastically, sharing his frustration with current AI tools that don’t show their reasoning. “I want to know why it matched this transaction,” he says. “There’s an AI conversation for each one of these transactions. Why not give that to us?”

The Shift to Advisory Can’t Wait

If machines can prepare returns faster and more accurately than humans, what exactly are clients paying for? Two-thirds of Thomson Reuters’ customers say they want to shift to advisory services, but most don’t know how to actually do it.

Enter Ready to Advise, launched in June 2024. The tool takes everything from a completed return and analyzes it against potential tax strategies based on that client’s specific situation and goals.

“It will quantify the savings,” Elizabeth explains. “It will ask for more information to get to a range. It will allow you to have that discussion where you can say, ‘Hey Blake, I noticed from your 1120-S filing some potential strategies you should take.'”

Then it walks you through implementing those strategies and produces client-ready documentation. For firms struggling to move beyond compliance, this is huge.

But technology alone won’t fix the business model problem. Clients have been trained to expect strategic advice for free. “I might call my accountant and say, ‘Hey, tell me what this big beautiful bill does for me this year?,’ which is code for don’t charge me for this,” Elizabeth says, capturing the conundrum perfectly.

That’s where Practice Forward comes in. It’s Thomson Reuters’ tool for helping firms understand their worth and develop advisory pricing models. The goal is shifting from hourly billing for returns to year-round advisory subscriptions.

Ready to Advise also solves a talent problem. Traditionally, you needed years of experience before you could offer meaningful tax advice. But with AI assistance grounded in Checkpoint’s content (maintained by over 4,500 subject matter experts), newer staff can contribute to advisory work much sooner.

“That junior associate’s experience, paired with all the knowledge that there is available in generative AI today, is incredibly powerful,” Kirat notes.

Blake shares a personal example that drives home the value of advisory over compliance. His tax preparer advised setting up a C-Corp to potentially qualify for QSBS treatment, which could save millions in taxes someday.

“I can’t even quantify the value of that,” Blake says. “But that’s why I’m willing to pay thousands of dollars for a tax return. It’s that insight, not the return.”

Meanwhile, DIY tax software keeps getting better. Blake describes doing a business return himself using consumer software with ChatGPT open for research. The same process would have taken hours of manual work just a few years ago.

Firms that stick to just preparing returns are going to get squeezed from both ends.

“AI-enabled professionals and firms, they’re going to outcompete and outperform,” Elizabeth warns, “because they’re going to be able to do it faster, better and get to this advisory, which our clients want.”

What to Do Right Now

So where should a traditional tax firm start? Elizabeth recommends figuring out what you hate doing.

“What are your pain points that you hate to do?” she asks. “There’s a pretty high likelihood that I or a talented person on my team is going to be able to say, ‘This is how we can solve that for you.’”

The technology exists today. SurePrep can handle document gathering. SafeSend can automate delivery. Ready to Advise can help you identify tax-saving opportunities. CoCounsel can answer complex questions using curated, expert-verified content. The audit logs are there to verify everything the AI does.

The harder change is mental: accepting that the compliance work that defined the profession for decades is becoming commoditized, and the future belongs to firms that embrace automation as the foundation for higher-value advisory services.

Elizabeth even suggests bringing these concepts into accounting education to attract new talent. Currently, tax courses focus on rules and calculations rather than strategy. After all, accounting is still “the language of business,” as Elizabeth was told as an undergraduate. The difference is that AI can now handle the grammar and spelling, freeing professionals to focus on telling the story.

The transformation won’t be easy, but it’s not optional. As Elizabeth learned when she left the profession out of frustration with mundane tasks, talented people won’t stick around if the work doesn’t engage them. The good news is that automation finally makes it possible to eliminate the drudgery and focus on what really matters: helping clients succeed.

Listen to the full conversation with Blake, Elizabeth, and Kirat for more insights on preparing your firm for the automated future of tax.

Two-Thirds of Accounting Staff Hate Private Equity—But Partners Love It

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Two-thirds of partners at private equity-backed accounting firms say they’re satisfied with their arrangements. But ask the staff actually doing the work, and you’ll hear a different story. Over half are dissatisfied, with one director calling the situation “a dumpster fire.”

This stark disconnect emerged from an Accounting Today survey discussed on The Accounting Podcast by hosts Blake Oliver and David Leary. The episode also revealed a disconnect in pricing. Tax preparers charge an average of just $280 for a basic 1040 (CPAs) or $228 (enrolled agents). These numbers had David asking incredulously, “Where are these people? I’ve never been quoted this low of a price.”

The Private Equity “Dumpster Fire”

The numbers from Accounting Today’s survey reveal a profession divided. Among partners and owners at PE-backed firms, 67% report satisfaction (40% very satisfied and 27% somewhat satisfied). But look at staff responses and it’s almost a perfect mirror image: 52% are either somewhat dissatisfied or very dissatisfied.

The anonymous comments from survey respondents paint an even bleaker picture. “It is a dumpster fire,” said one director at a large firm. “Low morale, people leaving, bonuses cut, pay raises eliminated or lowered.”

Another director at a very large firm agreed. “It’s horrible and dysfunctional. Losing clients, staff leaving, and partners pay more attention to their bank account than taking care of staff. Most partners are counting the days until they can leave with their money in hand.”

Perhaps most concerning for the profession’s future, 64% of respondents believe private equity will have a negative impact on the integrity and independence of public accounting firms. Another 56% think clients will suffer negative consequences.

“The industry will take a hit and the clients will take a hit,” David noted. “That’s not going to bode well for everybody else.”

It’s worth noting that fewer than 400 of the 44,000 US CPA firms have taken private equity investment, so less than 1%. But these tend to be larger, high-performing practices, and the trend only started accelerating around 2022.

Tax Preparers Leave Money on the Table

While PE-backed firms wrestle with cultural upheaval, smaller practitioners face a different challenge: chronic underpricing. The National Association of Tax Professionals’ 2025 survey reveals CPAs charge an average of just $280 for a basic 1040. Enrolled agents charge even less at $228, while non-credentialed preparers average $185.

These numbers shocked David. “Since I stopped doing my own taxes and pay an accounting firm to do them, it’s $1,200 to $1,300 a return. I’ve never been quoted this low of a price.”

Still, the survey contained some encouraging news. When preparers raise fees, clients rarely leave. Melissa Bowman, an EA in Ohio, increased prices 12-20% across the board twice since 2020, and “not one client left because of pricing.”

“If not one client leaves after you implement a substantial price increase like that, you’re still underpriced,” Blake pointed out.

One particularly surprising finding is that 18% of preparers don’t charge extra for state returns. “TurboTax has trained 45 million taxpayers over the last 30 years that you have to pay extra to get your state return done,” David noted. “The fact that almost 20% don’t charge for doing the state return seems crazy to me.”

Billion-Dollar Audit Relationships Raise Independence Questions

The independence concerns raised by private equity pale next to the decades-long, billion-dollar relationships between the Big Four and their largest clients. Deloitte has audited Microsoft since 1986, collecting $78 million in 2025 alone.

“This is like a $2 billion relationship between Deloitte and Microsoft over the last 40 years,” David calculated. “With that much money involved, the motivations just can’t be aligned with the public.”

The situation gets more complex when you consider that these firms also sell consulting services. “Doesn’t Deloitte sell Microsoft consulting type services and they implement Microsoft Copilot AI type things, but they also audit Microsoft?” David asked.

Blake acknowledged the concern. “These firms are audit firms, but they’re also consulting firms. And consulting teams are some of the biggest resellers now of the technology their clients develop.”

Change may be coming whether firms want it or not. With Microsoft cutting 15,000 jobs in 2025, David predicts inevitable pressure on audit fees. “They’ll go back to their auditor and say, ‘we don’t want to pay this much for our audit. We want you to use AI,’” David predicts.

What’s Next for the Profession?

The AICPA is seeking comments on ethics rules updates for alternative practice structures—the arrangements that enable private equity investment. But there’s a catch. Despite announcing the comment period weeks ago, the actual exposure draft won’t be available until December 29.

“Today is the 23rd,” David pointed out. “If it’s not done today, when are they doing this? Christmas Eve, Christmas Day?”

David predicted the process could drag on. “This could take a decade,” he suggested.

The accounting profession is under pressure from private equity reshaping firm culture, chronic underpricing in tax prep, and billion-dollar audit relationships raising independence questions. For practitioners, there is a clear need to raise prices and watch the PE developments carefully.

For the complete discussion, including a story about a Scottish police officer’s heroic retrieval of evidence from a toilet and concerns about IRS readiness for tax season, listen to the full episode of The Accounting Podcast.

The Nine Factors That Determine Whether a Business Is Real or Just a Hobby

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Susan Crile spent 25 years as a professional artist. In all but two of those years, she reported losses on her tax returns. When the IRS came knocking with a deficiency notice that could cost her tens of thousands of dollars, they claimed her art wasn’t a real business—just an expensive hobby.

What happened next became one of the most instructive Tax Court cases for understanding how to defend business deductions against IRS challenges.

In episode 16 of Tax in Action, host Jeremy Wells, EA, CPA, breaks down Susan Crile v. Commissioner (Tax Court Memorandum 2014-202)—a case he considers essential reading for anyone working with self-employed clients. As Jeremy explains, “If you work with small business owners, I strongly recommend reading through this opinion.”

When Your Business Becomes the IRS’s Target

The hobby loss rule creates what Jeremy calls a “heads I win, tails you lose” situation for the IRS. Here’s why it’s so devastating for small business owners.

When the IRS decides your activity is a hobby rather than a business, the tax consequences are brutal. “The income from these kinds of hobby, sport or recreational activities is still included in taxable income,” Jeremy explains. “But the reverse is not true. Those losses are not deductible.”

Think about what this means. If you’re an artist who sells $10,000 worth of paintings but spends $25,000 on studio rent, supplies, and marketing, the IRS still taxes that $10,000 as income. But if they say you’re pursuing a hobby, you can’t deduct any of that $25,000 in expenses.

Since 2018, when the Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions (made permanent by later legislation), hobby expenses have been completely nondeductible. You pay tax on every dollar coming in, but can’t offset any dollars going out. The only exception is cost of goods sold (COGS), as the cost of raw materials can still reduce gross income.

The burden of proving your activity is a legitimate business falls entirely on you. Courts won’t just take your word for it. As Jeremy notes, “I can say I’m hoping to make a profit someday, but the courts look at all of the objective factors that go into how I’m operating that activity.”

Who’s at Risk (And Who’s Not)

The hobby loss rule applies to nearly every small business structure: individuals filing Schedule C, partnerships, S corporations, estates, and trusts. But C corporations are completely exempt.

Jeremy points to Amazon as a perfect example. “Amazon was a C corporation pretty much from the start,” he explains. The company famously took seven to eight years before turning a profit. “There was a long time there where investors were nervous that Amazon was never going to be profitable.” Yet Amazon never faced hobby loss scrutiny because C corporations don’t have to worry about this rule.

Simply forming an LLC or electing S corporation status won’t protect you. “Just registering an entity such as an LLC or just making a tax election, such as electing to be an S corporation, doesn’t necessarily guarantee that that taxpayer is not going to have to worry about the hobby loss rule,” Jeremy emphasizes.

For partnerships and S corporations, the determination happens at the entity level, not the individual partner or shareholder level. That affects how losses flow through to individual tax returns.

Susan Crile’s David vs. Goliath Battle

Susan Crile was a tenured art professor at a university when she received IRS deficiency notices in 2010. The IRS was challenging tax years 2004, 2005, and 2007 through 2009—five years where her losses ranged from about $37,000 to $63,000 annually.

The IRS made two arguments. First, they claimed her art activity wasn’t engaged in for profit. Second, they argued that even if it was a business, it should be considered part of her work as an art professor, making the expenses unreimbursed employee expenses rather than business deductions.

Crile believed this was a test case. In an interview after the decision, she said she felt the IRS was exploring “the art industry as a whole to see how far it could go in terms of auditing artists.” Whether that’s true or not, her case established important precedents for creative professionals everywhere.

The Nine Factors That Saved Her Business

The Tax Court uses a nine-factor test from Treasury Regulation 1.183-2(b) to determine whether an activity has a profit motive. Jeremy notes that this framework actually came from earlier court cases. The courts created the test, and the Treasury later adopted it into regulations.

Here’s how each factor played out in Crile’s case:

1. The manner in which she carried on the activity

The court found Crile kept “relatively good records” of sales, galleries, and exhibitions. She worked with a bookkeeper for most years in question. But what really impressed the judge were her business decisions, like switching galleries when she realized her current venue no longer attracted buyers interested in her type of art. The judge concluded, “Petitioner’s marketing efforts demonstrate a profit objective.”

2. Her expertise and that of her advisors

The IRS tried arguing that while Crile could create art, she didn’t understand the business of selling it. The court thoroughly rejected this. The judge found she “understood the general factors that affect the pricing of art: a history of sales, gallery representation, solo exhibits, critical reviews, prestigious public accolades, and she worked diligently to achieve these credentials.” The court’s verdict? “She is, without doubt, an expert artist who understands the economics of her business.”

3. Time and effort expended

Crile spent about 30 hours per week on art during teaching periods and worked full-time creating art the rest of the year. But the court looked deeper, distinguishing between tasks necessary for any activity versus those “essential only because she was conducting a business.” Mundane business tasks like marketing, networking with collectors, and arranging shows would be unnecessary for a hobbyist.

4. Expectation that assets may appreciate

The court recognized that art is “a speculative venture where a single event, a solo show, a rave review or a museum acquisition can lead fairly suddenly to an exponential increase in the prices paid for an artist’s work.” Artists create inventory that might sit at low values for years before that breakthrough moment arrives.

5. Success in other activities

Crile had been an artist for over a decade before becoming a professor. Her academic success actually enhanced her standing with art professionals and expanded her clientele. This factor was relatively neutral in the case.

6. History of income or losses

This was Crile’s weakest point: she had only two profitable years in 25. Jeremy acknowledges “the IRS won this point.” However, the court noted that some losses might have resulted from improperly claiming personal expenses as business expenses. The 2008 financial crisis had also devastated the New York art market during several years under review. Most importantly, the court stated that “losses do not negate the petitioner’s actual and honest intent to profit from the sale of her art.”

7. Amount of occasional profits

With just two years of reported profits, this factor “weighed slightly in favor of the IRS.” But the court remained sympathetic, understanding that in the art world, one breakthrough can change everything.

8. Financial status

Crile had a salary from teaching, but she’d been an artist for over a decade before getting that job. She didn’t become an artist to shield other income from taxes. This factor was neutral.

9. Elements of personal pleasure

The court offered this memorable insight: “A level of suffering has never been made a prerequisite to deductibility.” Yes, Crile probably enjoyed creating art. But her extensive research, marketing efforts, and business operations took her activity “well beyond the realm of recreation.”

The Verdict That Protected Creative Professionals

When the court weighed all factors together, “both qualitatively and quantitatively,” the balance tipped in Crile’s favor. She had proven “an actual and honest objective of making a profit.”

The court found that her activity was indeed a business, allowing her to deduct ordinary and necessary business expenses, and any losses were deductible. As Jeremy summarizes, “Her professional conduct, demonstrated expertise, significant time commitment, and reasonable expectation of appreciation outweighed even decades of losses.”

Clearing Up the “Three-of-Five Year” Confusion

Many tax professionals misunderstand the three-of-five year rule. “I hear this misstated a lot as an activity can’t lose money for three or more years before it’s not deductible,” Jeremy says.

However, that’s not what the rule says. If an activity shows profit in any three of five consecutive years (or two of seven for horse-related activities), it creates a presumption of profit motive. This shifts the burden of proof from the taxpayer to the IRS, but it doesn’t guarantee anything.

“Even if the activity does meet that safe harbor presumption, the IRS can still determine that that activity is not engaged in for profit,” Jeremy warns. Conversely, “an activity can not have profits for more than three years and still be an activity engaged in for profit.”

Practical Lessons for Tax Professionals

Jeremy transforms Crile’s victory into actionable strategies for protecting clients:

  • Document everything. “Documentation and record keeping is key,” Jeremy emphasizes. “Part of the reason Crile was successful is because she had a really good documentation system of her income, expenses, and all the work she produced and her efforts to market that work.”
  • Understand your client’s industry. Jeremy notes how “understanding how the art industry works was key to this case.” Crile brought in expert witnesses to educate the court about art market dynamics. When you can explain why a business operates the way it does within its specific market context, losses become understandable business challenges rather than red flags.
  • Focus on profit motive, not profit. “Having a profit motive isn’t the same as regularly making a profit,” Jeremy clarifies. Don’t scramble to show profitability. Focus documentation efforts on proving business intent.
  • Get to know your clients. Jeremy urges practitioners to understand their clients’ business vision, market strategy, and operational challenges. This ensures “when they go through those periods of losses, you’ve got the ability to make a solid case for them that that activity is, in fact, still engaged in for profit.”

The Human Side of Tax Law

Jeremy finds Crile’s case particularly valuable because it shows “how technical rules and factors at play actually work out in a real life scenario.” Reading the court opinion alongside Crile’s post-case interview reveals “the human side of the story.”

The case made national headlines, with coverage suggesting it protected artists’ livelihoods by confirming their work could be businesslike. But as Jeremy notes, each case is different. “It’s entirely up to the taxpayer to conduct an activity in a professional and business-like manner to avoid the hobby loss rule.”

For tax professionals working with struggling entrepreneurs, such as artists, gig workers, or innovative startups, Crile’s case provides a masterclass in building defensible positions. The tax code, despite its complexity, can accommodate the messy reality of business development when practitioners know how to document and present their clients’ genuine business efforts.

Listen to Jeremy’s complete analysis of this landmark case in episode 16 of Tax in Action. If you work with small business owners, he strongly recommends reading the full Crile opinion to ensure your clients never face the devastating financial consequences of having their business reclassified as a hobby.

Why This SWAT Team CFO Says Your Legacy Systems Are Costing You Millions

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When Ximena Velazquez Maynard stepped into her role as CFO of Legacy Management Group in early 2023, she found exactly what she expected: a disaster. The company was juggling 30 separate QuickBooks files while their 11 nursing homes operated in a financial system where facilities couldn’t even talk to each other. Basic financial tasks that should take hours were consuming months.

But for Velazquez Maynard, this was familiar territory. Throughout her career, she’s been the “SWAT team” CFO who gets called in when companies need their accounting rescued, she explains in episode 32 of The Unofficial Sage Intacct Podcast. And she’s turned several of those disasters into companies that sold for huge profits within just a few years.

A Healthcare Empire Built on Shaky Financial Foundations

Legacy Management Group’s story begins in the 1980s with two nursing homes run like a mom-and-pop operation. Everything changed in 2018 when the current leadership took over with a vision to do something greater.

Since then, Legacy has expanded to 11 nursing facilities (nine in Louisiana, two in Texas), plus a pharmacy and mobile X-ray company. They have five holding companies, property companies, and a management company, all with slightly different ownership structures that need to stay separate for legal and financial reasons.

When Velazquez Maynard arrived, she inherited a patchwork of systems trying to manage this complexity. The 11 nursing homes were using PointClickCare’s financial module—a system so limited that facilities in the same software couldn’t communicate with each other. “It was not created by a very good accountant,” Velazquez Maynard says bluntly.

The remaining entities were scattered across QuickBooks files. At one point, they had 30 separate files to manage.

When Manual Processes Strangle Growth

The impact of these disconnected systems went far beyond inconvenience. Consider what happened when Legacy needed to split a bill among their 11 facilities. The accounting team had to make 11 different entries into 11 different files, plus create corresponding due-to and due-from entries. “They would never, ever reconcile in the end,” Velazquez Maynard recalls.

The lack of visibility created expensive blind spots. Floor spending requirements—a critical metric where nursing homes must spend a specific dollar amount per resident annually—went untracked. Without proper monitoring, Legacy once found themselves owing $300,000 to the government because they couldn’t see their spending trends across facilities.

“We could not see easily on a month-to-month basis where we were trending on our floor spending requirement per facility, which varies greatly,” Velazquez Maynard explains. This meant they couldn’t make informed decisions about staffing levels or resource allocation until it was too late.

During her interview for the CFO position, Velazquez Maynard didn’t sugarcoat the situation. “I hear your issues, I hear what you’re doing. It’s not working because you don’t have the software you need.” Within three months of starting, she confirmed the current setup couldn’t support Legacy’s growth plans.

The Complexity of Healthcare Finance

Healthcare organizations face unique challenges that make financial management particularly complex. Legacy deals with monthly audits, manages resident trust funds under strict regulations, and navigates billing across Medicare, Medicaid, hospice companies, and workers’ compensation.

“It’s a very complicated system,” Velazquez Maynard notes. The company often guides families through Medicaid applications that can take one to six months while providing care regardless of payment status. They serve some of society’s most vulnerable populations, including residents without family who cannot make their own decisions.

The St. Christina facility acquisition shows how operational and financial challenges intertwine. When Legacy bought this facility with “the absolute worst reputation,” Velazquez Maynard discovered a wheelchair ramp that, instead of being repaired, had padding on the adjacent wall to catch wheelchairs that might slide into it. “I was amazed. I was like, this is terrifying,” she recalls.

Legacy invested millions transforming the facility, adding private bathrooms and making it safer for residents. But such strategic investments require a level of financial visibility that’s impossible with 30 separate QuickBooks files.

A Rapid Transformation

Having implemented Sage Intacct eight years earlier at NTT Testing, Velazquez Maynard knew what was possible. This time, the implementation was even faster. “We implemented everything within two to three months,” she confirms.

The team kept it simple, using core Intacct functionality rather than trying to do too much at once. “We wanted to get everything in there. We got all the basics in flowing well first, and then we looked at adding purchasing and other things that may be available to us,” Velazquez Maynard explains.

The transformation wasn’t without challenges. Legacy invested in EMRConnect to pull financial and statistical data from PointClickCare into Intacct, hoping for complete visibility through dashboards and reports. Unfortunately, that integration hasn’t delivered as promised. “The most we’re getting out is basically journal entries coming over,” Velazquez Maynard admits. “That’s probably been our only challenging point throughout the integration.”

Despite this setback, the core implementation delivered immediate wins. Within months, Velazquez Maynard created custom floor spending reports that transformed how Legacy manages compliance. “It’s an easy report that we can look at every single month. And we do. We analyze it,” she says. “Each quarter, we’re able to make informed decisions on staffing.”

Life-Changing Automation

The most dramatic improvement came from Sage Intacct’s handling of inter-entity transactions. What once required hours of manual entries and reconciliation now happens automatically in the background.

“One thing that was life changing for us was the way that Sage Intacct handles due-to/due-froms in the background,” Velazquez Maynard shares. She still reminds her accountants they don’t need to create these entries manually. “Sage does it for you. It handles it all for you. Just put it in and pay it and call it a day.”

Legacy created targeted dashboards for facility administrators, the people Velazquez Maynard describes as “on the front line every single day trying to run those buildings and running in circles.” These administrators now see their facility’s financial performance in real-time, allowing them to fix issues before month-end close.

The dashboards help administrators review accounts payable, correct miscategorized expenses, and monitor budgets as things happen, not after the fact.

The finance team itself is lean—just two main accountants (a senior and staff accountant), an AP team, and the executive leadership. This small team now manages complex financial operations that previously consumed far more resources.

Building an Integrated Tech Stack

Sage Intacct’s integration capabilities allowed Legacy to build a comprehensive financial ecosystem. They use SmartLynX for scheduling (critical when labor is their biggest expense), iSolved for payroll and HR, and Divvy for credit card management.

“What Sage Intacct does really well. is integrating with other software, and there is always some kind of solution that they can find you,” Velazquez Maynard notes. If Intacct doesn’t have what you need, “there’s someone out there that can team up with Sage and it can become part of the platform that will make you a winner.”

The Real Cost of Standing Still

When asked about advice for other healthcare finance professionals considering modernization, Velazquez Maynard is direct: “They can’t be afraid of the cost, because in all reality, the cost of not doing it is probably greater.”

She points to the hidden expenses of staying on legacy systems. “The hours that are going to be spent by your CFO, controller, and accountants trying to do manual things or in Excel that could be automatic—it’s going to end up paying for itself.”

For organizations worried about implementation complexity, Velazquez Maynard offers reassurance. The implementation partners “point you in the right direction. They tell you step by step what you need to do.”

Looking ahead, Legacy faces the same challenge Velazquez Maynard identifies as healthcare’s biggest issue: the labor force. “Finding good labor is hard,” she admits. The company regularly evaluates wage scales, trying to determine if higher pay will attract better talent or if they’re “just throwing money at something.”

With facilities sometimes forced to use agency staff at $55-65 per hour, having clear financial visibility through SmartLynX metrics helps them better control these costs. “You have to be staffed. So sometimes there’s just nothing you can do.”

Lessons for Healthcare Finance Leaders

Legacy’s transformation from 30 disconnected systems to a unified platform offers clear lessons for healthcare organizations. The speedy implementation proves that transformation doesn’t require years of disruption. The immediate benefits, from automated inter-entity transactions to real-time floor spending reports, demonstrate tangible returns on investment.

Most importantly, Velazquez Maynard’s experience shows that the right technology enables growth rather than just supporting operations. Legacy continues expanding, confident their financial infrastructure can scale alongside their ambitions. When Velazquez Maynard took the job, she told her boss, “If you’re planning on selling in the next 20 years, I am not taking this job.” With the foundation they’ve built, she might just keep that promise.

For healthcare finance professionals wondering if transformation is worth the effort, Velazquez Maynard’s journey provides a clear answer. The question isn’t whether you can afford to modernize; it’s whether you can afford not to.

Listen to the complete conversation with Velazquez Maynard on The Unofficial Sage Intacct Podcast to hear additional insights about managing multi-entity healthcare organizations, building effective financial teams, and navigating the unique challenges of the nursing home industry.