Small Business Taxes & ManagementTM--Copyright 2020, A/N Group, Inc.
With the release of some of President Trump's supposed tax information more than a few people are asking "is that deductible"? First of all, even if you go to the barber and get a haircut because you're seeing the customer who could put your business on the map, it's not deductible. Flat out no. It's a personal expense. What if you're a television on-air talent such as a newscaster? A haircut you get on your own is still not deductible, but if your hair is arranged by a stylist employed by the television station for that performance there's no imputed income.
Clothing. Clothing is probably the item most often incorrectly deducted. It was frequently deducted when miscellaneous itemized deductions for job-related items was available on individual tax returns. The clothing had to be required as a condition of employment and not suitable for everyday wear. Some people have claimed it on business tax returns. The IRS view of "everyday wear" is pretty broad. The tuxedo you bought so you could attend a party for a client--it can be worn elsewhere. A uniform required by an employer such as an airline pilot, health care worker, delivery worker may be deductible. A painter's attire (cloth cap, white bib overalls) isn't distinctive enough. Protective or safety clothing such as kevlar chaps or pants used by tree workers, safety shoes, hard hats, work gloves are generally deductible. Workers who may be required to wear protective clothing include welders, carpenters, machinists, chemical workers, fishing boat crew members, etc. (Again, not by individuals.) The same rules apply to cleaning of the clothing.
Keep in mind that deduction isn't currently available on Schedule A of Form 1040, but you may be able to deduct it if you file a Schedule C or a business return such as an 1120S. If you own a business and provide uniforms or special clothing to employees for a noncompensatory business purpose. For example, you've got a number of employees working in your auto repair business and want to identify employees from customers. You provide work shirts with the name of the shop on the front and back of the shirt. You can deduct the cost of the shirts and not report it as income to the employee.
CAUTION. Whether or not an item qualifies is very fact-specific. Talk to your tax advisor.
Personal use of company auto. The rules here can get very complicated very quickly. Recordkeeping is essential. But many business owners put a car in the business name and claim all use is business use. First whether you're the owner or an employee, travel from home to the office is commuting and not deductible unless you include the value of the vehicle on the employee's W2. From the office to a job site or client is generally deductible.
There are a number of ways to value personal use by an employee. Which methods you can use depends on the individual situation.
Spouse on business trip. You can take your spouse with you on a business trip, but you can't deduct his or her portion of the expense. That means airline travel, hotel room, meals, etc. Double room for the night is $200 and a single $150. You can only deduct $150; the cost of your single. Your customer may have invited your spouse to come along, but that still doesn't make it deductible. Take your secretary so she can keep notes? Nope. Of course there's an exception. If your spouse is an employee of the company and he or she is there for a bona fide business purpose, his or her trip is fully deductible. The rules here are pretty cut and dried. The only possible other exceptions we've heard of is if you're disabled and need an aide or you're taking a business associate .
Vacation on the side. Combining business and pleasure? It's doable, but you've got to watch the rules. It depends on the primary purpose for the trip. Taking a week-long trip to Chatham Florida and spending one day at a client and six at Wally Land won't cut it. You can't deduct the trip there and back, nor the stays at hotels. You can deduct the costs associated with going from the hotel to the client and back. On the other hand, you take a trip to Chatham and spend 5 days including the weekend. You discuss business Friday and Monday and Tuesday. On Sunday you visit Aunt Sue who's a mechanic at the Daytona 500. The trip to and from Daytona isn't deductible, but the rest of the trip is. Different, stricter rules apply to business trips outside the U.S.
Meals and entertainment. Entertainment is no longer deductible. Period. Meals are deductible, but the recordkeeping requirements are strict. A lone diner can deduct out of town meals while on business. Otherwise you have to be dining with a business associate, customer or potential customer, vendor, etc. where business isdiscussed. Eating, in town, by yourself isn't deductible, no matter how late you work or what the situation. You may be able to deduct the meal if you invite a coworker and business is discussed. But if you do that on a regular basis (e.g., one day Fred takes out Sue and Mike, the next day Sue takes out Fred and Mike, etc.) expect the deduction to be challenged. Luxury meals such as $1,000 for two people for dinner can be challenged.
Conventions. Trips to conventions can be deductible if they advance your trade or business. Conventions or seminars for investment or income producing activities don't qualify. For example, a series of seminars on managing your rental properties generally wouldn't be deductible. (In some cases managing rental properties can be a trade or business. Talk to your tax advisor.) But conventions where you simply receive one or more DVDs that you can view at your leisure don't qualify. And, much the same rules apply as to travel for business. Expenses of your spouse don't qualify (unless he or she is an employee), travel expenses depend on whether or not the trip was primarily business or pleasure, etc. A company convention isn't automatically deductible. One court has developed a list of four factors to consider, the most important one is the time devoted to business versus social activities. Foreign conventions and those on cruise ships have more stringent requirements.
Company airplane? You may be able to get a free ride on the company jet (or turboprop, or piston engine) but the value of the ride must be included as income on your W2. The good news is the imputed amount is based on a formula that some consider artifically low compared to the benefit.
Company products or services provided to employees. It's not unusual for executives and employees to get free or discounted use of company products or services. This is a broad area and whether or not the preferential treatment is taxable to the employee and by how much depends on a number of facts and circumstances. The most known freebie is free rides for airline employees. This one falls under a "no additional cost service". In other words, the free flight isn't costing the airline anything if the plane isn't full. Other fringe benefits that carry no tax consequences can include de minimis items such free coffee in the break room, or a discount on services the company normally provides to customers of no more than 20 percent off.
Facts and circumstances. Many of the items discussed above are much more complex and often contain exceptions to general rules. And the final outcome often depends on the specific facts. Even subtle changes can change the outcome. Best to discuss with your tax advisor.
Copyright 2020 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 11/04/20