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Lessons from the Tax Court: deducting business expenses

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in Firing,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

1. Keep receipts, not a list

To prove your expense-deductions on your tax return, it's best to go overboard on recordkeeping. More is always better. While you may be able to rely on the "Cohan rule" to help you deduct some undocumented expenses in a pinch, it won't always save the day.

Case in point: A taxpayer who worked as both a firefighter and housing authority cop deducted $5,000 in unreimbursed employee business expenses. Those included costs for a cell phone, a second home phone line, uniforms, dry cleaning expenses, professional dues, firing-range expenses, buying a gun and ammunition. He submitted a work sheet showing the expenses, but he didn't provide any receipts or other records.

The Cohan rule (named after a case involving the entertainer George M. Cohan), allows the Tax Court to estimate the amount of deductible expenses if it is convinced that some expenses were incurred, even if the taxpayer didn't substantiate the costs. In this case, the Court let the taxpayer deduct only $1,500 for the uniforms, firing-range expenses, gun and ammo. (Jones, TC Summary Opinion 2004-76)

2. No deduction for 'common' products

You can write off "ordinary and necessary" business expenses. But don't try to deduct more-common expenses that aren't used specifically for your business. Sometimes that line isn't very clear.

Case in point: A professional bodybuilder deducted the cost of bison meat and vitamin-enhanced "power shakes." He ate the bison meat because it had high protein levels. He also deducted the cost of special body oils that he'd apply before competitions.

The Tax Court denied his deductions for the power shakes and bison meat. Why? Even though they enhanced his appearance, nonprofessionals could also use them. But the court did allow deductions for the body oils. Reason: The oils are specifically marketed to professional bodybuilders. (Wheir, TC Summary Opinion 2004-117)

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