As a small business owner, you want to take every legal tax deduction you can to lower your tax bill. But lingerie? A petting zoo? Daily breakfast eaten at your desk? As it turns out, one of those three items passed IRS scrutiny, proving that what's crazy for one business to try to deduct could turn out to be fine for another.
Firearms was a popular response mentioned by several experts asked to share some of the unique items for which they've seen business owners try to get a tax break.
"A client tried to deduct the cost of a shotgun," says Steven J. Weil, Ph.D., EA, president and partner of Fort Lauderdale firm RMS Accounting. "The reason given was, 'I am a pharmacist and I need to protect myself in case someone wants to break into my house looking for drugs'."
Another small business owner tried to deduct the cost of a concealed weapons permit class because they claimed it would allow them to "protect their office," says Jeffrey Beebe, a CPA in Boise, Idaho. The problem? "They didn't do anything that represented any kind of special risk," he says.
And Thomas J. Williams, a tax accountant who operates Your Small Biz Accountant, LLC, said a client thought their "concealed weapon and permit would be deductible since it would be used for security purposes at the office." He had to point out to the client that for an item to be deductible, it "must meet the necessary and ordinary test for the industry type. The client did not keep cash on site, nor were they located in an overly crime-ridden area; a general sense of feeling safer by owning a gun would not qualify as reasonable business expense."
Off the Wall … But Deductible?
"A purchase from SexyHighHeels.com," says Donna Merrill, business coach, tax expert and founder of Business Untangled, describing surprising items her clients have tried to write off. That purchase turned out to be a personal gift, purchased on a business credit card (another no-no). It didn't fly. But two other unusual ones did:
- A petting zoo for a direct sales home-based business. "Positioned strategically on the tax return with very visible notes to be seen upfront, this deduction continued to be accepted by the IRS for numerous years," she says.
- A Playboy subscription. "This expense was actually put through the scrutiny of an audit," says Merrill. "It was a legitimate expense for the taxpayer, who was a photographer who did boudoir photography."
"Clothing and shoes" are the ones that top the list of creative deductions Andrew G. Poulos, principal of Atlanta-based Poulos Accounting & Consulting, Inc., sees clients try to take. "Other crazy deductions I have seen include expensive gifts to their spouse, which include jewelry, lavish trips and even lingerie as a 'gift.' "
Meals and entertainment deductions can trigger an audit if the business owner isn't careful. "In my experience, the most abused expense is meals and entertainment," according to Williams. "Clients are under the wrong impression that it's a free for all. I once had a client try to deduct their daily breakfast because he happened to be speaking on the phone with a customer or sitting at his desk completing paperwork."
Folasade Ayegbusi, founder of Accountingwithfolasade.com, says she's seen a business owner try to deduct the occasional "alcohol run" under meals and entertainment. "Now, if the doctor prescribed you alcohol, then yes, we can deduct it," she says.
Is Fido Deductible?
Pets can be expensive, and no doubt a tax deduction to lessen the burden would be nice. Some entrepreneurs do try. One of Weil's clients, for example, tried to deduct the cost of their dog saying, "He is the company mascot, and we provide medical coverage for our employees."
Joshua Zimmelman, owner of Westwood Tax & Consulting, says he's had clients try to deduct vet bills and the cost of pet food by claiming their dogs were doing double duty as "guard dogs." Beebe also had a client who tried to deduct the cost of their pet German Shepherd by claiming it was a guard dog.
Hobby or Business?
"People try to wrap their hobbies — from a kid's soccer team to auto racing — into their business," says Crystal Stranger, EA and president of 1st Tax. "It's a thin line often between what does and does not fly when it comes to making something personal be business-related by calling it advertising or marketing," she warns.
One test: Is it highly related to your business? She gives this example: "If you have a steer-roping team and run a business that builds saddles for steer roping, then the activities of competing your team and traveling to events are likely to be fully deductible. Whereas if your business is insurance, you will have a harder time connecting that to being a profit center."
Vacations & Beach Homes
Personal vacations disguised as a business trip are another potential tax trap, warns Avo Asdourian, EA and founder of VirtualTaxAccountant.com. "If the deduction is for a convention and you are audited, the IRS will require the conference name and supporting registration documents, and proof that you attended the conference at least eight hours a day," he explains. He adds, "If you call your vacation a business meeting, then you need to provide the people you met with and a synopsis of the business meeting and the outcome of the business meeting."
One of Beebe's clients tried to deduct a $600,000 catamaran used to entertain clients once or twice a year. Another hoped to get a tax break by claiming a deduction for a cabin deep in the woods, as well as the snowmobiles used to get there in the winter, because it was used occasionally to entertain clients.
Clients have tried to come up with "elaborate schemes" involving "foreign companies owning nice houses on even nicer beaches," says Austin Carlson, a CPA and associate at Gray Reed & McGraw. His answer is "not deductible," he says.
For an expense to be deductible, the IRS says "it must be be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or 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." But in many cases, business owners attempt to deduct a purely personal expense, says Williams.
As seen from the example of the Playboy subscription, some unconventional purchases may be deductible in the right circumstances. Make sure you keep good records and consider working with a qualified tax professional with experience helping small business owners.
But beware tax preparers who promise big deductions before reviewing your situation. "Don't use anyone who suggests that you hide income or take write-offs you know you aren't entitled to — this is a tip-off that the preparer is shady," warns Asdourian. "If the IRS catches the preparer, all the preparer's clients may come under audit." Conversely, the wrong preparer could mean you miss out on deductions you are entitled to take.
Just remember the consequences if you come under the microscope of the IRS. The agency could put a lien on your business, which can have a major negative impact on your personal credit (if you're a sole proprietor) and your business credit scores.
"There are always opportunities to plan legally within the law," says Carlson, "but if it sounds too good to be true, it's probably a one-way ticket to a massive IRS headache."
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