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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.
November 27, 2006
URL: http://www.entrepreneur.com/article/171204

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.

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.

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.

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.

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.

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.

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.

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.

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."