Tax Deductions

What Social Media Tax Advice Gets Wrong About Business Vehicle Write-Offs

Earmark Team · May 31, 2026 ·

Social media influencers love to throw out tax advice about having your business purchase a vehicle to claim big expenses, especially accelerated depreciation. Sometimes this advice even goes out to people who aren’t self-employed. But as Jeremy Wells, EA, CPA, explains in Episode 27 of Tax in Action, there’s more to deducting the business use of a vehicle than what these influencers would have you believe.

“For most self-employed folks and small business owners, buying a vehicle in the name of your business is probably a bad idea,” Wells argues. The tax law doesn’t care whose name is on the title. It cares about how you use the vehicle, trip by trip. And for most small business owners, you can usually get the same tax effect by owning the vehicle personally.

The episode walks through the statutory framework, including IRC §162, §262, §274, and §280F, along with regulations, revenue rulings, and court cases that govern vehicle deductions. Wells also shares a three-question framework to help determine the best approach for each client’s specific situation.

What Makes Vehicle Use Deductible (And What Doesn’t)

The foundation starts with IRC §162, which allows taxpayers to deduct ordinary and necessary operating expenses of a business. Wells points out that the statute says nothing about ownership; it addresses operating expenses of an automobile used in a trade or business. Meanwhile, IRC §262 says personal, living, and family expenses are not deductible, including commutes between your residence and your place of business.

The key comes from Revenue Ruling 99-7, which Wells emphasizes clearly lays out the difference between a business trip and a personal trip. “We need to think about whether each specific trip is business or personal,” he explains. The unit of analysis is the trip itself, defined by both its origin and destination.

Deductible trips include:

Travel from your main workplace to another workplace in the same area (like visiting a customer)
Attending off-site business meetings in your local area
Driving to a temporary work location outside your metro area

But if a trip begins or ends at your personal residence, it’s typically a commute, meaning it’s personal and nondeductible.

“When I look through a client’s mileage logs, I filter that mileage log in a spreadsheet for the personal residence of that client,” Wells says, sharing his approach. “Nine times out of ten, a lot of those trips begin or end with the taxpayer’s personal residence.”

There’s an important exception. The Tax Court found in Curphey v. Commissioner that trips between a bona fide home office and other work locations are deductible. If your home office qualifies under §280A(c)(1)(A) as your principal place of business, then your residence becomes a business location. But Wells cautions, “It’s not a home office just because you say it’s a home office. It’s a home office because it’s your primary place of working.”

This principle goes back to the Supreme Court’s 1946 decision in Flowers v. Commissioner, which held that business trips must be motivated by “the exigencies of business rather than the personal conveniences and necessities of the traveler.”

The Strict Substantiation Rules You Can’t Ignore

IRC §274(d) requires strict substantiation of vehicle expenses, including the amount, time, location, and business purpose. Wells explains there are two standards: adequate records and sufficient evidence.

“Adequate records” is what taxpayers should strive for: a contemporaneous log combined with documentary evidence like receipts. Wells specifically recommends smartphone apps. “One I usually recommend is MileIQ.” These apps use your phone’s GPS to automatically detect and record trips. “As soon as your phone’s GPS recognizes that you’re moving faster than a normal human being can walk or run, it assumes that’s a trip in a vehicle.”

Without adequate records, taxpayers fall back on “sufficient evidence,” or their own statement plus whatever corroborating evidence they can find, like bank statements showing fuel purchases. But Wells warns, “usually the IRS and the courts will see right through” reconstructed logs created from memory.

The strict substantiation rules of §274(d) supersede the Cohan rule, which normally allows courts to estimate expenses. This catches many practitioners off guard. But Wells puts it bluntly: “When it comes to vehicle use, Congress has effectively eliminated judicial mercy.”

The Depreciation Trap

IRC §280F limits annual depreciation for “listed property,” including passenger automobiles, defined as four-wheeled vehicles rated at 6,000 pounds or less of unloaded gross vehicle weight. The IRS publishes inflation-adjusted limits every year.

But it gets tricky under §280F(d)(2). You can only deduct the portion of depreciation attributable to qualified business use, yet your basis in the vehicle drops by the full depreciation amount, including the nondeductible personal portion. For example, if maximum depreciation is $5,000 and business use is 60%, only $3,000 is deductible, but basis still drops by the full $5,000.

The real danger comes when business use patterns change. As long as business use stays above 50%, normal MACRS depreciation applies. But if business use drops below 50% in any subsequent year, two things happen:

You must switch from MACRS to the Alternative Depreciation System (ADS), which is essentially straight-line depreciation with longer recovery periods.
You must recapture as ordinary income all excess depreciation, which is the difference between what you claimed and what would have been allowable under ADS from the start.

“Accelerated depreciation and especially Section 179 expensing are wagers on future business use,” Wells explains. “You’re essentially gambling that the business use of that vehicle will never drop below 50%.”

There’s another complication for business-owned vehicles. When an employee uses them (including S corporation shareholder-officers), the business use is a nontaxable working condition fringe benefit. But any personal use, including commuting, becomes taxable compensation under §274(l). That means payroll taxes on top of income taxes.

A Three-Question Framework To Cut Through the Complexity

Wells uses three questions to analyze any vehicle situation:

Who owns the vehicle?
Who uses the vehicle?
What percentage of use is for business and how is that expected to change over time?

“In my experience, most mistakes and complex situations arise when taxpayers ignore at least one of these three questions, or the answer to one of these three questions,” Wells says.

He demonstrates with three scenarios involving Jessica and her business, Lighthouse LLC:

Scenario 1: Jessica’s LLC is a sole proprietorship. She uses her personal vehicle 80% for business, but trips begin or end at her residence. A friend recommends buying a vehicle through the LLC for depreciation. “For tax purposes, it makes no difference,” Wells says. The LLC is disregarded, so she deducts expenses the same way regardless of ownership. Plus, Wells notes business ownership usually means “higher financing costs, especially in terms of the interest rate, and higher insurance costs.”

Scenario 2: Now Lighthouse LLC is an S corporation. If the corporation owns the vehicle and Jessica uses it personally, that personal use becomes taxable wages. “A much simpler approach,” Wells says, “would be to reimburse her for the mileage or for the business portion of her actual operating expenses under an accountable plan.”

Scenario 3: The LLC owns the vehicle, but Jessica’s business use has dropped from 80% to 60% and continues declining. She has three options:

Prepare for recapture by making estimated payments (least desirable),
Reduce personal use to keep business use above 50%, or
Distribute or sell the vehicle before crossing the threshold.

“Once business use drops below 50%, that recapture is unavoidable,” Wells says.

The Simpler Alternative: Standard Mileage Rate

Treasury regulations allow taxpayers to use the IRS’s annually published standard mileage rate instead of tracking actual expenses and depreciation. You multiply business miles by the rate, and parking, tolls, auto loan interest, and property taxes remain separately deductible. Everything else, including fuel, maintenance, and insurance, is included in the rate.

“It makes it relatively easy,” Wells says, especially when using a smartphone app for tracking.

The Bottom Line for Tax Professionals

Wells closes with wisdom worth remembering: “The best vehicle strategy is not the one that maximizes this year’s deduction. It’s the one you can defend three years from now.”

For most small business owners, personal ownership of the vehicle combined with proper substantiation and accountable plan reimbursements delivers the same tax benefits without the complexity of business ownership. The key is understanding that deductibility depends on how you use the vehicle, not whose name is on the title.

Having a qualifying home office often provides more value than business vehicle ownership by converting commutes into deductible business trips. And when it comes to depreciation, remember that accelerated write-offs are a bet that business use will stay high. That’s a bet many small business owners will lose as their business evolves.

Listen to the full episode for Wells’ complete analysis of every code section, regulation, and court case discussed here.

Your Client’s Non-Cash Donation Documentation Is Probably Missing These Critical Details

Earmark Team · February 9, 2026 ·

A married couple donated used goods worth $6,760 to charity. They filed Form 8283 with their 2019 tax return. The IRS examined the return, the case ended up in Tax Court, and the entire deduction was disallowed.

What makes this case remarkable is that neither the IRS nor the Tax Court ever claimed the donation didn’t happen. Both sides agreed the contribution was real and made to a qualifying organization. The taxpayers lost anyway.

In this episode of Tax in Action, host Jeremy Wells breaks down the Besaw v. Commissioner case to reveal what went wrong. It comes down to something every tax practitioner has seen.

“When you help people with tax returns, and you ask them to upload their documents around tax time, and you get a slew of these blank Goodwill receipts,” Wells explains, “the taxpayer’s expecting some sort of tax benefit from all that. And you’re looking at that thinking, I can’t do anything with this.”

When Good Donations Go Bad

The timeline of the Besaw case reads like a warning every tax practitioner should remember.

In 2019, the Besaws filed their joint federal income tax return claiming $6,760 in non-cash charitable contributions. They attached Form 8283, the correct form for reporting non-cash donations of $500 or more. So far, so good.

But the form was basically empty. The Besaws left out the donation dates, the fair market values of the donated property, their cost basis in that property, and the method they used to arrive at the deductible amount.

“Really, all of the important information,” Wells notes.

The IRS examined the return in 2022 and requested proof for those charitable contributions. In response, the Besaws submitted what Wells calls a “reconstructed record,” essentially taking what was on their incomplete Form 8283 and using it to piece together documentation of their contributions.

The IRS said that wasn’t good enough. They denied the deduction and sent a notice of deficiency. The case wound up in Tax Court.

Contemporaneous Is The Magic Word

The fatal flaw in the Besaw case comes down to one word that appears throughout tax law: contemporaneous.

“The word contemporaneous comes up in other places in tax law as well,” Wells explains. “If you drive to meet a client or meet a vendor, you’re supposed to keep a contemporaneous written mileage log. That means you’re supposed to keep that throughout the year. You’re not supposed to look back at the prior year and try to reconstruct that from memory.”

The same principle applies to charitable contribution records. But Section 170 gives a specific definition. Documentation must be received by the earlier of the date you file your return or the due date (including extensions).

The Besaws created their records in 2022, long after filing their 2019 return and while the IRS was already examining it. That timing made all the difference.

What makes this case really striking is that nobody disputed that the donation actually happened. “At no point did the IRS or the Tax Court claim the donation may never have happened,” Wells emphasizes. “Everyone agreed that the donation happened. The issue was whether it was properly documented.”

This flows from a principle Wells returns to often. “Deductions are a matter of legislative grace.” That phrase appears throughout Tax Court decisions. It means the deduction doesn’t come free. You can’t just say you made a contribution and expect the benefit. The law sets rules for how taxpayers claim and prove deductions. Fail to meet those requirements, and the deduction disappears, even if the donation was real.

The Four Levels of Documentation Requirements

Understanding what documentation you need depends on how much you’re donating. The rules get stricter as the amounts go up.

Level 1: Non-Cash Contributions Under $250

For donations under $250, Treasury Regulation 1.170A-13(b)(1) requires a receipt showing:

The name of the charity
A description of the property
The date and location of the contribution

This is where those blank receipts from donation drop-offs become a problem. “A lot of times those slips of paper wind up in our client portal without much more than whatever is preprinted on them by the organization, which is usually just the name of the organization and its location,” Wells observes. “There’s no other information there.”

The receipt doesn’t need to include a value—that’s the taxpayer’s job. But it must describe what the taxpayer gave.

Level 2: Non-Cash Contributions Over $250

Cross the $250 threshold, and you need a contemporaneous written acknowledgment from the organization. This must include:

A description of the property
A statement of whether any goods or services were provided in exchange, and a value or good-faith estimate of those goods or services

“This is actually where the taxpayer failed in this Tax Court case,” Wells points out, “because the charity receipts contained no descriptions of the donated items.”

Remember, the acknowledgment must be received by the earlier of the filing date or the due date, including extensions. Miss that window, and you can’t fix it later.

Level 3: Total Non-Cash Contributions Over $500

When total non-cash contributions exceed $500, you must file Form 8283. Treasury Regulation 1.170A-13(b)(3) says you need to report:

The date you acquired the property
How you acquired it (i.e., purchase, gift, or inheritance)
Your cost or basis in the property
The fair market value at the time of donation
The method used to determine the fair market value

“The taxpayer in this Tax Court case left all these blank,” Wells notes. “And that was problematic for him.”

Level 4: Single Items or Groups Over $5,000

When any single item or group of similar items exceeds $5,000, IRC Section 170(f)(11)(C) requires a qualified appraisal. The taxpayer, the charity, and the appraiser all must sign Section B of Form 8283.

Wells has seen how this plays out. “I’ve had situations where taxpayers wanted to claim a deduction in excess of $5,000, and once we explain the appraisal requirement, either they didn’t want to go through with the appraisal, or they adjusted their valuation of that contribution to an amount below $5,000.”

What You Need vs. What You File

The charity doesn’t provide valuations on receipts. “It’s up to the taxpayer to report and to calculate a fair market value of those contributed items,” Wells explains. “It’s not up to the organization to put that together.”

But descriptions must be detailed enough to identify the items and estimate value. You can’t write “trunk full of stuff.” But you don’t need to list every single piece of clothing either.

Beyond what gets filed with the return, Treasury Regulation 1.170A-13 requires taxpayers to keep:

A detailed list of donated property
Receipts showing dates, locations, and descriptions
Fair market value worksheets showing how they calculated values
Any appraisals, if required

This is what the IRS requested in 2022, and what the Besaws couldn’t produce in its original form. Form 8283 is only part of the package.

Dealing with Those Blank Goodwill Receipts

“When you see those blank Goodwill receipts pop up in your client portal, how will you address those?” Wells asks. It’s a question every practitioner faces each tax season.

When receipts say something like “household goods, used clothing $1,000,” is that enough? Based on the Besaw case and the regulations, “Probably not,” Wells says. “We need a little bit more information than that.”

When non-cash charitable contributions appear, Wells recommends asking these questions:

What exactly did you donate? Get actual descriptions, not just “clothing”
When and where did they donate? Dates and locations matter
Is there a receipt or written acknowledgment? If not, do they have their own records?
Does the record describe the property adequately? “Stuff” won’t cut it
Did they receive anything in return? This affects the deductible amount
Do total non-cash contributions exceed $500? This triggers Form 8283
Does any single item exceed $5,000? This may require an appraisal
How did they determine the value? They need an actual method

Getting Real About Fair Market Value

Treasury Regulation 1.170A-1(c)(2) defines fair market value as “the price a willing, knowledgeable buyer would pay a willing, knowledgeable seller under no compulsion.”

For clothing and household goods, this usually means thrift shop value. Wells recommends a practical test. “If you didn’t know anything about this t-shirt other than you saw it hanging on a rack in a thrift shop and you liked it, what price would you reasonably pay for that?”

One common problem is sentimental value. “Just because an item holds some sentimental value for you or your family doesn’t necessarily mean it has a higher fair market value,” Wells cautions. “Sentimental value doesn’t really translate into actual market value.”

There’s also a quality requirement. Under Section 170(f)(16), clothing and household goods must be in “at least good used condition” to qualify. Worn-out or broken items are not deductible at all.

Four Myths That Create Problems

The Besaw case debunks several common assumptions:

Myth 1: A signed receipt is enough

In reality, the receipt must describe the property and include other details.

Myth 2: You can fix missing details later

This killed the Besaws’ deduction. Documentation must be contemporaneous.

Myth 3: Fair market value is optional for small donations

Form 8283 requires fair market value for every non-cash donation over $500.

Myth 4: If the donation happened, the IRS should allow it

The Besaw case proves otherwise. Both sides agreed that the donation occurred. But the Tax Court still disallowed the deduction.

The Bottom Line

The Besaw case demonstrates that, in tax law, documentation beats facts. A legitimate charitable donation means nothing without proper contemporaneous records.

Tax practitioners must remember:

Contemporaneous means by the filing date or due date (including extensions)
Different amounts trigger different requirements
Form 8283 isn’t the whole story. Taxpayers must keep detailed records
Those blank Goodwill receipts are audit risks waiting to happen

“This Tax Court case illustrates that substantiation is everything,” Wells concludes. “It really is in a lot of areas of tax law, and especially here in terms of charitable contributions.”

The charitable deduction can be powerful, but it comes with serious technical requirements. Listen to the full episode and make sure your clients understand these rules before they drop off that next load at Goodwill, and definitely before they try to claim the deduction.

Which Employee Benefits Survived Recent Tax Legislation and Which Disappeared Forever?

Earmark Team · February 5, 2026 ·

Picture an HVAC technician standing in a Florida hardware store, personal credit card in hand, about to purchase a part needed to complete an air conditioning repair. It’s a routine moment that plays out thousands of times daily across the country: an employee spending personal funds on a legitimate business expense. But what happens next determines whether that simple transaction remains a straightforward reimbursement or transforms into unexpected taxable income.

This scenario is part of the final installment of the Tax in Action podcast’s three-part series on fringe benefits. In this episode, host Jeremy Wells, EA, CPA, completes his comprehensive discussion of IRC Section 132 benefits by looking at the remaining four fringe benefit categories and tackling the often-misunderstood topic of accountable plans.

The timing couldn’t be better. The Tax Cuts and Jobs Act of 2017 initially suspended many traditional benefits through 2025. Now, the One Big Beautiful Bill Act has made those restrictions permanent. And ir’s crucial for tax practitioners to understand these changes.

The Legislative Wrecking Ball: What’s Gone and What Remains

Before advising clients on fringe benefits, practitioners need a clear picture of what recent legislation has taken off the table permanently.

No Qualified Transportation Benefits Deductions for Employers

The qualified transportation fringe once covered four benefit categories:

Transportation in a commuter highway vehicle
Transit passes
Qualified parking
Qualified bicycle commuting reimbursement

For employers in major cities, these benefits were a meaningful way to help employees manage commuting costs.

That’s all changed now.

The Tax Cuts and Jobs Act disallowed the employer deduction for these benefits from 2018 through 2025, with one narrow exception: employers could still deduct transportation costs provided to ensure employee safety. As Jeremy explains, this means “vehicles that need additional security, such as bulletproof glass or a driver, a chauffeur that is trained in defensive driving techniques”—not typical small business scenarios.

The One Big Beautiful Bill Act made this disallowance permanent under IRC Section 274(a)(4).

But there’s a crucial nuance: the employee exclusion still exists for most of these benefits. Employees can still receive transit passes or qualified parking tax-free, within the limits in Treasury Regulation Section 1.132-9. The employer just can’t deduct the cost anymore. This creates an awkward situation where “there’s really not a strong incentive for the business to provide that fringe benefit,” Jeremy notes.

Bicycle commuting reimbursement fared worse. The Tax Cuts and Jobs Act eliminated both the employer deduction and the employee exclusion entirely. “Beginning with tax year 2018, the qualified bicycle commuting reimbursement is no longer a thing,” Jeremy confirms.

Moving Expense Reimbursements Apply Only to Military and Intelligence

Under IRC Section 217, employers used to be able to exclude from employee income the reimbursement of moving household goods and travel expenses between residences (including lodging but not meals). It was a practical benefit for companies relocating talent.

The Tax Cuts and Jobs Act suspended the exclusion and the individual’s ability to deduct moving expenses. The One Big Beautiful Bill Act made that suspension permanent, with two specific exceptions.

Members of the U.S. Armed Forces on active duty who move pursuant to a military order still qualify. Also, the One Big Beautiful Bill Act added employees or new appointees of the intelligence community, as defined in Section 3 of the National Security Act of 1947.

For everyone else, this is a benefit “we just really won’t see that much anymore,” Jeremy says.

What Benefits Survived?

Not all benefits fell victim to legislative changes. Two Section 132 benefits emerged unscathed.

Qualified Retirement Planning Services (Section 132(m)) allows employers maintaining qualified employer plans to provide tax-free retirement planning advice to employees and their spouses. Jeremy describes this as situations where “you might meet with a financial advisor” when becoming eligible for employer-sponsored retirement plans.

The benefit requires nondiscrimination. Highly compensated employees can participate only if services are available “on substantially the same terms to each member of the group of employees.”

Qualified Military Base Realignment and Closure Fringe (Section 132(n)) compensates military personnel and certain federal civilian employees for housing value declines caused by base closures. Jeremy explains how military bases drive local economies, and when they close, “selling a house could be pretty difficult.”

The Defense Department’s Homeowners Assistance Program provides three payment scenarios:

Private sale: difference between 95% of prior fair market value and actual selling price
Government acquisition: greater of 90% of prior value or mortgage payoff
Foreclosure: payment directly to lienholder

The program is run by the U.S. Army Corps of Engineers and is currently limited to wounded, injured, or ill soldiers and their surviving spouses.

Achievement Awards and the Gym Membership Myth

Beyond Section 132, two benefit categories generate frequent questions (and misconceptions).

Specific Rules for Achievement Awards

Employee achievement awards survived legislative changes intact. Employers can provide tax-free awards for length of service and safety achievements, but the rules are rigid.

Safety achievement awards cannot go to “a manager, administrator, clerical employee, or other professional employee.” Jeremy clarifies the recipient must be “someone that is actually in a line of work within that company where safety could be an issue.” For example, awards can go to workers on factory floors or construction sites, but not office workers.

No more than 10% of eligible employees can receive safety awards annually.

Length of service awards require at least five years of employment. Jeremy notes these are “usually ten, 15, 20 years” in practice.

For both categories, the awards must meet the following requirements:

It must be tangible personal property (such as the “stereotypical gold wristwatch”)
It cannot be cash, cash equivalents, vacations, meals, lodging, event tickets, or securities
The award must involve a “meaningful presentation,” such as a sort of ceremony or all-hands meeting
The award cannot create conditions suggesting disguised compensation

There are also dollar limits to keep in mind. The award value is limited to $1,600 per employee per year for qualified plan awards, and $400 for non-qualified awards. A qualified plan must be written and not discriminate toward highly compensated employees.

Athletic Facilities: The Question That Won’t Die

Jeremy addresses a common question from self-employed clients: “How do I let my business write off my gym membership?”

But gym memberships are inherently personal expenses, and therefore not deductible.

The athletic facilities benefit under IRC Section 132(j-4) requires the facility be “owned or leased and operated by the employer” for the “substantially exclusive use” of employees, spouses, and dependent children.

The following absolutely do not qualify:

Gym memberships
Country club memberships
Personal trainers
Any fitness program open to the public

Jeremy sympathizes with self-employed clients who want to look good for their clientele, but wanting doesn’t make it deductible. The only path requires the business to literally own or operate the gym itself.

The Three-Requirement Test for Accountable Plans

When employees spend their own money on business expenses, accountable plans determine whether reimbursements are tax-free or taxable wages.

The Employee’s Dilemma

IRC Section 62(a)(1) creates a problem. Employees cannot deduct business expenses from their gross income. The Tax Cuts and Jobs Act suspended the old miscellaneous itemized deduction (subject to 2% of AGI), and the One Big Beautiful Bill Act made the exclusions permanent.

Returning to Jeremy’s HVAC technician example, “They get to a site, they are ready to make the repair, but they’re missing a part.” The technician buys it with personal funds. Without proper reimbursement, “this was not a personal expense. This was a business expense. The employee should expect to be reimbursed.”

Three Requirements, Zero Flexibility

Treasury Regulation 1.62-2 establishes three criteria for accountable plans. Miss any one, and “allowances, advancements and reimbursements paid under a non-accountable plan have to be included in the employee’s gross income.”

Requirement 1: Business Connection

The expense must be “ordinary and necessary for the employer” and incurred “in connection with the performance of services as an employee.”

Jeremy warns against payments made “regardless of whether the employee actually incurs or is reasonably expected to incur bona fide employee business expenses.” Those payments automatically fail the test.

Requirement 2: Substantiation

For general expenses, employees must provide documentation “sufficient to enable the payer to identify the specific nature of each expense.” Vague terms like “miscellaneous business expenses” don’t qualify.

For Section 274(d) expenses (travel, meals, vehicle use), strict rules require:

Dates and durations
Locations and distances
Business purpose
Identity of individuals involved

Jeremy emphasizes “receipts or contemporaneous logbooks” as the standard.

Requirement 3: Return of Excess

When providing advances, employers must get back any unsubstantiated amounts. Jeremy gives a simple example: “You give an employee $100 to drive across the county” but receipts total $40. “The employee needs to return the additional $60.”

A safe harbor exists if the company provides quarterly statements showing advances versus substantiated amounts and gives employees 120 days to substantiate or return the excess.

The Cascade Effect of Failure

Revenue Ruling 2006-56 contains a harsh rule. If an arrangement “routinely pays allowances in excess of the amount substantiated without requiring actual substantiation” or repayment, “all the payments, not just the excess, but all payments” become taxable wages.

The Recharacterization Trap

“An arrangement that characterizes taxable wages as nontaxable reimbursements or allowances doesn’t satisfy the business connection requirement,” Jeremy points out, emphasizing a critical limitation.

This comes up frequently with S-corporation shareholder-employees who engage advisors mid-year. “We can’t go back in the past and look at that and try to recharacterize some of those wages. That is not allowed,” Jeremy explains.

Who’s Excluded

Independent contractors fall outside accountable plan rules entirely. Jeremy clarifies that reimbursements “need to be included in the gross income that’s reported as payments to that independent contractor” on Form 1099-NEC. The contractor then deducts the expense themselves.

Partners in partnerships create a gray area. “I don’t really see a case for using accountable plans for partners in partnerships,” Jeremy says. Instead, handle reimbursements through the partnership agreement, with unreimbursed expenses deducted on page two of Schedule E.

Protecting Clients from Costly Mistakes

The fringe benefit rules have permanently changed, and the remaining benefits require careful implementation. As Jeremy concludes, employers must understand the rules “whenever they provide any sort of benefit or compensation to employees that they want to be deductible and/or excludable.”

Accountable plans are a critical mechanism for separating tax-free reimbursements from unexpected wage income, but the three requirements don’t allow for partial compliance.

Practitioners must know what’s permitted and work to correct persistent misconceptions. Gym memberships don’t become deductible because clients want them to be, and companies can retroactively reclassify wages.

The stakes justify the diligence. Every employer who mishandles these benefits creates lost deductions for the business and unexpected taxable income for employees. And nobody wants that.

This concludes Jeremy’ three-part series on fringe benefits and accountable plans. Listen to the full episode for complete details, and check out part one and part two covering qualified employee discounts, no-additional-cost services, working condition fringes, and de minimis benefits.

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

Earmark Team · January 28, 2026 ·

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.

From OnlyFans Audits to AI Cheating Scandals: Inside Accounting’s Strangest Week Ever

Earmark Team · January 24, 2026 ·

In episode 465 of The Accounting Podcast, hosts Blake Oliver and David Leary tackle one of the most bizarre unintended consequences of recent tax legislation: IRS agents may soon need to review OnlyFans content at work to determine if digital creators qualify for tax deductions. This absurd scenario perfectly captures the chaos unfolding as artificial intelligence and new regulations collide with traditional accounting practices.

The IRS’s Awkward New Job Requirement

The new “no tax on tips” deduction allows digital content creators to deduct up to $25,000 from their taxes. But conservative groups successfully lobbied to exclude “pornographic activity” from this benefit, leaving the IRS to determine what qualifies as pornography—a definition the Supreme Court has never clearly established.

“Are IRS agents going to have to sit in their offices at work and look at OnlyFans accounts and determine whether or not this content qualifies?” Blake asks. “Supreme Court Justice Potter Stewart famously said, ‘I know it when I see it.’ So that’s my question.”

The timing couldn’t be worse. The IRS just closed hardship telework requests, forcing employees back to the office while the agency faces a backlog of over 8,000 accommodation requests and has lost 25% of its workforce through voluntary separations this year.

David raises another complication: “If somebody did one video that got determined to be pornographic, do you lose the whole deduction or can you claim all the other days that you got tips?”

Tax professionals face their own dilemma. “Let’s say you get a client who says they want to claim the tips deduction, and they’re an online creator,” Blake explains. “Are you going to check out the content and decide whether it qualifies?”

When AI Meets Ethics—The KPMG Scandal

While the IRS grapples with content moderation, KPMG Australia is dealing with its own technology-related embarrassment. Multiple auditors were caught using AI and group chats to cheat on mandatory compliance training during 2023-2024. This happened after KPMG had already paid a $50 million fine for exam cheating from 2015-2020.

“AI is really good at taking these kinds of tests,” Blake notes. “Just copy paste all the questions into ChatGPT and you’ll pass in a heartbeat.”

The consequences were light: formal warnings for most, one verbal caution, and one person who left months later. The firm didn’t report the incident to regulators.

“They got fined $50 million for it before and then they just continued to do it,” David points out. “So the fines don’t work, obviously.”

The PCAOB is now warning it will closely scrutinize AI use in accounting firms. They’re particularly concerned about private equity-backed firms, fearing pressure for short-term results will compromise audit quality when combined with AI automation.

The Death of the Billable Hour

Beyond scandals, AI is reshaping how accounting firms operate and charge for their services. The billable hour, introduced in the early 1900s as a management tool and dominant since the 1960s, faces extinction.

“When AI can review thousands of contracts in minutes instead of weeks, charging for time spent becomes economically absurd,” writes Rita McGrath of Columbia Business School in the Wall Street Journal.

Blake experienced this transformation firsthand as a freelance bookkeeper. “I billed hourly for keying transactions into accounting software. I then figured out how to automate 90% of it. I had a choice: bill 80-90% fewer hours and lose all my revenue, or switch my clients to fixed fees and take ownership of the process.”

The efficiency gains are already here. Ramp has AI approvals handling 80-90% of transactions automatically. Xero’s new auto-reconcile feature uses AI to match transactions with high confidence. According to OpenAI’s survey of 9,000 workers, employees save an average of one hour daily using AI, with heavy users saving ten hours weekly.

But not every company succeeds at this transition. Pilot raised $118 million at a $1.2 billion valuation, betting it could automate bookkeeping and achieve software margins. Today, they have just 2,500 clients and recently launched a partner program to offload the labor they couldn’t eliminate.

“The fact that they’ve launched a partner program indicates they’re trying to push labor costs out of the company so they can be a software company,” Blake observes.

The irony isn’t lost on David. “They have this headline, ‘Tired of endless QuickBooks updates breaking your workflow.’ But the very first app they list in their integrations is QuickBooks. It’s built on QuickBooks.”

AI Writing Reports Nobody Trusts

Companies are racing to use AI for financial reporting even while harboring deep doubts about its reliability. Twenty-eight percent of financial executives already use generative AI for external reporting. ON Semiconductor’s AI writes entire sections of management discussion and analysis. Hewlett Packard Enterprise plans to use AI for first drafts of financial statements starting in January.

“Take financial statements, drop them into ChatGPT and ask for the narrative. It does a spectacular job,” Blake says. “Taking numbers and turning them into a story that non-accountants can understand, highlighting what’s important, it’s really good at that.”

Yet Harvard Business Review’s survey of 603 business leaders shows only 6% of companies trust AI for core business processes. Most limit AI to low-risk or supervised tasks.

“The work accountants do requires near 100% accuracy,” Blake explains. “Research shows AI achieves 80% accuracy at 30-minute tasks but 100% only for tasks taking a few minutes.”

Meanwhile, Meta’s creative accounting for its Hyperion data center—using complex structures to keep it off-balance sheet—shows human financial engineering still outpaces AI. As the Wall Street Journal called it, “Artificial intelligence, meet artificial accounting.”

What Comes Next

Interesting research is challenging assumptions about what drives audit quality. Studies show offices with less competition deliver better audits with fewer errors. “Competition pushes down fees, which incentivizes auditors to cut corners,” Blake explains.

Another study found audit teams with more women deliver higher quality at lower fees, but only in supportive environments with good work-life balance and female partners.

President Trump, meanwhile, claims tariff revenue will eliminate income tax entirely. “We’ve taken in literally trillions of dollars,” he stated, though actual tariff revenue was only $258 billion last year versus $2.7 trillion from income taxes.

“Doesn’t anybody prep him?” David wonders. “He just makes up numbers.”

The accounting profession is at a crossroads. Will accountants become the quality control layer ensuring AI meets professional standards? Or will they cling to outdated models until technology makes them irrelevant?

To hear Blake and David’s full discussion, including details about the new Trump IRA accounts for kids and Senator Jim Justice’s $5 million tax settlement, listen to episode 465 of The Accounting Podcast.