Weird Tax Deductions Taken by Small Businesses
Tax season has a tendency to throw everyone in a tailspin. Both individual households and businesses alike attempt to reduce tax liabilities owed to the IRS. While there are some instances where illegal attempts are made to lower tax bills, most taxpayers want to stay within the bounds of the law.
Constant changes in the tax laws can cause confusion over which expenses are deductible and which are not. This presents a unique challenge to all filers, but especially those who are dealing with small business taxes. There are special deductions that may be claimed by small businesses; however, it is common for business owners to misinterpret which deductions they are eligible for and those for which they do not qualify. Consider the following list of “weird” tax deductions claimed by small businesses.
Business owners are permitted to deduct costs associated with entertaining clients. The IRS grants these tax breaks when the expenses are “ordinary and necessary” and not extravagant in nature. In short, the IRS understands that sometimes a business owner has to spend money in order to make money; however, there are limits to what is considered deductible.
Examples of unusual—yet allowed—tax deductions include:
- Sporting event tickets: The IRS will allow business owners to deduct sporting event tickets (customary costs) as long as all parties attending are related to the promotion of a business, and business topics are discussed at the event.
- Deep-sea fishing: Again, as long as business discussions are conducted and considered in the cost of doing business, it would be possible to deduct this type of expense. It is difficult to inspire investments and other funding if you are unable to impress clients to some degree. Understand just how much of these types of expenses can be deducted before filing your return.
There are also many deductions that filers attempt to claim that might be better off avoided. They include:
- Pet expenses: While your dog may serve as some form of “guard” dog, you cannot write expenses associated with your dog's care unless your business is classified as a dog breeder.
- Home office expenses: It is legal to deduct home office expenses; however, filers who attempt to claim excessive amounts of expenses or costs associated with a home office may find the IRS looking at an audit to verify claims. Even many people that don't have legitimate home offices try to claim this deduction and frequently get caught by the IRS.
- Personal expenses: Although the IRS understands that certain expenses may, in fact, contribute to your business, not all are exclusively business related. Business owners should think twice before deducting personal expenses, such as manicures or hair care. These types of expenses are usually considered personal expenses and as such cannot be deducted. In some cases items such as manicures and hair care can be deducted, but that is in rare cases—for example, if you run a modeling agency.
Watch out for weird tax deductions
Depending on the type of business you operate and the situation surrounding the deductions, many unusual expenses may qualify. On the other hand, the IRS is more likely to perform an audit when questionable expenses are claimed as a deduction.
If the IRS digs deeper into your deductions during an audit and finds that the deduction is not legitimate, there are many penalties they can assess. For this reason, it is important for business owners to pay close attention to the expenses they claim in relation to their business.
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