A Guide to Questionable Small Business Tax Deductions

Small business owners want to make every legal tax deduction possible to lower their tax bill. Many unique items are listed in an attempt to pass IRS scrutiny. Here are some examples:

Firearms

One popular item mentioned by several experts is firearms. Steven J. Weil, Ph.D., EA, president and partner of RMS Accounting in Fort Lauderdale, says a pharmacist client tried to deduct the cost of a shotgun, with the reasoning being protection if someone broke into his house looking for drugs.

A different small business owner attempted to deduct the cost of a concealed-weapons permit under the claim it would allow them to protect their office, according to Jeffrey Beebe, a CPA from Boise, Idaho. The issue was the owner’s business didn’t represent any special risk, Beebe says.

Thomas J. Williams, a tax accountant and the operator of Your Small Biz Accountant, LLC, said a client of his believed their concealed weapon and permit would be deductible since it’s primary function was to provide protection at the office. He had to explain that for an item to be deductible, it must meet the ‘necessary and ordinary’ test for the industry type. Since the client did not keep cash on site and was not located in a heavily crime-ridden area, owning a gun would not qualify as a reasonable business expense.

Meals and Entertainment
Some of the most common deductions that can trigger a business are meals and entertainment. Williams called them the most abused expense, as clients are under the impression it is a free for all. One of his clients tried to deduct their daily breakfast simply because he happened to be on the phone with a client or completing paperwork while he ate.

Pets
Is the dog deductible? Pets can be pricey, and a tax deduction would certainly lessen the burden. Some entrepreneurs try to do just that. A client of Weil’s made the argument that the dog is the company mascot, and medical coverage is provided for employees.

Joshua Zimmerman, who owns Westwood Tax & Consulting, has had clients who attempt to deduct vet bills and pet food by claiming their dogs are guard dogs. Beebe had a client who tried to deduct the cost of a German Shepard for the same reason.

Hobby or Business?
Many small business owners try to incorporate their hobbies into their business, according to Crystal Stranger, EA and president of 1st Tax. She warns about the thin line separating personal and business-related activities relating to advertising and marketing. To pass the test, it must be highly related to your business.

Vacations and Beach Homes
Another trap to be wary of are deductions for personal vacations disguised as business trips. Avo Asdourian, EA and founder of vitrualtaxaccountant.com, warns that if you deduct a convention trip and you are audited, you must provide supporting registration documents and proof that you attended the conference at least eight hours a day. If you call a vacation a business meeting, you must provide the names of those you met with, a synopsis of the meeting, and the outcome of the meeting.

Protect Yourself
The IRS says that for and expense to be legally deductible, it must be both an ordinary and necessary expense. Ordinary means common and accepted in your trade or business, and necessary is defined as helpful and appropriate for your trade or business. It must not be indispensable to be considered necessary.

Some unconventional expenses can be deductible under the right circumstances. Be sure to keep good records and consider hiring a qualified tax professional – one with experience working with small business owners – to assist you.

The consequences are potentially serious if you come under IRS scrutiny. The agency can put a lien on your business, which can significantly impact your personal credit and your business’ credit.

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