in-20250917-IR-045250447NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20242422 Individual Income Tax For the 2020, 2021, and 2022 Tax Years HOLDING Individuals established that the Department’s assessment of additional Indiana individual income tax was overstated. ISSUE

I. Individual Income Tax – Schedule C Income and Expenses.

Authority: I.R.C. § 61; I.R.C. § 62; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-2-2; IC 6-8.1-5-1; Stinson Est. v. United States, 214 F.2d 846(7th Cir. 2000); Indiana Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 45 IAC 3.1-1-66; IRS Publication 535, Business Expenses (2022); Black’s Law Dictionary (11th ed. 2019). Taxpayers protest the proposed assessments of additional Indiana individual income tax resulting from an audit of a restaurant for which they are the sole proprietors. STATEMENT OF FACTS

I. Individual Income Tax – Schedule C Income and Expenses.

Taxpayers a married couple who are Indiana residents. Taxpayers own and operate a restaurant. The Indiana Department of Revenue (“Department”) conducted an audit of the restaurant for the 2020, 2021, and 2022 tax years. As a result of the audit, the Department adjusted the restaurant’s sales tax and withholding tax liabilities. Those adjustments resulted in an increase to Taxpayers’ individual tax liability. The Department issued the individual tax assessments in husband’s name, but the restaurant is owned as a sole proprietorship by husband and wife. Hereinafter they will be referred to as “Taxpayers.” Taxpayers disagreed with some of the adjustments and submitted a protest to that effect. An administrative hearing was held, and this Letter of Findings results. Letter of Findings 03-20242423 and Letter of Findings 04-20251333 address the protests related to the withholding tax audit and sales tax audit, respectively. Additional facts will be provided as necessary. DISCUSSION Taxpayers protest the Department’s assessment of additional Indiana individual income tax. In support of her protest, Taxpayer provided copies of her Form Schedule C Profit or Loss From Business (“Schedule C”) and Form 1099-K Payment Card and Third Party Network Transactions from each of the tax years at issue. As a threshold issue, it is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence the Department’s claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving the proposed assessment is wrong rests with the person against whom the proposed assessment is made. Id.; See e.g. Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). A taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. Further, “[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). 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(a). 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 industry. 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 535, Business Expenses (2022). “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(c). The Department conducted an audit of Taxpayers’ restaurant for both sales tax and withholding tax. That audit resulted in adjustments to the restaurant’s tax liabilities. Taxpayers operate the restaurant as a sole proprietorship and thus they report all self-employed income and business expenses on Schedule C of their individual tax return. Adjustments to the restaurant’s tax liability resulted in adjustments to Taxpayers’ individual income tax liability. The audit report stated “[i]t was determined in the withholding tax audit [] that wages were paid in cash and checks and these were not included in the gross receipts reported on the Schedule C Income tax return.” As a result, gross receipts on Taxpayers’ individual income tax return were also adjusted. Letter of Findings 03-20242423, issued contemporaneously with this Letter of Findings, concluded that the adjustments to the restaurant’s gross receipts based on unreported wages were incorrect. Thus, the corresponding adjustment to Taxpayers’ individual income tax liability is also incorrect. The audit also addressed Schedule C deductions that Taxpayers took on various expenses including advertising, insurance, rent, repairs, maintenance, and supplies. In a statement of protest, Taxpayers’ representative requested “a reasonable amount of mileage be allowed as all vehicle expense was removed from the years in question.” Taxpayers’ representative is incorrect. Rather, the audit report provides, “[T]axpayer was accounting for vehicle expenses for three vehicles . . . ” The Department permitted Taxpayers to claim those expenses for two of the three vehicles. The audit report reflects that the Department asked Taxpayers to provide mileage logs and registration information for the additional vehicle. Taxpayers failed to do so, and expenses for the third vehicle were disallowed. Taxpayers did not present any documentation at the hearing to support their claim that they should have been permitted to claim expenses for the third vehicle. As to the other Schedule C expenses, Taxpayers did not raise any argument regarding deductions relating to advertising, insurance, rent, repairs, maintenance, or supplies. Additionally, Taxpayers did not submit any documentation to rebut the Department’s adjustments to those expenses. In summary, the Department’s adjustment to Taxpayers’ individual income tax liability based on changes to gross receipts for Taxpayers’ business were incorrect. However, the Department correctly adjusted several Schedule C expenses based on a lack of documentation from Taxpayers. FINDING Taxpayers’ protest is sustained to the extent that a supplemental review by the Department will result in a reduction of the assessments for additional Indiana individual income tax. July 10, 2025 Replaces Finding Document: New