When it comes to taking deductions, most business owners know very well the expenses that the Internal Revenue Service considers “ordinary and necessary” for business. There are specific rules, for instance, on writing off vehicle costs . Ditto with equipment, furniture, inventory, retirement savings, home offices and professional fees paid to accountants, lawyers and consultants.
Not every legitimate business expense falls neatly into one of these categories, however. A growing number of business owners are turning to professionals outside of accounting or law for advice on everything from mediating partner disputes to boosting workplace productivity. Some health conscious bosses are stocking office kitchens with healthy snacks for the staff or hiring personal trainers for staff fitness sessions. And some weary business owners often tack vacation days onto their business travels.
So how do you determine whether those expenses, especially those that also yield a personal benefit, are fair-and-square business deductions? “These are things that aren’t specifically contained in the law, so you have to navigate and see if they’ve been barred or allowed or not yet talked about,” says Barbara Weltman, a Millwood, N.Y., tax attorney and author of “J.K. Lasser’s Small Business Taxes 2008.”
If court rulings and IRS pronouncements don’t offer much guidance, then it’s time for what tax pros refer to as the “laugh test.” Can you write off an expense without snickering about pulling one over on the IRS? If there is a concern in the taxpayer’s mind that probably means it’s not deductible.
Here are some not-quite-textbook expenses, and how tax experts view them:
Fees paid to nontraditional advisors. Did you hire an efficiency expert for tips on time management or a speech expert for help on public speaking? As long as you can argue that the advice was appropriate and helpful for your business, you should be able to deduct the fee. There are gray areas, however, when it comes to professionals (such as business coaches) who offer a blend of personal and work-related advice. In those cases, use common sense; if a coach focused on personal matters, don’t claim it as a business deduction. One exception is when a family business uses a consultant to settle sibling disagreements or other strained family relationships that impair a company’s management. Those fees are typically deductible.
Boondoggles: If you tack a few extra days onto the end of a work trip for personal R&R, you can deduct many of your travel-related expenses. The primary purpose of the trip must be business, however, and the cost shouldn’t be overly extravagant. If that’s the case, you can deduct the costs of airfare, taxis and 50% of your business meals. You can even deduct some out-of-pocket personal expenses if a Saturday night stay makes your business trip cheaper.
Snacks, food, beverages and other office-kitchen supplies: Whether they’re healthy or not, small bites or drinks that you supply staff for free count as a deductible business expenses. But be careful not to be too generous, as the IRS might view meals, in particular, as part of your employees’ compensation. If you were to give your employee a free lunch every day, that’s probably an example of something that would be taxable to the employee. In most cases, however, the IRS considers small food or drink items as a fringe benefit that’s “de minimis,” meaning it doesn’t have to be added to wages because the value is minimal. For more on fringe benefits, see IRS Publication 15-B .
Trips to the gym: Sorry, but even if those daily workouts make you more physically fit to run your company you can’t write off those health-club costs. However, a business owner can deduct the cost of installing an athletic facility (such as a small gym) for employees as long as it meets three rules: the facility is operated by the employer; located on the employer’s premises; and primarily used by employees.
Clothing: Uniforms for owners or employees that carry the company’s name or logo are deductible as a business expense. However, you can’t take a deduction for clothing if it’s adaptable to street use. If you are an attorney, and you buy a $3,000 suit to look good in court, you can’t deduct it. A contractor, however, could safely write off the cost of steel-tipped boots, and a party clown could deduct the cost of a clown suit.
Classes, workshops and conferences: Tuition, books and related educational expenses are deductible as long as they’re directly related to your business. A business owner who takes a class to help her maintain or improve her business skills is deductible. But an art class taken at a local community college to relieve stress won’t fly with the IRS. Although it may make some intuitive sense, it’s going to be considered a personal expense.
Meals: For wining and dining to be deductible, the primary purpose must be business, and someone else (such as a client or customers) must be present. If you drive a long way to meet with a client and stop to buy a meal for yourself on your way home, that’s not deductible. But, in most cases, if you have dinner with that client, you can deduct 50% of the meal’s cost as a business entertainment expense.
Music: In an effort to create a comfortable or creative work environment, a number of small businesses like to play soft background music. When that’s the case, the cost of the stereo equipment can be deducted as a business expenses.