To understand these concepts, I need to clarify a few important points. When I was a young boy, my mother taught me that “frustrations only come from unrealized expectations”. What took her only a few seconds to teach developed into a lifetime of study and application. While “Saving Thousands” may come across like click-bait, in reality I’ve had countless experiences of preparing tax returns for new Law Enforcement clients who didn’t understand the important points of this post. Let’s make some clarifying assumptions:
- You or someone you know are a Law Enforcement (LE) Professional either currently working, or looking to pick up, security extra jobs.
- These extra jobs are not coordinated through the Police Department (PD) and the pay is not included in your PD W-2.
- You are considered a contractor and are paid on a 1099 basis. (If you are paid on a W-2, please see another one of our blog posts)
Now that these points have been clarified let’s talk strategy!
Biggest Blunder
The most common mistake I see when reviewing LE tax returns is little to no expenses being claimed. As this is the most common, I need to at least touch on it. The law refers to deductible business and professional deductions in the following way: They must both be ordinary and necessary to be considered deductible. Easy enough right?
However, there has been several court cases required to define the words ordinary and necessary regarding the law. On irs.gov, their definition is provided:
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
There isn’t a strictly defined list somewhere in the tax code that dictates what is tax deductible and what isn’t in regards to business expenses. What is or isn’t tax deductible is based on your individual facts and circumstances and the application of ordinary and necessary. You should seek the advice of a tax professional when determining your deductions.
In the scenario of little to no expenses being claimed, I can easily save you thousands of dollars just making sure all of the appropriate expenses are applied to your return.
The Runner-up
The second most common LE tax return mistake I see is one where 1099 extra job income is reported on the form Schedule C, but expenses are reported as itemized deductions. There is a tremendous amount of minutiae and detail that I could cover here. In the interest of directness, I’ll limit this to just one point. Claiming expenses on the form Schedule C helps reduce self-employment income, and the self-employment tax that comes with it. The self-employment tax is approximately 15%. This 15% extra tax is based not on gross earnings, but profit, and goes towards paying for Social Security and Medicare.
Therefore, by claiming the expenses as itemized deductions, you don’t help to reduce the self-employment tax. If your net profit on security extra jobs is $10,000, then your self-employment tax could be $1,500 more than it ought to be. This may seem too obvious to be a common occurrence, but it truly is the second most common mistake I see when other professionals prepare a LE tax return.
Neither Last nor Least
The third most common LE tax return mistake I’ll share has the worst possible outcome. In the other scenarios, you pay too much tax to the federal government, money that you ought to have kept. However, in this scenario you’ve claimed everything you can think of. Your entire cell phone family plan bill, that new extra job car you bought from another officer or at an auction, your mortgage payment, and your health insurance. I’m glad you were thinking out of the box! Unfortunately you didn’t apply ordinary and necessary correctly and you’ll end up paying for it in penalties, interest, audit fees and most importantly, your time. Now all of the deductions I mentioned may surprise you. I selected them because they are on the line of what is and what isn’t deductible. Let me explain:
- Your cell phone bill may be deductible. However, you first have to determine which portion of it is attributed to your specific number and what percentage of it is used for work. A family plan including a spouse and two children could run you $240 per month. Your phone is the primary phone on the plan, so all of the surcharges and taxes apply to your line. This means of the $240, your phone accounts for $130 of the plan. You use your phone 75% of the time for work, which would then allow $97.50 per month to be deducted.
- You bought an extra job car for $6,500 from another officer. It’s a Crown Vic and it’s already rigged with lights and decals and is immediately ready to use. You don’t write this off all in one year! The vehicle may need to be depreciated over a five year period or we may elect to just claim the mileage driven on the vehicle for a larger deduction. Remember, facts and circumstances.
- Your mortgage payment is not tax deductible. The mortgage interest is, as well as the property taxes. You may qualify for an office-in-home deduction but even still the total payment cannot be written off.
- Your health insurance is paid through your check with the PD. It’s taken pre-tax and has already been deducted before you ever see your check.
The third most common LE tax return mistake feels great at first, but you’ve overstepped and claimed too many deductions. You are now more susceptible to IRS scrutiny and run the risk of having to spend thousands of dollars because you thought to save a few bucks preparing your own tax return, or hiring someone who didn’t truly understand your industry.
How Molen & Associates Saves You Thousands
We sit down with you, interview-style, going over many of the most common LE expenses. We’ve created a LE Checklist for your use during the year, to help you keep up with the things you’re purchasing. We understand your industry and have specialized in LE tax return preparation since 1980. Our agents prepare more than 1,000 LE returns each year. We will help you avoid all of the common and not so common mistakes in tax return preparation and make sure you pay the least amount of tax allowable by law.
If you’re reading this and you’re an EJ coordinator, or you’re part of an EJ Facebook group, please share this article with other Law Enforcement Professionals. It could mean thousands of dollars in savings, and in your chosen industry, you know how much that can mean.
Kevin Molen
Senior Tax Professional
