in-20250827-IR-045250391NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241394 Individual Income Tax For The Year 2022 HOLDING The Department’s assessment of additional income tax was incorrect; married couple’s two Schedule Cs were not duplicates of business income and expenses. ISSUE

I. Individual Income Tax – Assessment.    

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 6-8.1-5-1; IC 6-8.1-5-4; 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); 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); IRS Publication 334, Tax Guide for Small Business (2022); IRS Publication 535, Business Expenses (2022); IRS Publication 587, Business Use of Your Home (2022); IRS Publication 946, How to Depreciate Property (2022). Taxpayers protest the assessment of additional individual income tax. STATEMENT OF FACTS Taxpayers are a married couple that live in Indiana and file their individual income tax return as married filing jointly. For tax year 2022, Taxpayers timely filed their IT-40 Indiana Income Tax Return. The Indiana Department of Revenue (“Department”) reviewed Taxpayers’ return and determined that Taxpayers had more federal adjusted gross income (“FAGI”) than what was reported on their Indiana IT-40. As a result, the Department issued a Notice of Proposed Assessment for additional income tax. Taxpayers protested, and an administrative hearing was held. This Letter of Findings results. Additional facts will be provided as necessary.

I. Individual Income Tax – Assessment.

DISCUSSION The Department determined that Taxpayers had more FAGI than what was reported on their Indiana IT-40 and assessed additional income tax, penalty, and interest. Taxpayers provided an explanation and copies of their 2022 federal return, W-2s, 1099 forms, and various receipts and related documentation for their business income and expenses. As a threshold issue, it is the taxpayer’s responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence that the Department’s claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving that 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). An assessment, including taxpayer’s penalty assessment, is therefore presumed valid. A taxpayer must provide documentation explaining and supporting that the Department’s position is wrong. Additionally, “[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). If a taxpayer uses a car or truck in a business, he/she may be able to deduct the costs of operating and maintaining the vehicle. IRS Publication 334, Tax Guide for Small Business (2022). A taxpayer can use either the “standard mileage rate” or “actual expenses” for deducting car and truck expenses. Id. The IRS provides a standard mileage rate that is updated periodically. Id. Indiana follows the mileage rate set by the IRS. Property used for business purposes may be deductible under certain circumstances. Generally, if property is acquired and expected to last more than one year, the entire cost of the property cannot be deducted in the year of purchase. Id. Instead, the cost of the property can be spread over a number of years with a portion deductible each year on Schedule C as depreciation. Id. In order for property to be depreciable, it must meet the following requirements: Id. The Modified Accelerated Cost Record System (“MACRS”) is the method used to depreciate most property purchased after 1986. IRS Publication 946, How to Depreciate Property (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). During the Department’s initial review, it determined that Taxpayers’ FAGI was incorrect. The review included adjustments related to Taxpayers’ Schedule C business income and expenses. Specifically, the Department stated that Taxpayers could not claim depreciation and car/truck expenses simultaneously, that the depreciation for a truck/trailer purchase could not be approximately $91,000, and that Taxpayers “double reported” expenses on separate Schedule Cs. During the hearing, Taxpayers explained that they used TurboTax to complete their return. For reasons unknown to Taxpayers, TurboTax required Husband and Wife to split the business income and expenses between each them and report the corresponding amounts on two Schedule Cs. Taxpayers believed because of this TurboTax requirement that even though the Schedule C in Husband’s name and the Schedule C in Wife’s name rely on different business expenses, the two Schedule Cs appeared as duplicates to the Department. In support of the protest, Taxpayers provided documentation related to their business and all Schedules attached to their return along with copies of their 2022 tax returns. Taxpayers operated a trucking business based in central Indiana. The business consisted of two trucks. During 2022, the trucks traveled routes in Indiana and several other midwestern states while delivering general freight loads. Taxpayers submitted their 2022 return to the Department. After review, the Department requested additional information in the form of Taxpayers’ federal return and related schedules, wage/income statements, a description of the business, and documentation for Taxpayers’ three largest three business income and expense categories. During the hearing, Taxpayers’ CPA stated that Taxpayers provided additional information in response to this request. The Department reviewed the documentation and determined it was still inadequate as related to the two Schedule Cs in Husband and Wife’s names. The Department also stated that Taxpayers were required to choose between mileage and actual expenses for the trucks. Finally, the Department stated Taxpayers could not claim depreciation and denied the two Schedule Cs, thus increasing Taxpayers’ FAGI. Taxpayers provided a significant amount of documentation during the protest review. An in-depth review shows that Taxpayers’ IT-40 Indiana Income Tax Return for 2022 had six Schedule Cs attached as detailed below. The Department allowed four of the Schedule Cs, and business related income and expenses for those Schedule Cs are not under protest. The Schedule Cs under dispute for this protest are the two related to the trucking business in Husband and Wife’s names (the first and the fourth Schedule Cs listed above). A review of documentation provided by Taxpayers shows that Taxpayers are correct. The dollar amounts shown on the two disallowed Schedule Cs are not duplicates. Receipts and other documents provided by Taxpayers verify such. Further, Taxpayers owned two different trucks and operated both under their business activities. Taxpayers claimed mileage on one truck and actual expenses (i.e., depreciation) on the other truck. Generally, the Department’s original statement was correct that a taxpayer must opt between mileage or actual expenses related to a vehicle. However, considering that Taxpayers operate a trucking business and operate more than one vehicle as part of the business, there is nothing prohibiting them from claiming mileage on one truck and actual expenses/depreciation on the second truck. This approach will require a detailed review by the Department when the return is processed. Further, Taxpayers claimed insurance expenses as a business expense on the Schedule Cs. Inclusion of insurance premiums is allowed under IRS publication 334 as long as the policy covers vehicles used in the business. Per the information and documentation provided by Taxpayers, deducting the insurance premiums on the Schedule Cs should be allowed. During review of the two Schedule Cs, the Department notes that some “Contract Labor” expenses appeared to be duplicates. The Department discussed the issue with Taxpayers’ representative. Taxpayers later confirmed that seven of the entries listed are duplications. As such, $3,400 listed as a deduction related to “contract labor” should not be allowed when the Department updates Taxpayers’ account post-protest. Finally, the Department notes that on the Schedule C related to the dispatch services provided by Wife (sixth on the list above) that Taxpayers claimed the entire monthly amount of their utility bill for electricity as a business expense. The Department refers Taxpayers to IRS Publication 334, Tax Guide for Small Business, specifically the “Business Use of Your Home” section. While deductions are allowed related to the use of a taxpayer’s home as a part of his/her business, certain requirements must be met. IRS Publication 587, Business Use of Your Home, (2022), provides additional information related to deductions for utility expenses. Based on available information, it appears Taxpayers operate their business from their home. If this is correct, then it is likely that only a certain percentage of their utilities are deductible as a business-related expense and not the entire year’s expenses. Taxpayers should correct this error in future tax years. In sum, Taxpayers provided sufficient documentation to support that the Schedule Cs filed in Husband and Wife’s names are not a duplication of their trucking business’ income and/or expenses. Other than accidentally including $3,400 of contract labor expenses twice, Taxpayers’ Schedule Cs were correct as originally filed. Because Taxpayers operate two trucks within their trucking business, they are allowed to claim mileage on one truck and actual expenses/depreciation on the other truck. The insurance premiums claimed as an expense are also allowable. The Department will review Taxpayers’ account, remove $3,400 of the contract labor expense, and update the proposed assessment accordingly. Taxpayers should correct any errors related to utility expenses on their Indiana returns going forward. FINDING Taxpayers’ protest is sustained to the extent detailed above. June 3, 2025 Replaces Finding Document: New