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Keep your promotional deductions in ‘reasonable’ zone

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in Small Business Tax,Small Business Tax Deduction Strategies

Make sure to keep your promotional expenses in line with the resulting income. If you try to grab a huge write-off for promotional costs that produce little income, the IRS could see your "promotional" efforts as something else, and deny the write-off.

Case in point: A taxpayer who owned an S corporation in the tire industry was also an auto-racing enthusiast. His S corporation deducted $67,000 worth of various promotional activities, including putting his business name on a racecar. The IRS tossed out the deduction, and he took the case to court.

Result: Businesses can deduct "ordinary and necessary" business expenses. But the U.S. Tax Court sided with the IRS, saying that business expenses that are ordinary and necessary can also be considered unreasonable in their amounts. You can only deduct the "reasonable" portion of your promotional expenses.

The Court compared the amount claimed as a deduction to the income generated from the promotions and determined the amount to be unreasonable. It disallowed a portion of the deduction and imposed an accuracy penalty on the taxpayer. (Hopkins, TC Memo 2005-49)

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