Dry cleaning, dancing and a Harley with ape hangers
WASHINGTON — People try to claim the darnedest tax deductions.
Yes, your pet Chihuahua has a ferocious bark. But, no, you can’t claim that Coco is a guard dog for your home-based business and, thus, a legitimate tax deduction.
You might feel that your cat or dog is a dependent, but you can’t deduct expenses for the family pet. You may, however, qualify for a medical deduction for a service animal.
As tax season gets underway, I asked accountants about the outlandish deductions they’ve seen people try to claim.
Lawrence Pon, a certified public accountant (CPA) based in Redwood City, California, has probably kept many clients from being audited.
“A client injured his wrists, so the doctor told him to keep his wrists elevated,” Pon said. “He asked me if he purchased a Harley with those high handlebars, can he deduct that as a medical expense? I told him to show me the prescription from the doctor.”
People also get quite creative with the medical expense deduction, Pon said.
The IRS says that “payments to participate in a weight-loss program for a specific disease diagnosed by a physician, including obesity” can be deducted. For the 2019 tax year, you can deduct only the share of medical and dental expenses that was more than 7.5% of your adjusted gross income.
But forget about trying to deduct ballroom dance lessons because they help you lose weight.
People often push the limits of deduction credibility when it comes to business expenses.
For example, a friend of mine went to a multilevel marketing presentation where the promoter claimed he was writing off all of his home expenses because he titled his personal residence in the name of his business. He was sharing this tip as a way the would-be entrepreneurs could reduce their tax bills.
However, just because the business holds the title to your principal residence does not make the insurance, utilities and other such costs deductible, said G. Scott Haislet, a California-based CPA and attorney.
A personal home is treated as a residence regardless of who holds the title, said Gina DeRosa, a CPA based in Torrance, California.
“Titling a residence in the name of a business does not turn personal, nondeductible expenses into business expenses,” DeRosa said. “If the property is converted to 100% office space with no personal use, expenses could be deductible.”
Pon pointed out that putting your personal residence in the name of your business can actually cost you a legitimate tax break.
If your business sells your house, it would not qualify for the exemption of $250,000 (single) or $500,000 (married couple filing jointly) from the sale of a principal residence, he said.
The same promoter told folks that if they were traveling for pleasure and struck up a conversation with their flight seatmate in an effort to recruit the person for business, that could be considered a business meeting — and the airfare and travel expenses would then be deductible.
“Business travel has long been a misunderstood part of the tax code,” said IRS spokesman Eric Smith. “Normally, a trip becomes deductible only if the primary purpose is business-related. Doing a minor business thing while on vacation doesn’t instantly transform what is really a vacation into a business trip.”
DeRosa said that if the purpose of the trip was to recruit for the business, it might be deductible. “But it is unlikely that anyone books a plane trip in hopes of recruiting business,” she said. Guidelines for business travel are in IRS publication 463.
And what about the suits or business attire you have to wear for work? Or the dry-cleaning bills for those work clothes?
All the CPAs said such deductions are not allowed. However, the cost of uniforms, costumes or protective clothing could be deductible.
“The test for deductibility for clothing is whether it is specialized and can’t generally be used for everyday wear,” Haislet said. “Just because somebody does not like to wear suits or other business attire and would not buy or wear such attire but for employment [purposes] does not make it deductible for tax purposes.”
You may feel financially foolish that you aren’t being as imaginative as tax-deduction braggarts — especially if they are getting away with some shady stuff. But if caught, they could be hit with a hefty tax bill, plus penalties. And that makes them the fools.