Deducting ordinary and necessary business expenses
Monday, July 29, 2019
Kissing up to the IRS, on this National Lipstick Day or any other, won't help with dubious business expense claims. Your work-related expenses must be ordinary and necessary.
When I quit working in an office, I quit regularly applying makeup. Now I only pull out the mascara and powder and lipstick when I have an in-person meeting or must make a media appearance.
So today, National Lipstick Day, really isn't a big deal for me.
Others, however, are celebrating, especially by taking advantage of the lipstick deals, including some freebies, that are being offered at cosmetics counters across the country.
And a few of those folks might even get to deduct future lipsticks and other makeup as a business expense as long as they meet Internal Revenue Service rules.
Writing off work-related expenses: To be deductible, the tax code says a business expense must be necessary and ordinary for your line of work.
So what does that mean exactly?
First, note the "and."
The expense, as detailed in section 162 of the Internal Revenue Code, must be both, not one or the other.
OK, but section 162 doesn't define either ordinary or necessary. The Internal Revenue Service, however, takes a stab at playing a tax-inclined Merriam-Webster.
An ordinary expense, says the IRS, is one that is common and accepted in your trade or business. This means that what may be deductible for one business may not be allowed off for another.
A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Determining ordinary and necessary: The next question is, of course, what exactly does the IRS consider ordinary and necessary for a business?
The answer is the same as for many tax instances: It depends.
In many situations, it's pretty obvious what is ordinary and necessary to operate a business.
We've all heard about the more extreme tax write-offs that managed to pass IRS muster.
There's the bodybuilder who was allowed to deduct body oil as a business expense.
Sometimes even domestic animals, such as a business' guard dog, can be claimed.
And, of course, exotic dancer Chesty Love (that was her stage name) whose breast implants were deemed deductible stage props for her job.
Generally, though, you (and the IRS) just need to use common sense when it comes to work-related expense claims.
No laughing tax matter: There's also what has been referred to as the laugh test. As you enter the item on your tax return, can you do so without laughing about how you're getting the better of the tax collector?
Here's a great example from a 1961 U.S. Tax Court case:
Mr. Henry, an accountant, deducted his yacht expenses, contending that because the boat flew a pennant with the numbers "1040," it brought him professional recognition and clients. The matter ended up before the tax court. The court ruled that the yacht wasn't a normal business expense for a tax professional, and so it wasn't ordinary or necessary." In short, the yacht expense was personal and thus nondeductible. (Henry v. Internal Revenue Commissioner, 36 TC 879 (1961))
Mr. Henry's creative tax relief attempt got him laughed out of court without his write-off.
Almost 60 years later, tax professionals are still snickering about Mr. Henry's chutzpah and IRS officials are still denying similar nebulous business deduction claims.
Document, document, document: Also remember that for a business expense to be allowed, you need to be operating a business. That means you're doing whatever it is you're doing in order to make a profit.
If the IRS determines your activity is actually a hobby that you engage in primarily for fun, not to make money, then all your ostensible claims likely will be disallowed.
And as in every tax-related situation, substantiation is key. When it comes to a business, it's also critical to keep good, and separate, business records.
If the IRS asks — and if an examiner is chuckling at something on your return, you can be sure there will be questions — your records will let you show exactly how your claimed deduction is ordinary for your occupation and necessary for the operation of your business.
Otherwise, the IRS will tell you, and your lovely lipsticked lips, to kiss off.
You also might find these items of interest:
- Deducting, or not, special clothing costs
- America's Yankee Doodle Boy provides a tax deduction rule
- Mama Mia! Swedish tax break prompted ABBA's wild outfits
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