Non-Deductible Taxed Items

You Can’t Deduct Your Wedding and Other Things You Shouldn’t Be Expensing

NEW YORK (MainStreet) — It’s hard to believe that 2014 is almost over; however, with the new year almost upon us, it’s time to start looking at everyone’s favorite time of spring — tax season. You want to write off as much as you possibly can. Still, especially for small business owners and the growing “gig economy” workers, you’re going to want to pay attention to things you shouldn’t be writing off. Every situation is different and your accountant should be the final arbiter, but here are some things you should not be expensing.

Club Dues

“People are constantly deducting their club dues,” says Bradford Hall, the managing director of Hall and Company. What he means is clubs that are primarily social. “People think that those memberships are deductible, because they occasionally do business or wine and dine clients there,” he says. While you might be able to deduct any fees associated with bringing in a client, your membership fees are not deductible.

Note that this does not apply to professional organizations and other groups, such as networking clubs, which are totally for business — go ahead and deduct those.

Personal Travel

Adam Libman of Libman Tax Strategies points out a similar situation: people who think that just because they’re doing business on a pleasure trip that makes it business. “You don’t get to write off a trip to Hawaii, because you chatted about your business at the bar,” he says. “It has to be more material than just talking to someone.”

Concerts

Here’s an interesting twist of tax law: You cannot, no matter how related to your business, deduct going to a concert and doing business there. Libman points out that this is because the IRS has decided that it’s too loud to do any kind of significant business there — so don’t try it, even if you work in the industry.

Commuting

If you go on a business trip, your travel expenses will probably be deductible. However, Hall states that a regular commute is not deductible. Similarly, a vehicle you purchase for your business might be, but there are strict limits on how much you can deduct per year. “If you get a big SUV it’s going to take you something like 20 years to expense the full cost of the vehicle,” he says. So if you’re going to buy a car for business purposes, make sure that it’s a modest one.

Hobby Losses

“A lot of people want to take something they do for fun and pretend it’s a business,” says Hall. For example, if you start a wedding band, spend a ton of money on equipment, but never get a paying gig, that’s not going to count as a deductible expense as far as the IRS is concerned. “You need to have profits three of the last five years for it to count as a legitimate business,” he says. The only exception to this rule is animal husbandry, where you can show a profit two out of the last seven years on breeding, training, raising or racing horses.

Taxes and Penalties

Your business might owe from last year, including interest and penalties. That might be costing you big time, but it’s not deductible even though it’s a business expense, says Hall.

Weddings

Libman knows more than one person who has tried to deduct a wedding or a bar mitzvah on the grounds that they were doing business there. “Just because there are associates or potential clients there doesn’t make it deductible,” he says.

This underscores a broader principle when it comes to what you can get away with deducting: “Is it primarily for business or personal use?” asks Libman. “Ultimately it’s going to come down to three things — documentation and intent.” That’s the question the IRS is going to ask and the question you should be asking yourself before you try and deduct something.

“If there’s an audit, the first three things they’re going after are travel, meals and entertainment,” he says.

1. ‘Missed it by that much!’
Over the years, taxpayers have concocted a lot of zany arguments to justify tax deductions. We’ve come up with what we think are the 15 most creative ones that the courts decided did not quite work. As secret agent Maxwell Smart would say, “Missed it by that much!”

2. Pizza for the Kids
A woman in Washington, D.C., ran her own staffing and consulting business. She hired her three children, ranging in age from 8 to 15, to help her with jobs such as shredding, stuffing envelopes, copying and tending the yard around her home office.The mother, who was also a paid tax preparer, included the hours her kids worked on time sheets and issued them W-2 forms. But instead of paying her children in cash, she bought them meals, including pizza, and paid for tutoring. She tried to deduct the kids’ “wages” as business expenses, but the Tax Court didn’t buy it. In its view, the services that the children performed were more for parental training and discipline than part of the typical activities of employees, so it denied her write-off in full.

3. Wrecking a Rental Car
An airline employee needed to get to New Orleans but was stranded by heavy fog. He worked out a great deal with a rental car company where he paid nothing for a car that the company needed driven to New Orleans. Unfortunately, he wrecked the auto in Mississippi and had to pay for the damages. He tried to deduct the payment as a casualty loss, but the Tax Court denied his write-off because he wasn’t the owner of the vehicle.

4. Shoddy Construction
A couple paid a builder to construct their dream home. Not long after they moved in, they discovered a series of problems with the house, including the foundation that made living there a nightmare. They claimed that the builder defrauded them and deducted a large theft loss on their tax return. But the Tax Court denied the deduction, saying that although they were victims of poor workmanship, they weren’t victims of fraud.

5. A Little Peace and Quiet
A busy tax preparer ran her business from her home. During tax season, she felt so harassed from clients calling her at all hours of the day and night that she occasionally booked a room at a local hotel for some peace and quiet. On her own return, she deducted the cost of this rest and relaxation as a business expense. Unfortunately for her, the Tax Court ruled that the cost of her good night’s sleep was a nondeductible personal expense.

6. Love & Marriage & Self-Employment Tax
A married couple operated separate proprietorships. The wife’s operation turned a small profit, but her husband’s business generated a sea of red ink. When figuring their self-employment tax bill, the couple claimed the bonds of matrimony allowed them to offset his loss against her income to wipe out any self-employment tax liability.

The IRS disagreed, saying that even though they were married, his losses could not be used to reduce the self-employment tax bill on her income. Playing the referee in this tax dispute, the Tax Court sided with the IRS because the husband had no hand in running her firm. “The fact that they discussed their respective businesses over meals does not establish that [the husband] played a role in operating the realty business,” the ruling noted.

7. Payment for an Affair
After a police officer discovered his wife was having an affair with her doctor, he confronted the doctor and threatened a lawsuit. Eventually, the doctor agreed to pay $25,000 to settle the matter. The police officer claimed the $25,000 was a tax-free gift, but the Tax Court said that the payment is taxed as income because it was offered to settle the doctor’s misconduct.

8. Prostitutes and Porn
A tax lawyer spent more than $65,000 in a year on prostitutes and pornographic materials. He deducted the total as a medical expense, making a novel argument that cited the positive health effects of sex therapy. However, the Tax Court red-lighted his write-off, saying that his conduct not only was illegal, but also wasn’t for the treatment of a medical condition.

9. Overdone Overdrafts
A couple who owned two struggling dry-cleaning businesses couldn’t get a loan from their bank because they were judged to be a bad credit risk. But they worked out a deal to regularly overdraw their account and then satisfy the overdraft after the bank called them. This odd financing method caused them to incur more than $30,000 a year in overdraft charges, which they deducted as a business expense. This didn’t wash with the Tax Court, which nixed the write-off, saying the charges were unreasonably high. Not surprisingly, the pair wound up filing for bankruptcy.

10. Billing Mommy
A wife was sent to jail for killing her husband. Although she was named as the primary beneficiary of his 401(k) plan, state law barred her from receiving any of the funds because of her crime. So the account was paid to their son instead as the secondary beneficiary. He claimed that his mother should be taxed on the payout as the intended beneficiary. An Appeals Court gave him an A for effort but an F in taxation, ruling that he owes tax on the distribution.

11. Vegas Gambling Junket
In an effort to drum up business from banks, a repo firm sponsored a bus trip to Las Vegas. Although employees talked informally with their collection contacts on the ride to Vegas, no formal business meetings were scheduled, and everyone spent most of the weekend gambling. The trip was a rousing success because the repo firm got a lot more business from the attendees. The company was less successful in the Tax Court, which denied the deduction for the junket because the business discussions were an insubstantial part of the trip.

12. Lunch with Cohorts
A partner in a law firm met every day with his colleagues at lunch to discuss the firm’s business, such as case assignments and settlements. But the IRS balked when he asked Uncle Sam to pick up part of the tab. The Tax Court came down on IRS’ side, saying that the cost of the meals was a non-deductible personal expense, even though business was discussed. The moral of the story is that while the partner can have his cake and eat it for dessert, he can’t get a subsidy from other taxpayers for his meals.

13. Designer Clothes
The manager of an Yves Saint Laurent boutique was required to purchase and wear the designer’s clothing as a condition of her job to project the image of an exclusive lifestyle. She deducted the cost of the clothes as an employee business expense because she only wore the outfits at work. In her view, the clothes were too dressy for her simple, everyday lifestyle. Nevertheless, a court denied her deduction because the clothes were suitable for wear outside of work, even though they were not her taste.

14. A Fish Tank
A couple’s tax returns were filed late and were riddled with questionable deductions, such as the cost of dining room furniture and a fish tank. That piqued the IRS’s attention. After an audit, the couple was slapped with a late-filing penalty and a big tax bill. They claimed that their late filing should be excused because their accountant had been sent to jail for killing her husband and the person who took over her office was incompetent. The Tax Court refused to cut them any slack.

15. Red Blood Cell Depletion Allowance
A woman with a rare blood type made more than $7,000 in a year as a blood plasma donor. She sought to offset the income by claiming a depletion deduction for the loss of both her blood’s mineral content and her blood’s ability to regenerate. While depletion is a proper write-off for firms that remove natural deposits of minerals such as coal and iron ore from the ground, the Tax Court decided that individuals cannot claim depletion on their bodies.

16. Letting Others Burn Down the House
Homeowners who want to tear down their homes and rebuild sometimes ask firefighters to burn them down. This training exercise serves the public good. But to get a deduction, an Appeals Court says that the homeowner must show that the value of the donation exceeded the value of the demolition services provided. Since the house in the case before the court had to be destroyed anyway to make room for its successor, its value was negligible and didn’t exceed the value of the demolition services that the owners received, so the homeowner’s charitable deduction was denied.