While nobody likes to think about paying taxes, thinking about new deductions can give you a sense of excitement and possibility. What will you do with those extra savings? We’re going to look at some of the wackiest tax deductions we’ve seen – that were legal of course – and what made them allowable. If you aren’t quite sure whether your expenses are deductible, your Certified Tax Coach can help. Remember, it’s best to get professional guidance when taking deductions, to make sure you aren’t crossing the line from unusual – to illegal!
Creative Tax Deductions That Were Allowed
Creativity isn’t usually appreciated when it comes to your taxes. Taxes are serious business! But sometimes unique situations suggest unique solutions. In these instances, some creative-thinking business people had legitimate reasons for their write-offs that were convincing enough to the IRS to allow the deductions.
Some scrapyard owners danced the cha-cha when permitted to deduct the cost of their Purina Cat and Dog Chow. How did they get to pay for their pets? One scrapyard enticed feral cats to come chase away snakes at their location that were scaring off customers. And while everyone knows the stereotype of junkyard dogs, they offer a valuable business service providing security and theft protection.
Professional bodybuilders who earn income showing off their muscles during fitness competitions have some tricks of the trade. One of these is the application of posing oil, which the IRS permits as a business expense.
As long as these unique expenses are business-related and tied to protecting income, property or mitigating against losses, they can be permitted!
Some deductible medical expenses are easily justified, like the bills you get for visiting the doctor or needing treatment in the hospital. Other expenses you incur while managing or treating your diagnosed health condition may also qualify for a deduction.
A family who discovered that the only way to help their child manage severe respiratory issues was a change in climate, decided to send the child to a boarding school in Arizona. They were able to deduct expenses associated with travel, room, and board due to the medical necessity of the move.
Many children struggle with an overbite. Rather than choosing the traditional treatment of orthodontics, some families prefer a less invasive treatment. Playing the clarinet has proven beneficial for this condition. These families have been successful in deducting the cost of instruments and lessons as a medical expense.
These issues are typically decided on a case-by-case basis, and the key is medical necessity. If the IRS questions your return, you will have to prove that the expenses you deducted were directly related to managing a diagnosed medical condition.
Blending Business and Medical Expenses
Claiming either medical or business expenses outside the norm can be tricky. But what about combining the two? There are certainly opportunities to seek deductions for medical procedures that can be considered necessary for their work.
One common expense people attempt to deduct is cosmetic surgery, arguing that they underwent the procedure for business reasons. While a frequent explanation is that people who are more attractive have greater success when it comes to getting a job or increasing their sales, nearly all of these deductions are rejected by the IRS. But there have been a limited number of successes.
For example, a wine shop owner argued that surgery to correct his sense of smell was directly associated to his business. He stated that the ability to smell is a necessity when examining the quality of wines. The IRS agreed with his position and approved the deductions.
As with any deduction you take, documentation is key. When your position is that your medical expenses are related to your ability to earn a living, documentation illustrating the connection is critical. When deciding whether a medical expense truly qualifies for a business deduction, the IRS is looking for proof that you would not need the treatment if not for the type of work you do.
The more unusual the expense, the more important it is to keep records and documentation showing how the expense is related to income.
Caution and Consequences
The consequences of too many inappropriate deductions can be a full audit of your returns. In some cases, IRS agents go over multiple years’ returns because they notice a pattern of unacceptable claims. If it turns out that you took a deduction that doesn’t meet IRS criteria, you will lose the deduction. In addition, you are responsible for all of the taxes, penalties, and interest connected with the error. A standard penalty for understatement of income is 20 percent, but in truly egregious cases, the penalties can be as high as 40 percent.
When your goal is to keep your taxes as low as possible, thinking carefully about your deductible expenses is an important step. Some of the costs you incur may not appear to be deductible at first glance, but as you compare the purpose of the expense with your sources of income, there may be a clear relationship. Your willingness to look beyond traditional tax deductions is an important component of your comprehensive tax minimization strategy.
It is easy to take innovative thinking a step too far, resulting in deductions that don’t meet IRS standards. You can count on your Certified Tax Coach to keep you on the legal side of the line with a thorough review of your expenses.
_ Mike C. Manoloff, CPA, CTC