in-20250730-IR-045250361NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20251114 Individual Income Tax For The Tax Year 2022 HOLDING Individual established that the Department’s assessment was too high. ISSUE

I. Individual Income Tax – Burden of Proof.

Authority: I.R.C. § 61; I.R.C. § 62; I.R.C. § 162; I.R.C. § 465; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-8.1-5-1; IC 6-8.1-5-4; Stinson Est. v. United States, 214 F.3d 846 (7th Cir. 2000); Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64 (Ind. 2009); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Internal Revenue Service, Topic no. 305, Recordkeeping; Internal Revenue Service, Topic no. 509, Business use of home; Internal Revenue Service, Topic no. 510, Business use of car; Internal Revenue Service , Publication 535: Business Expenses. Taxpayer protests the proposed assessment of additional income tax for 2022. STATEMENT OF FACTS Taxpayer is an Indiana resident who timely filed his 2022 Indiana Full-Year Resident Individual Income Tax Return (“IT-40”). The Indiana Department of Revenue (“Department”) reviewed Taxpayer’s return and denied business losses that Taxpayer claimed on his federal return pending verification of the business’ income and expenses. Taxpayer timely protested the proposed assessment. An administrative hearing was held. This Letter of Findings results. Additional facts will be provided as necessary.

I. Individual Income Tax – Burden of Proof.

DISCUSSION Taxpayer argues that he properly reported his business expenses and income to the Department. The Department denied the loss that Taxpayer claimed on his federal Schedule C because the Department did not receive an explanation for why Taxpayer’s business reported $0 of income, nor did it receive documentation supporting Taxpayer’s three largest categories of business expense. IC 6-8.1-5-4(a) requires that “[e]very person subject to a listed tax must 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.” The person also “must allow inspection of the books and records and returns by the [D]epartment or its authorized agents at all reasonable times.” IC 6-8.1-5-4(c). When the person subject to the listed tax fails to keep books and records, under IC 6-8.1-5-1(b), the Department “shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment” if the Department “reasonably believes that a person has not reported the proper amount of tax due.” All tax assessments are prima facie evidence that the Department’s claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC 6-8.1-5-1(c). Importantly, “each tax year stands alone.” Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). The taxpayer is required to provide documentation to explain and support his or her challenge. When an agency is charged with enforcing a statute, jurisprudence defers to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010). Indiana imposes an adjusted gross income tax on all residents. IC 6-3-2-1. An Indiana resident taxpayer’s income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. The Indiana statute refers to the Internal Revenue Code to compute what is considered the taxpayer’s Indiana income tax. I.R.C. § 61(a) provides that gross income includes “all income from whatever source derived[.]” 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. As a threshold issue, the taxpayer must not be an employee when he carried on the trade or business. “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.” Internal Revenue Service, Publication 535: Business Expenses (2022). If a taxpayer purchases tangible personal property, such as a vehicle, only when the taxpayer uses the property for business purposes, is the taxpayer allowed to deduct the cost of such use. Internal Revenue Service, Topic no. 510, Business use of car. Internal Revenue Code provisions dealing with deductions, exemptions, and exclusions are “matters of legislative grace.” Stinson Est. v. United States, 214 F.3d 846, 848 (7th Cir. 2000). The taxpayer who claims such deduction must maintain adequate records to substantiate it. See Internal Revenue Service, Topic no. 510, Business use of car; Topic no. 305, Recordkeeping. If a taxpayer uses their home as part of their self-employment business, they may claim expenses based on that use. See Internal Revenue Service, Topic no. 509, Business use of home, available at https://www.irs.gov/taxtopics/tc509 (last visited April 28, 2025). In order to qualify for this deduction, a taxpayer must use part of their home in one of the following ways: Exclusively on a regular basis as [the] principal place of business for [the] trade or business; [e]xclusively on a regular basis as a place where [a taxpayer] meet[s] or deal[s] with [their] patients, clients, or customers in the normal course of [their] trade or business; [a] separate structure that's not attached to [their] home, used exclusively on a regular basis in connection with [their] trade or business; [o]n a regular basis for storage of inventory or product samples used in [their] trade or business of selling products at retail or wholesale, so long as [the taxpayer’s] home is the sole fixed location of such trade or business; [f]or rental use; or [a]s a daycare facility. Id. “If the exclusive use requirement applies, [a taxpayer] can’t deduct business expenses for any part of [their] home that [they] use both for personal and business purposes.” Id. A taxpayer may deduct for expenses related to the maintenance of the business portion of their home, including “real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs.” Id. If a taxpayer is not “at risk” for all of a business’ losses in a certain year — that is, if someone other than the taxpayer would bear the burden of the loss — the taxpayer may not claim business losses greater than the amount that they stood to lose. I.R.C. § 465(a), (b). However, if some business losses may not be claimed due to this rule, the taxpayer may deduct them in the next tax year. I.R.C. § 465(a)(2). Originally, Taxpayer claimed that his business, which sells life insurance policies, had $0 of income and $5,844 of expenses, resulting in a net loss of $5,844. Specifically, Taxpayer claimed $1,715 in advertising expenses; $394 in car and truck expenses; $480 in insurance expenses; $961 in utilities; $160 in various electronic business expenses; and $2,134 as a Section 465(d) carryover. The Department asked Taxpayer to substantiate his three largest areas of expense (i.e., the Section 465(d) carryover, advertising, and utilities) and to explain why his business had $0 of income. During the protest process, Taxpayer submitted receipts and invoices substantiating his expenses. Taxpayer also represented that he inadvertently did not report his income from the business because it was under $600. Taxpayer submitted documentation showing that he had $391 of commission income from his business in tax year 2022. Taxpayer successfully substantiated his advertising expense and his utilities expense by submitting bills showing that he paid the amounts that he alleged. However, Taxpayer declined to submit his federal 2021 tax return, so the Department cannot verify that he had a valid Section 465(d) carryover. Because the Department did not ask Taxpayer to substantiate any of the other categories of expense prior to issuing its assessment, the Department will not now revisit those areas of expense. The Department agrees that Taxpayer has substantiated two of his three largest business expenses. However, Taxpayer did not substantiate his Section 465(d) carryover, and Taxpayer showed that he had income above what he reported on his federal Schedule C. The Department will therefore recalculate Taxpayer’s taxes owed, adding $391 of income and removing $2,134 of expenses compared to Taxpayer’s original filing. FINDING Taxpayer’s protest is sustained to the extent described above. May 8, 2025 Replaces Finding Document: New