Q&A: Business Expenses and Tax Deductions

Question: A friend of mine recently told me that he deducts most of his meals with his family because he is self-employed and his wife helps him out with his business. Thus, any of these meals are deductible because they discuss some business while eating. Is this true?

Joe B, Phoenix, AZ

Answer: No, this is definitely not true and is certainly not recommended. In order to deduct your business meals, you must make sure that your business discussion is both “substantial” and “bona fide.” Your friend would fail both of these tests. First, while there are no rules telling you how much time during the meal you must discuss business matters (i.e. it does not need to be a majority of the time), you must be sure that the business discussion is the primary purpose of having the meal. This does not mean that you cannot have a relationship with the person being entertained, but you had better have a valid business relationship with the person before you try to claim any tax deductions. In addition, the IRS would most certainly argue successfully that the primary purpose of your meal was not business related. When you entertain family members, you may be able to show a legitimate business purpose, although this will certainly be more difficult than someone who was not related to you. You should be sure to remember these rules, as it is up to you to prove that you are entitled to deduct the entertainment expenses as legitimate business expenses.

Medical Expenses and Tax Deductions

We often get questions as to the deductibility of medical expenses by non-business taxpayers (business taxpayers have more opportunities to claim tax deductions because they can utilize a medical reimbursement plan or other tax savings methods for their employees). In order to claim a deduction on your personal tax return (Schedule A- Itemized Deductions), you must make sure that the expense relates to the cost of diagnosis, cure, treatment, mitigation or prevention of any specific disease. You are not permitted a deduction for general health benefits (even if prescribed by your physician) and expenses done solely for cosmetic reasons.

Here are some medical expenses you should consider:

(1) doctor bills (such as for a physician, chiropractor, dentist, Christian Science practitioner, and psychiatric service fees)

(2) any medical equipment/supplies (wheelchair, braces, crutches, ambulances, eyeglasses, splints, oxygen equipment, etc.)

(3) medical treatments (childbirth, injections, vasectomy, insulin, abortion, acupuncture, etc.)

(4) premiums (health insurance, blue cross, etc.)

(5) Hospital Services (room and board, emergency and operating room fees, etc.)

(6) Medicine and Drugs (prescriptions only)

(7) laboratory tests (blood, urine, X-Rays, etc.)

(8) miscellaneous (alcohol/drug treatment, birth control, travel to medical facility (your mileage is tax deductible here), organ donor costs and expenses, lifetime care payments for retirement home, dog/Braille for blind individuals, special telephones for deaf individuals, stop-smoking programs, special schools for handicapped individuals, childbirth classes, education costs for handicapped children, etc.). As long as the expense is for a legal medical procedure (do not try to deduct illegal drugs!), you should be safe in claiming it.

Please also recall that the recent Health Care bill made some changes to what can be claimed as tax deductions in future years. We will report on these changes and how to plan for them as we get closer to the implementation date for this new law.

Tax Court Rules Against Real Estate Investor

In a recent decision (Woody v. Commissioner, TC Memo 2009-93), the US Tax Court has held that a real estate investor was not “in business” when he incurred expenses and thus could not claim his expenses as “ordinary and necessary” business expenses. In February 2004, Mr. Woody began to investigate the local real estate market so he could begin to accumulate properties for investment or rental purposes. He began to market his services, had business cards printed and began to actively promote his business (and had a business plan in place). In addition, he took a few courses to increase his real estate skills. He made multiple offers on properties in 2004 but failed to actually acquire any properties during this year (he did have one contract in place that was cancelled after the inspection revealed many defects). He claimed more than $23,000 of expenses for 2004. The IRS subsequently examined his return for 2004 and denied all expenses, asserting that the expenses were not tax deductible because Mr. Woody was not in business.

The Tax Court noted that there are three factors to decide if an expense is a business expense for tax purposes:

(1) Did the taxpayer intend to make a profit?

(2) Was the taxpayer regularly engaged in the business activities?

(3) Whether or not the activity actually commenced

Mr. Woody satisfied the first two factors and the IRS conceded that he had sufficient records to prove the expenses were in fact actually incurred. Thus, the only issue was whether or not Mr. Woody had actually began his business. The Tax Court ruled that he had not and denied the deductions, stating that the deductions were at most “start-up” expenses for which elections and amortizations came into play. The Court stated that the business did not begin before Mr. Woody acquired his first rental property, rejecting Mr. Woody’s argument that the business began when the first contract was accepted (even though he did not close due to the defects).

There is not much more that Mr. Woody could do in this case. He maintained excellent records, had a business plan and basically did everything that a business advisor would recommend in getting his business started. However, as we have stated many times in the past, until the business becomes a “going concern,” the expenses are not currently deductible but instead become “start-up” expenses.

Conventions and Seminars – How to Deduct

So you are heading to Las Vegas or Hawaii to attend a seminar or convention for your business. Of course, you also want to have some fun while you are there (all work and no play makes one a dull person!). Here are some tips to keep in mind so that you can claim a valid tax deduction while still enjoying the perks associated with this type of business travel (shows, sightseeing, gambling, recreation, beaches, fishing, etc.):

- Save as much information from the seminar or convention as you possibly can. For instance, make sure you keep a copy of the itinerary, program handouts, registration forms, course materials, business cards and any other information specific to the seminar or convention. This will assist if the IRS questions how or why this event was related to your business (i.e. why this was a “business” expense and not “personal”).

- Keep copies of all receipts, including those for your hotel (required no matter what the cost), meals, entertainment and the fees associated directly with the seminar (for registration, specific programs, books/tapes purchased, etc.). It is critical that you keep these, along with proof of payment (cash, check, credit card) so that you can prove that you really incurred the expenses. While receipts are not required for some travel expenses under $75, I still recommend that you obtain them if at all possible, as it makes these issues in an audit much easier to resolve.

- Make sure that you can prove how the seminar/convention helped your business. For instance, nearly any seminar on taxes, marketing, client satisfaction and the like can be deducted. Do not try to claim a business tax deduction for lifestyle or investment seminars unless that is also your specific business.

- Ensure that the seminar or convention is held in the “North American” area– this includes all of the U.S., the Caribbean, Mexico, Canada and Central America. It is much more difficult to claim valid tax deductions if the seminar is held outside of this geographic area.

- Make sure that you spend more than half of the day on “business” at the seminar or convention. This means that you should, at a minimum, spend at least 4 hours and 1 minute per day attending the event. Do not go to a seminar and then not participate and expect to be able to claim a valid business deduction. You will still have much time for socializing or sightseeing but you must work a bit in order to claim the favorable tax deductions.

Q&A - Business Expenses and Tax Deductions

Question


My accountant recently told me that I could not deduct my expenses to a business convention in Las Vegas because I spent one of the days there doing personal sightseeing and only conducted business for two days while I was there. I think I can deduct the expenses. Please help, as this will cost me a lot of money.

Tom T., Seattle, WA

Answer


Tom– you are in luck, as all of your travel expenses are deductible, with the exception of any amounts you spent while sightseeing (these are personal expenses and are not deductible).

All of your travel expenses (airfare, hotel, meals/entertainment, seminar/convention fees, and local transportation would be deductible, but not the gasoline or meals for your sightseeing activities).

The basic rule is that your trip must be primarily for business (attending the convention was the main purpose and not sightseeing), and you must spend more time for business than pleasure on your trip. For purposes of determining how much time is business related, your travel each way counts as business days.

In addition, you should spend at least four hours each day while you are at the convention doing business in order to make these days count as business days. If you satisfy these rules, there is no reason why you cannot claim your travel expenses.