Accountants are often asked if certain expenses are tax-deductible. Sometimes the answer is a straight yes or no, but most times the answer is a definite maybe.
Below are some of the tax deductions I have frequently been asked about over the years and whether or not they are deductible.
- Commuting to work – Generally not – Commuting to your primary place of work is never deductible for IRS purposes, but some states (like MA) allow limited deductions for such things as tolls paid through an E-Z Pass account and for weekly/monthly commuter passes. Also, you can deduct travel expenses for visiting clients from your home or primary office.
- Medical expenses – Yes, but… – Most out-of-pocket medical expenses such as prescription drugs and co-pays are allowed as a deduction, but only those expenses that exceed 10% of your income are actually deductible on your tax return. Most people do not hit this threshold. Also, medical insurance premiums you pay on a pre-tax basis through your employer are not deductible.
- Gifts to individuals – No – A gift to an individual is never tax deductible, and if you make a gift to someone in excess of the annual exclusion ($14,000 in 2016), you need to file a gift tax return. You also need to file a gift tax return is you make a joint gift of any amount with your spouse to an individual.
- Dry cleaning – No, unless… – The rule is that if you can normally wear your work clothes away from your job (like a suit), you cannot deduct the cost of buying or dry cleaning the clothes. If you have a uniform specifically required for your work (like a police officer’s uniform or an opera singer’s costume), the dry cleaning costs are allowed, but the costs must generally exceed 2% of your income to be tax-deductible.
- The time you devote to charity – No – The value of your time is never allowed as a charitable tax deduction. You may deduct the cost of supplies and materials you use in your charitable work (for example, if you are a graphic designer and create signs for a charity event), but you cannot deduct the value of your time.
- Summer camp for the kids – Maybe – If you send your kids to a summer day camp while you work or look for work, you are eligible to claim a tax credit for those expenses if you meet the income criteria. However, amounts spent on overnight camps are not eligible for the tax credit.
- Country club dues – No – Membership fees paid to any club organized for business, social or recreation purposes are not deductible. You may deduct expenses paid to entertain clients at such clubs (such as a client dinner), but the general membership dues are not deductible.
- Entertaining clients at sporting events – Yes – If you bring a client to a sporting/entertainment event, you can generally deduct 50% of the expenses. For luxury suites, the rules are a little more complicated. For a one-time luxury suite rental used for entertaining clients, you can generally deduct 50% of the expenses. But if you rent a suite for more than one event at the same venue, you can only deduct 50% of the cost of a normal ticket at the venue and 50% of the food and beverage costs.
- Uncollectible accounts receivable (bad debts) – Maybe – If a client doesn’t pay you, the ability to deduct the bad debt depends on how you report your income and expenses for tax purposes. Most small businesses report on the cash basis, meaning that income is recognized when payment is received and expenses are deducted when paid. If you report on the cash basis, you cannot deduct the bad debt because you never reported the income to begin with (you never received the money). If you report on the accrual basis, meaning income is recognized when you bill your customers and expenses are deducted when you receive a bill from a vendor, you can deduct the bad debt.
- Lease payments for a business vehicle – Yes – You can deduct the lease payments for a vehicle used for business purposes, but if the car is your personal vehicle, you cannot deduct the whole payment (a vehicle used as your personal vehicle can never be considered 100% business use). If the car is used 80% for business, you can deduct 80% of the lease payment less a very small “lease inclusion amount” determined by the value of the car and when you placed it in service. In lieu of deducting your lease payments, you may use take a deduction using the IRS standard mileage rate. For 2016, the rate is 54 cents per business mile driven. Also, if your employer provides you with an auto allowance or reimburses you for your auto expenses, you cannot deduct those expenses again on your tax return.
While Donald Trump has talked about being under continuous audit from the IRS since 2002, audits of someone like Trump and the Trump Organization are not like audits of most taxpayers. The IRS Large Business and International (LB&I) Division handles audits of large business entities and high net-worth individuals. In many of these cases, the IRS will assign employees to work with these taxpayers year-round. They also have programs such as their Compliance Assurance Process in which they work with large businesses to address complex tax issues before the tax returns are filed.