No, You Can't Deduct That: 11 Tax Deductions That Can Get You in Trouble
Ah, tax time--the one and only time when you absolutely must disentangle your personal life from your business. Botch this, and you'll either pay way more tax than you need to, or end up facing an audit.
Often, getting your personal life out of your business starts with deductions--what you can claim as a business expense, and what you can't. No one sees more questionable deductions than accountants, so Xero, a company that provides cloud-based software to accountants, enlisted Zogby to survey 400 of them about their clients' tax mistakes.
Below are the 11 most commonly-abused business tax deductions. We've also included some commentary from Jody Padar, CEO and principal of Arlington Heights, Illinois-based New Visions CPA Group, on the circumstances under which these deductions just might be allowed.
You can deduct this if: There is a business intent in the trip. Say you go to Disney World for a conference, and your family stays with you in your hotel room. You can deduct your own travel expenses and the cost of the room. You won't get to deduct Disney tickets for your family members, but you can probably deduct your own ticket if you take a business associate to the Magic Kingdom.
2. Pets, supplies and veterinarian's bills
You can deduct this if: A pet is necessary in the ordinary course of your business. Let's say you're a geriatric physician, and you own a therapy dog and bring it to nursing homes when you visit patients. You can deduct the cost of the dog, its food, its vet bills, and the cost of boarding it when you go on vacation. If you're in another profession and you just like to bring your pet to the office with you, Fido's chew toys are probably not going to be deductible.
You can deduct this if: You're buying food for clients. Also, if you require an employee to work more than 10 hours a day, you can write off his or her dinner. But as an entrepreneur, you can't write off your own dinner.
4. Swimming pool or hot tub
You can deduct this if: This is more a personal medical deduction than a business one, says Padar. If you have arthritis and get a doctor's note, you can write off the cost of your pool or hot tub as long as it doesn't increase the value of your home. Similarly, if you have asthma, you can get a doctor's note and write off your air conditioner.
5. Home improvements
You can deduct this if: Generally, you can't. But if, for instance, you're running a home-based daycare, and you need to make improvements so the kids could get in and out of the house more easily in an emergency, you can deduct those. Otherwise, says Padar, "You use the home office rule, which gives you a very itty-bitty deduction."
6. Clothing or jewelry
You can deduct this if: You're a performer--actor, artist, DJ--and you're buying the clothing or jewelry for a performance. In that case, it's considered 'costuming,' and you can write it off.
7. Eating out
You can deduct this if: Business is discussed at the meal and you document it. Then it's considered "meals and entertainment," and you can deduct it at 50 percent.
You can deduct this if: The car or motorcycle is necessary in the ordinary course of your business. Padar has a client who teaches people how to ride motorcyles, so his motorcycle is deductible.
Generally, you have two options: deduct the mileage on business-related travel at 56.5 cents a mile (that's the 2013 rate), or own a car that you use exclusively for business. In that case, you need to depreciate the car and deduct its cost, repairs, and the fuel.
9. Event tickets
You can deduct this if: It's work related. This falls under "meals and entertainment" and is deducted at 50 percent. What gets people into trouble is when they try to deduct too aggressively. "We have a saying," says Padar, "that pigs get fat and hogs get slaughtered. If you're doing something inappropriate, what do you think is going to happen?"
10. Family salary/gifts
You can deduct this if: Your family member is truly doing something substantial for the business. "There are lots of people who pay their kids in college to do work," says Padar. "It's one of the ways you can income-shift. You're in a higher tax bracket and the kids in a lower one, so as long as the child is doing something tangible, you're giving them income."
Likewise, gifts have to be work-related. "Say you buy an iPad," says Padar. "Are you truly buying an iPad to use for work, or did you buy an iPad for everyone for Christmas, and now you're trying to write it off?"
11. Sex-related activities
You can deduct this if: It can be considered client entertainment. You better be in Nevada.