Avoiding the Outrageous Tax Deductions that Could Get You in Trouble with IRS

Brigade Bookkeeping
March 29th, 2015
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So you or your accountant have filed or asked for an extension of your corporate taxes. Now it’s time to meet the personal tax filing deadline on April 15th. At Brigade Bookkeeping, we’re done reconciling monthly books for our regular customers. But, we have a few last minute and new clients who are still organizing their 2014 books in order to complete their taxes.

What is a tax deduction and what isn’t can be very subjective, but remember the IRS has the upper hand. A few dollars in savings isn’t worth the scrutiny of an audit.  Here are 6 Red Flag deduction categories you should be aware of.
Hmmm maybe I can deduct these
clothes on my tax return.

Some of these new clients we had to turn down because of interesting expenses they wanted to report to the IRS. That got me reminiscing about some of the most outrageous tax deductions I’ve encountered in my 15-plus year career in accounting and bookkeeping.

Below are some of the most interesting deductions that worked and others that did not:

  • CLOTHING & MAKEUP– People in certain careers, such as TV personalities and celebrities, can deduct clothing, makeup and even haircuts on their taxes because their appearance is part of their profession. However, for the rest of us, haircuts, manicures, pedicures, massages and clothing are usually not a deductible expense. A client, who was not in the TV biz, tried to have us deduct her mink coats and gowns, claiming she used them while she was attending business parties. We warned her that those deductions could potentially be audited and she took our advice and didn’t take the exemption. Tax deductions are allowed on clothing that an employer specifically requires, such as uniforms used by doctors, nurses, firefighters, professional athletes and delivery workers.
  • VACATION – If your company takes an annual retreat, part of it could be deducted on your taxes. But one man took that way too far, when he tried to claim his summer vacation to Italy as a business expense. The IRS rejected the claim.
  • DEPENDENTS – If you have children, you should claim them as dependents. The Child Tax Credit can save you as much as $1,000 per child, if they meet certain criteria. To meet the criteria children must be under age 17 at the end of the tax year and must be US citizens. One of the most outrageous tax deductions someone once tried to claim was counting their unborn twins as dependents, which was rejected by the IRS. The IRS has also rejected taxpayers who try to claim their pets as dependents.
  • ENTERTAINMENT EXPENSES – The IRS says business owners can deduct 50% of their business-related meals and entertainment expenses on their taxes. But what about a trip to the Bahamas or an entire wedding? Even if you talk business while on a Caribbean adventure with your buddies, don’t try to deduct it. The IRS has rejected similar claims. One man tried to deduct the full cost of his daughter’s wedding as a business expense. Guess what? The deduction was not only rejected by the IRS, but the man had to pay back taxes and late penalties.
  • HOBBIES  – No one is allowed to claim a hobby as an expense. But, I do have a client who needed to shoot pictures of a client  skiing down a hill. The pictures were going to be used in a magazine ad. The client was successfully able to buy the skis for the magazine shoot, then expense them and keep them for future ski trips. However, in another case, the IRS rejected a tax payer’s deduction of a horse farm, because the tax payer considered horses his hobby.
  • HOME OFFICE  – Business owners who work out of their home are allowed to claim a portion of their home as tax deductible.  Supplies, such as printers and computers, may also be deductable.  However, some clients try to get away with deducting their entire mortgage, and that is a mistake.

So here’s the bottom line, don’t try to be slick with the IRS. Keep your books in order and take your accountant’s advice when a deduction is border line legit. What is a tax deduction and what isn’t can be very subjective, but remember the IRS has the upper hand. A few dollars in savings isn’t worth the scrutiny of an audit.

Good luck and remember to file your taxes by Wednesday, April 15th!

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