Things are progressing between you and Eric, but you're dreading this next visit with his son and daughter-in-law. The more time you've spent with Eric, the more you've learned that he is rather misinformed about tax law. What makes things more challenging is his tendency to share his misinformation with Jackson and Kara. You realize that your accounting services are why Eric's Elmhurst Motorcycle has both stayed afloat and even prospered through the years.

You take a deep breath because Jackson and Kara are about to walk through the door. Although Jackson and Kara were very pleased with the refund they received after they filed last year's taxes, you have the feeling they're going to be looking for more. Then again, who isn't? Peggy Sue: Hi, Jackson and Kara, nice to see you again! Kara: Nice to see you too. Jackson has some questions. Peggy Sue: Go ahead! Jackson: My dad says that the only small deduction left is for a small business. He says that I can charge all our bills to the business and get a higher refund. Kara: (Interrupting) Diapers and formula are expensive. Peggy Sue: Well, you cant write off diapers and formula but Im happy to talk about what constitutes a business expense. What kind of business are you thinking about? Jackson: Well, last year I re-built the engine on a 65 Mustang and it is sweet! I want to put all the parts and my time on our tax return and get more of a refund. Peggy Sue: (Carefully) Ok, well . . . let me start by clarifying what your dad was saying about business expenses.

Activity

Prepare a 23-page paper (approximately 350 words per page) explaining the following to the Erbs.

• What constitutes a business expense
• The difference between a business and a hobby
• The difference between the cash and accrual methods