in-20260128-IR-045260002NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE MEMORANDUM OF DECISION: 01-20251380 Individual Indiana Income Tax For the Year 2023 HOLDING Married couple provided documentation proving the Department’s adjustments to their adjusted gross income related to Schedule C were incorrect. ISSUE

I. Indiana Individual Income Tax – Income Determination.

Authority: I.R.C. § 62; I.R.C. § 162; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-2-2; IC 6-8.1-5-4; IC 6-8.1-9-1; Stinson Est. v. United States, 214 F.2d 846 (7th Cir. 2000); Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Wendt LLP v. Indiana Dept. of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dept. of Local Gov't Fin., 939 N.E. 2d 1138 (Ind. Tax Ct. 2010); IRS Publication 334, Tax Guide for Small Business (2023), https://www.irs.gov/pub/irs-prior/p334--2023.pdf; Topic no. 503, Deductible Taxes, https://www.irs.gov/taxtopics/tc503. Taxpayers argue that the Department’s adjustments to their 2023 tax return were incorrect. STATEMENT OF FACTS Taxpayers are a married couple and Indiana residents. For tax year 2023, Taxpayers filed their Indiana Full-Year Resident Individual Income Tax Return (“Form IT-40”) as married filing jointly. Taxpayers calculated their Indiana adjusted gross income using figures from their federal return, which included a Schedule C related to their business. Taxpayers’ Form IT-40 computed a refund of approximately $4,000. After review, the Indiana Department of Revenue (“Department”) adjusted Taxpayers’ return and disallowed the Schedule C attached to Taxpayers’ return in its entirety. This adjustment reduced Taxpayers’ anticipated refund to $44.  Taxpayers disagreed and submitted a protest to that effect.  An administrative phone hearing was held. This Memorandum of Decision results. Additional facts will be provided as necessary.

I. Indiana Individual Income Tax – Income Determination.

DISCUSSION Taxpayers protested the Department’s disallowance of their Schedule C and reduction of the calculated refund for tax year 2023. A review of Department records shows that the Department reviewed Taxpayers’ Form IT-40 and adjusted the return related to the Schedule C business income and loss. Per the protest submission, Taxpayers believe the adjustments were due to an error with TurboTax software which inadvertently removed Schedule C losses from their Indiana return. In support of the protest, Taxpayers provided over 400 documents related to their business income and expenses. As a threshold issue, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department's position is wrong. The Indiana Tax Court has noted that poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dept. of Local Gov't Fin., 939 N.E. 2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dept. of State Revenue, 977 N.E.2d 480, 486 (Ind. Tax Ct. 2012). “[W]hen [courts] examine a statute that an agency is 'charged with enforcing . . . [courts] defer to the agency's reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.’” Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014).  More generally, IC 6-8.1-9-1(a) affords a taxpayer a statutory right to file a claim for refund. Indiana imposes a tax “upon the adjusted gross income of every resident person, and on that part of the adjusted gross income derived from sources within Indiana of every nonresident person.” IC 6-3-2-1(b). IC 6-3-2-2(a) outlines what is income derived from Indiana sources and subject to Indiana income tax. There is a presumption that a taxpayer files his/her federal income tax return as required by the Internal Revenue Code. Thus, to effectively compute what is considered a taxpayer’s Indiana income tax, Indiana law refers to the Internal Revenue Code. IC 6-3-1-3.5 provides a starting point in determining a taxpayer’s taxable income and calculating what would be his/her Indiana income tax after applying certain additions and subtractions, with any necessary modifications following. Modifications are outlined in IC 6-3-1-3.5(a). A taxpayer who is in a trade or business may be able to claim deductions “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.” I.R.C. § 62(a)(1); I.R.C. § 162. “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of 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.”  IRS Publication 334, Tax Guide for Small Business - Business Expenses (2023), https://www.irs.gov/pub/irs-prior/p334--2023.pdf (last visited November 4, 2025). “Internal Revenue Code provisions dealing with deductions, exemptions, and exclusions are matters of legislative grace.” Stinson Est. v. United States, 214 F.2d 846, 848 (7th Cir. 2000).  Taxpayers are required to “keep books and records so that the [D]epartment can determine the amount, if any of the person’s liability for that tax by reviewing those books and records. The records . . . include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks.” IC 6-8.1-5-4(a). During the Department’s initial review, it determined that Taxpayers’ federal adjusted gross income (“FAGI”) as listed on the Indiana state income tax return was incorrect and adjusted the FAGI to “match verifiable income.” Specifically, the Department disallowed Taxpayers’ Schedule C in its entirety and requested additional information related to the business’ income and loss. Taxpayers provided copies of over 400 documents that included credit card statements, receipts, purchase invoices, etc., along with Excel spreadsheets detailing the business expenses. After further review, the Department approved depreciation but continued to disallow the Schedule C losses. Taxpayers protested the assessment and submitted the information referenced above for a second time. During an administrative phone hearing, Husband explained that he and his wife decided to open a business. The business entity was formed in 2021, but it took about two years to purchase and renovate the business property. Most renovations were performed and completed in 2023, and the business did not open to the public until mid-June 2023. This scenario resulted in a large business loss for tax year 2023. Considering the circumstances along with a review of the documentation provided shows that Taxpayers’ return and Schedule C were correct as originally filed. Business losses were large because renovations were completed in 2023 while business income was limited because the business was only open for five months of 2023. Finally, Taxpayers’ account states that Taxpayers were “writing off their property tax bill” and that this action is not allowed. This is incorrect. Real property taxes may be deductible if certain conditions are met for individual taxpayers such as itemizing deductions. Topic no. 503, Deductible Taxes, https://www.irs.gov/taxtopics/tc503 (last visited November 5, 2023). Relevant to this protest, real estate taxes can be deducted on Schedule C as long as the taxes were levied for the general public welfare and assessed uniformly at a like rate. IRS Publication 334, Tax Guide for Small Business - Taxes (2023), https://www.irs.gov/pub/irs-prior/p334--2023.pdf (last visited November 4, 2025). The property taxes “written off” by Taxpayers were the property taxes for their business property.  This type of deduction is allowed on Schedule C as a valid business expense. The Department will review Taxpayers’ 2023 Form IT-40 and allow the Schedule C business loss as originally filed, including a deduction for business property taxes. The Department will then issue any refund still owed to Taxpayers. FINDING Taxpayers’ protest is sustained. November 17, 2025 Replaces Finding Document: New