Business tax write-offs can provide much-needed financial relief for small business owners, but they can also be a source of confusion during tax season. While many business deductions are fairly straightforward, in more creative industries the range of legally acceptable write-offs can vary.
The IRS defines a legitimate deduction as something that is “both ordinary and necessary” to your business. You can only deduct an expense if it is common in your trade, and is considered both appropriate and helpful to your business. This definition leaves room for interpretation, and its ambiguity has led to some very unexpected deductions throughout the years.
1. Breast Augmentation (and Other Plastic Surgery)
While the IRS tends to deny deductions that appear personal in nature, some taxpayers have successfully appealed these decisions in court and set some rather surprising precedent.
One of the more unusual examples of this is the case of Cynthia Hess, also known as “Chesty Love,” an exotic dancer who wrote off her breast enlargement surgery as a tax deduction. The IRS rejected her claim, but a tax judge overruled their decision, determining that the change was directly tied to an increase in her income. The enlargement was also so extreme (up to a FF size) the judge did not believe the surgery provided Cynthia any personal benefit. Thus, it was approved as a legitimate and deductible business expense.
While most cosmetic costs are still considered personal expenses by the IRS (for example, haircuts and manicures are never accepted as business deductions), Cynthia’s physical augmentation case opened the floodgates for other surgeries, as long as they have been proven to significantly enhance business income. For example, a wine store owner from California was having issues with his sense of smell, and was able to deduct his nose job as a business expense since the surgery helped improve his ability to smell, and therefore to select the best wines during his sourcing trips in Europe.
2. Food and Grooming for Your Pet
Both dogs and cats have been successfully deducted as business expenses, but the circumstances are limited.
Dogs may be man’s best friend, but any canine owner can tell you that they are no friend of your wallet. Can you write off your pup as a business expense? In most cases dogs are considered personal expenses, but their food, training and veterinary costs can be written off if they fall under certain categories:
- Guard dogs (only if they are used to protect your business)
- Dog breeders (this must be a profitable business, not a hobby)
- Farm dogs (used to herd or protect cattle and livestock)
- Service dogs (this is not business-related, but rather a medical deduction)
While cats can be a harder deduction to justify as a business expense, there is some precedent. One business owner was able to successfully deduct the cost of care for a cat in his storage facility since it kept rats from destroying his inventory (and the cat kept vermin at bay better than other pest control methods).
3. Legal Defense When You Embezzle Money
It may be difficult to believe, but in some cases individuals can successfully deduct their legal fees as a business expense if they are charged with committing a crime. In 2000 Daniel L. Gordon was promoted to the president of GEM, a division of Merrill Lynch. In the same year Gordon transferred tens of millions of dollars into private accounts under his control, and falsified GEM’s records to make the company look more profitable.
He was taken to court and charged with money laundering, conspiracy to falsify records and wire fraud. When he attempted to deduct his legal fees (which amounted to around $320,000) he was denied, so he took the case to court. The judge found his legal fees to be partially deductible as “ordinary and necessary” business expenses. Read more about how the court came to that conclusion here.
4. Free Beer (Even if You Aren’t a Bar)
Deducting alcohol on your taxes can be tricky. The IRS has some pretty strict rules about what entertainment costs can be deducted as business expenses, and generally only 50% of food and beverage costs can be deducted (although there are some exceptions).
However, in one case, a gas station owner named Edward J. Sullivan provided free beer as a promotional scheme and was able to successfully deduct the brews after taking the issue to tax court. Sullivan was able to prove that giving away free beer (rather than trading stamps) brought more business to his station. See the full court decision here.
Keep in mind, if you plan on giving a bottle of fine wine or hard alcohol to a client, the IRS only allows you to deduct $25 or less for a gift to a single person.
5. Newspapers, Books and Magazines
If you buy any periodicals, books, subscriptions, magazines or newspapers that are related to your business, these can be deducted as business expenses. In fact, this even includes the magazines and newspapers you put in the lobby or waiting room.
Pro tip: If you buy a book related to your business that is updated annually, you should most likely deduct it once. If you are looking to set up a full library of reference books, an accountant may suggest that you depreciate the cost of these books over several years.
6. A Trip to the Caribbean (But Not Necessarily Asia)
While business trips around the globe can be deducted if they are recorded and filed properly, these trips must have a direct relation to conducting your business. Meaning, you probably shouldn’t decide to host a business meeting in Bangkok just because you love Pad Thai and thought it would be a fun city to bring your team.
However, the U.S. Treasury Department has a soft spot for the Caribbean on such matters. According to the U.S. Tax Information Exchange Agreement, business conventions held in many Caribbean nations can be deducted without the taxpayer having to provide a reason for the meeting to be held there.
The full list of countries included on the list are Barbados, Costa Rica, Dominica, the Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia and Trinidad and Tobago (as well as of course, Canada, Mexico and the U.S.).
7. Home Landscaping and Driveway Repair
While the IRS is notoriously hawkish about home office deductions, there remains the possibility of surprising deductions for those willing to test the limits of the law. In one extraordinary case, the IRS denied the business deductions for household maintenance expenses requested by a sole proprietor named Henry J. Langer, who regularly hosted clients in his home office.
When Langer took the case to tax court, the judge ruled partially in his favor, allowing him to legally deduct part of the costs of landscaping, lawn care and even driveway repair as they directly related to the passage of his clients in and out of his home.
8. Whaling Equipment and Boat Repairs
Obscure as it is, whaling captains have the ability to shore up some serious deductions. As of 2004, whalers are eligible for up to $20,000 in deductions on ship repairs and whaling equipment. Before you start sharpening your harpoons, keep in mind that the practice of whaling is banned for everybody except Native Americans.
A Word to the Wise
While some of these deductions are pretty unbelievable, keep in mind these examples are extraordinary cases and are certainly far from the norm. Before you consider challenging the system, remember that the costs of getting audited and taking your deductions to tax court can rack up some serious legal and accounting fees. If you are considering deducting an unusual business expense, consult with an accountant, and be sure to scour the IRS rules on business deductions.
Article by Rochelle Bailis