Despite being in the industry for more than 30 years, every day I get asked a tax-related question that I find not only weird, but thought-provoking as well.
There are so many changes to and interpretations of our tax code, and everyone has a different financial situation, which creates a lot of grey areas when it comes to filing taxes.
For example, twice this week I was asked if time volunteered in a charitable activity was deductible. The answer, of course, is no. One person owned a nail salon and donates gift certificates for manicures and pedicures to local charities for silent auctions. I had to tell her that her time is an intangible and therefore has no value to the IRS. Sure, she would have likely made $50 for that hour of time, but in a sense she is already deducting it because she isn’t declaring the income. The other person drives a few hours a week for a charitable organization that provides meals to the elderly and disabled. She is a semi-retired attorney who makes $400 per hour when at work. She would like to deduct $1,200 a week for the three hours she drives for the charity. Not allowed.
Confusion also arises over the rules for medical deductions. You cannot deduct the cost for cosmetic surgery as a medical expense because the procedure is not medical in the sense of preventing disease, curing a disease or saving a life. The IRS considers the procedure optional.
The IRS will allow the deduction if it’s reconstructive surgery to correct a birth defect or to restore one’s physical anatomy after a loss from cancer, other illness or accident. So if a woman has breast cancer and then gets breast augmentation, she may deduct the expense. The procedures that actress Angelina Jolie went through to reduce her risk of contracting cancer would be considered a medical expense and would be deductible.
If a woman gets a breast enhancement just to improve her appearance, the IRS will disallow the expense. But, as with most tax-related rules, there are exceptions. A stripper deducted the cost of her breast enlargement in order to “improve her skills” for business. She fought for her deduction up to tax court level where it was disallowed as a medical expense, but was allowed as an ordinary and necessary business expense.
Intent is a primary factor in determining whether or not an expense is deductible – especially when deducting business expenses. For example, according to Ann-Margaret Carrozza, a tax and estate planning attorney from New York City, (www.myelderlawattorney.com), a professional body builder was allowed a deduction for body oil but denied a deduction for health supplements.
Business intent is confirmed in the purchase of the body oil simply because every body builder on TV or in competition is covered in oil. Health supplements however, are available and used by many taxpayers, but are not deductible as a medical expense. The IRS doesn’t deem this an ordinary and necessary business expense for body builders, although I can understand an argument in his favor.
Carrozza cites other interesting deductions and attempts at deductions:
- A gas station was allowed a deduction for giving his customers free beer. The agency considers it a promotional expense. But beer supplied at a Super Bowl party by another business owner was disallowed. The reason is likely that the party setting did not provide a venue for a substantial business discussion.
- The cost of a wedding gift purchased for the boss’s daughter was disallowed as a business expense. The taxpayer fought it all the way to tax court, but it was still found to be a personal expense despite his argument that he would never have even attended the wedding except to make a good impression on his boss (Wonder if he still works there).
- A business owner successfully deducted the cost of feeding feral cats because they kept the rodent population down in the store. Yet a business owner who was protecting his home office by using his dog as a burglar alarm was disallowed the deduction. I would imagine if the dog were trained as a vicious beast and were guarding a junk yard at night, the deduction would be allowed. Dogs are also deductible as herding animals and as therapy or service dogs.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook