Don't Let These Tax Write-Offs Trip You Up
Some deductions may be worth a second look. Then there are those you want to be extra careful about.
Additional tax write-offs are always welcome at this time of year. But before you go chasing down new credits, it pays to make sure you understand the old ones.
You want to make sure you're deducting what you're already entitled to but not overreaching in a way that might bring unwelcome attention from the Internal Revenue Service. Here are some often-misunderstood write-offs worth closer consideration and some to be extra careful about.
Take a Second Look at These:
1. Business travel
If you do it right, business travel may be one area where mixing business with pleasure usually won't undermine your write-off.
If you're looking for a little R&R, it’s not hard to get some personal time away while also getting the most from your deductible travel expenses, according to Jeff Anderson, a partner with Padgett Stratemann, an accounting firm based in Austin, Texas. For example, he encourages his clients to schedule their business meetings to straddle the weekend, on Thursday, Friday and Monday. That way, your hotel and meal expenses over the weekend may be deductible.
"If it wasn't economically feasible for you to fly home and back, then the expenses for the weekend are deductible," Anderson says.
Or, if you can't schedule another meeting on Monday, he says, avoid those costly Friday night flights and take some "me" time. "If it's too costly to fly home on Friday, you can do the Saturday stay and fly on Sunday, as long as you can prove it was cheaper to fly on Sunday," he says.
Even if you spend three days playing golf with friends after a day of meetings, the airfare for the trip, though not the golf, is tied to the work activity and still deductible, Anderson says. If your spouse comes with you, his or her airfare is entirely on you, unless perhaps he or she has a role in your company.
2. Real home offices
Anderson says his clients are often skittish about taking a home-office deduction because it's perceived to be a red flag for tax audits. But you are entitled to a deduction if it's your primary place for business and is used entirely for business. "The rules are clear," he says.
It can be challenging for business owners to cordon off a part of their home as "the office" and not open it up to any personal use, Anderson says. But generally, "if you meet the criteria, you should claim it, because it allows you to write off a lot more stuff," such as part of your utility bills and mortgage or rent.
3. Start-up organization costs
If you're starting a new company, most write-offs don't kick in until you officially open for business, according to Stan Ginsberg, a partner in New York with the Metis Group, an accounting firm. One exception often can be organization costs, he says.
For 2010, business owners can generally write off up to $10,000 in expenses that are necessary to forming a business, such as filing incorporation papers, hiring an attorney, some employee salary and training expenses, advertising and travel.
Deductions That Can Get You in Trouble
1. Secondary offices at home
For every business owner who could write off a home office but doesn't, there's one who tries to do so incorrectly. "A lot of entrepreneurs get this wrong," says Robin Bell, a partner with the accounting firm Brown Smith Wallace, in St. Louis.
"They have an office away from home where they do billing, billable work and see clients. Then have a computer at home where they might check email or do research [but is primarily a family computer], and so they try to write off a home office," she explains. Usually they can't because it isn't their primary place of business and it's used for personal reasons.
2. Dual-use equipment
Call it the Farmville trap. Be careful with equipment that may be also used for personal purposes, things that accountants often call "listed items." These may include a company car, which might be used for chauffeuring kids, or the laptop or PC in your home office that you might check Facebook or play games on.
Business owners who use equipment for both their business and personal life need to keep track of how much it's used for both purposes, Bell says. If your business use falls below 50%, you could lose some or all of the deduction.
Keeping track "doesn't have to be an exact science," Bell says. "It just has to be enough to justify that business use." With a car, for example, use a calendar to note the days you commuted and visited clients, and tally them up at the end of the year.
3. Dining out
The IRS used to distinguish between meals for yourself when traveling on business, and meals and entertainment for you and a guest. It would generally allow a business owner to write off only part of the former but all of the latter. No more. Meals and entertainment are generally 50% deductible regardless of whether you are eating with a client or alone on the road. "People are always surprised by this," says Ginsberg. "And by the limit on gifts."
That limit on deducting business gifts is $25, an easy limit to exceed.
If you're in the habit of sending fruit baskets to clients at the holidays or buying the cocktails when you're out with customers, keep in mind that at least part of the cost will be your treat, not Uncle Sam's.
Eileen P. Gunn is a freelance writer in New York.