:: Top Tax Write-Offs That Could Get You in Trouble With the IRS
Before
you try to take that
questionable deduction on
your taxes this year, find
out exactly what could raise
a red flag with the IRS.
By
Kristin Edelhauser
November 27, 2006
From guard
dogs to Las Vegas-style showgirl
costumes, there's no limit to what
people will try to write off at
tax time for the sake of their
business. But where do you draw the
line? Which write-offs you're trying
to write off go too far?
We assembled
a team of three leading tax
attorneys to get their advice on how
far is too far in the land of tax
write-offs. Our team of experts
include Cliff Ennico, a
Connecticut-based business attorney
who specializes in advising
small businesses and
entrepreneurs; Donna LeValley, a tax
attorney and contributing editor to
the J.K. Lasser annual tax
guide; and Alvin S. Brown, a tax
attorney who formerly worked with
the office of the chief counsel of
the IRS for more than 25 years.
Tax
Write-Off:Travel Expenses Here's a write-off that's
sometimes difficult deciding just
where to draw the line. Can you
deduct the cost of going to see a
Cirque du Soleil show in Las Vegas
if you're treating your client? The
answer is yes, as long as you can
justify it as a business expense.
And what if your spouse goes along
on the trip? As long as they're a
partner or employee of your business
and attended conventions or meetings
on the trip you took together, then
his or her travel and 50 percent of
his or her meals are also
deductible.
Expert
Opinion: "You can deduct
travel expenses, and 50 percent
of related meals and
entertainment, if the travel is
reasonably related to your
business," explains Cliff Ennico.
How to Do It
Right: Here’s a tip from
Donna LeValley that will come in
handy on your next business
trip: Grab an envelope from the
stationary drawer of your hotel
room and put all your receipts
from that trip in it. Label the
envelope with a name and date to
help you remember that trip. The
more accurate your records are,
the more likely they'll be
accepted and validated by the
IRS if you become involved in an
audit situation.
Tax
Write-Off:Cell Phone Bill If you use a cell
phone as part of your business,
this could be a big deduction for
you. So don't make the mistake of
mixing business with pleasure by
sneaking too many personal calls
onto your cell phone bill.
Expert
Opinion: "Because of the way
a cell phone can be used, it's
come under scrutiny, so people
need to keep good records and
keep their actual telephone bill
so they can demonstrate that a
majority of the calls were
business calls," explains
LeValley.
How to Do It
Right: Take a look at your
cell phone bill to make sure you
receive an itemized report.
Because cell phones are
considered listed property, you
need to keep detailed records of
their use. In the case of a land
line, it's a good idea to have a
separate phone number for your
business since the IRS won't let
you allocate the cost of a
single phone in your home to
your home office.
Tax
Write-Off:Home Office Home office deductions used to
be a big red flag for an audit back
in the 1990s. These days, you just
need to use the deduction with
caution. A basic rule of thumb to
follow? "Anything that's unusual and
disproportionate to your level of
income is something the IRS will
check out," Alvin Brown says.
So how do
you determine your actual home
office space? This is the area in
your home dedicated solely to the
running of your business. Once you
figure out the percentage of your
home office compared to your overall
home, then you can go back to your
heating bills, electric bills and
all other bills that go to
supporting your home, and figure out
the amount you can deduct for
running your business.
Expert
Opinion: "Don't measure your
home office space yourself. When
you do, you almost always
shortchange yourself," says
Ennico.
How to Do It
Right: It's a good idea to
have a contractor measure your
space professionally. They can
provide you with a letter
stating the exact square footage
of your home office space should
you need to substantiate it with
the IRS.
Tax
Write-Off:Home Office Computer As our experts pointed out
before, it's not a good idea to mix
your business world with your
personal life. So they recommend
never using your home office
computer for personal tasks if you
can help it.
Expert
Opinion: "If this is the
only computer in your house,
you'll have to calculate the
percentage of total time you use
it for business purposes,"
suggests Ennico.
How to Do It
Right: Ideally, your best
option is to purchase a laptop
and dedicate it to being your
personal computer. This way you
can avoid any messy situations
come audit time.
Tax
Write-Off:Rent Wondering if you can still take
the home office deduction if you're
a renter? The answer is yes. But you
need to know the right way to go
about it.
Expert
Opinion: "If your landlord
is an individual or
unincorporated business, such as
a partnership or LLC," says
Ennico, "you may have to send
IRS Form 1099 to your landlord
in January of each year showing
how much of your rent you're
deducting."
How to Do It
Right: To ensure that you
handle this deduction
appropriately, it's a good idea
to check with your accountant
for details.
Tax
Write-Off:Personal Expenses This is a category business
owners can easily get into trouble
with if they're not careful. The
bottom line is, you simply can't
deduct services of a purely personal
nature that aren't related to your
business. For instance, you can't
deduct such homecare services as
gardening, landscaping and tree
removal simply because you work out
of a home office.
Expert
Opinion: “People start to
get in trouble when they try to
make personal expenses business
expenses,” says LeValley.
How to Do It
Right: If in doubt as to
whether an expense is deductible
for your business, LeValley
recommends getting a second
opinion. "I think that even if
you're very capable and even if
you've had some experience on
your own," LeValley says, "it's
always good to get what I call a
'financial checkup' every once
in a while."
Tax
Write-Off:Guard Dog In order for a dog to qualify as
your company's guard dog, it helps,
says Ennico, if you're a little
afraid of the animal yourself
(picture a Rottweiler, Pit Bull or
German Shepherd). Believe it or not,
this is a legit write-off if taken
correctly.
Expert
Opinion: Ennico points out
how to use it: "You'll only be
able to deduct that portion of
his or her total time devoted to
'guard-dog' duty."
How to Do It
Right: Though it may seem
rather obvious, your dog most
also be guarding your inventory.
Another interesting tidbit:
Though you can deduct expenses
relating to the dog, you can't
deduct the dog itself. But you
can depreciate it over its
expected lifespan as determined
by a local breeder. Who would've
thought?
Tax
Write-Off:Work-Related Uniforms or
Costumes The dos and don'ts of this tax
write-off are fairly simple: If the
costume or uniform is something you
could wear outside your job, you
shouldn't write it off. If, however,
it's obvious you can only wear it
for the duties of your specific job,
then it qualifies as a write-off. So
a new suit wouldn't qualify since
you can wear it other places outside
of your work environment. What about
a clown suit, you say? That's a
different matter.
Expert
Opinion: LeValley urges
taxpayers to go for the
write-off if it's a legit
expense. "If the expense is
real, take it," she says. "It
may be strange, it may be large,
but whatever it is, if it’s
real, be prepared to
substantiate it but don’t be
afraid to do it."
How to Do It
Right: A perfect example of
some rather unusual clothing you
can write-off involves a
Las Vegas showgirl who was
trying to write off the tight,
sequined costumes she purchased
for her performances. LeValley
says the showgirl was told she
couldn’t deduct the costumes
since they were clothing and she
could wear them elsewhere. To
prove that theory wrong, the
woman showed up at her audit in
one of her costumes and said,
“Where in the world do you think
I could wear this? I can’t even
sit down!” Needless to say, she
won her case.
Audit
Triggers: The Biggest Red Flags to
Watch Out For Here are just a few more things
you want to be careful with when it
comes to taking deductions on your
business taxes:
All in
the family. When employing a
spouse, child or close relative, be
careful not to give them any
extra-special treatment. Make sure
the responsibilities of their job
description are commensurate with
their age and experience. Pay them
the same salary you'd pay anyone
else doing the same job.
In the
money. An excessively high
income compared to previous years
can stand out and trigger an audit.
And high-income taxpayers are more
likely to be audited since they're
more likely to be involved in
complex transactions and have
partnerships, trusts or businesses.
Consistency is key. The IRS will
notice if your federal return is
disproportionate to your state
return, so be careful to ensure
they're consistent.
Stay on
the up and up. People who've
filed frivolous lawsuits in the past
are most likely always going to be
audited. Considering not filing your
taxes at all? Here's something that
may cause you to re-think your
decision: People who haven't filed
their federal taxes can be picked up
for fraud, hit with a felony and do
jail time. Even if you don't have
the funds to pay off everything you
owe, Brown strongly suggests filing
anyway—it's better to file and not
pay all you owe than wait until you
have all the funds and risk getting
hit with penalties or worse.
Know
your preparer. More and more,
the IRS is using a software program
to check up on tax-return preparers.
If they notice a high error rate,
they'll not only audit the
return-preparer, but they'll also
audit that person's clients as well.
So do your homework before choosing
a preparer. And if you ever have any
doubt as to whether they're guiding
you in the right direction, seek an
outside opinion before proceeding.
Protect
yourself. If you are selected
for an audit, Brown recommends
standing up to the IRS by getting
representation. As a former IRS
insider, Brown says that these days,
the IRS is "a bit out of
control--they aren't enforcing the
tax law with professionalism."
Presented by Alvin Brown and Associates, tax
attorney, formerly with the Office of the Chief Counsel of the IRS.
Call us for all IRS tax issues, problems and emergencies.
Protect yourself from IRS intimidation, errors, and penalties.
www.irstaxattorney.com
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ab@irstaxattorney.com -
(888) 712-7690 - (703)
425-1400
