Test your knowledge about deducting expenses on your individual or business tax return. Your prize if you know the correct answers? You might pay fewer taxes!

As you keep track of your various tax deductions throughout the year, you really want to be sure which items are allowable…and at what percentage or amount? You may be surprised and what you don’t know could cost you.

That’s why our Honeck-O’Toole team of experts put together this list of the most common questions we receive throughout the year. Browse and see if you can find a hidden gem or two for your next tax return.

  • Social club dues? No deduction. You cannot deduct dues paid to the following social organizations, even if business connections are made as a result: golf and athletic clubs, country clubs, airline clubs, hotel clubs.
    • Business association dues? Deduction with a caveat. Business association dues are deductible as long as they’re not tied to lobbying. If a business organization has a lobbying arm, most organizations will break out the lobbying portion of the bill so you can deduct the non-lobbying percentage of your dues.
    • Business gifts? Deduction with a caution. Business gifts are deductible up to $25 per recipient per year. An exception is a gift that can be considered entertainment, such as tickets to an event. In this case, you can deduct it as either a gift or entertainment—whichever is most beneficial. If you attend the event with the client, then it must be considered an entertainment expense. (Be careful. If you send a client or prospect a thank-you basket of goodies, it’s not a marketing expense. The correct way category is business gift, and it’s only deductible up to $25 per person per year.)
  • Parking or speeding tickets? No deduction. It doesn’t matter that you forgot to feed the meter while meeting with a client or you were racing to an important business luncheon.
  • Penalties or interest on income tax liability? No deduction. A penalty is a penalty in every sense of the word. There are no benefits from an income tax penalty.  
  • Professional Clothing? No Deduction. Unless it’s a required uniform or required safety clothing, it’s not deductible. Some real estate agents are not happy with this. Neither are people who work from home but have to buy suits for professional conferences.
  • Gifts to Employees? Deduction up to $25. More than that is a big NO unless it’s included in their compensation. Then it really isn’t a gift anyway. It’s wages. So go ahead and give that holiday ham or turkey.
  • Political contributions? No deduction. Politicians are not charities. No matter what they tell you.
  • Charitable contributions? Deduction. But be careful. If you pay for raffle tickets or purchase something at an auction, that’s not deductible. In those instances, you’re gambling and shopping, not donating.
  • Gifts to individuals (children, friends)? No deduction.
  • Alimony payments? Deduction. The recipient has to report them as income.
  • Child support payments? No deduction.
  • Attorney’s fee concerning divorce? No deduction.
  • Attorney’s fee concerning collection of alimony? Deduction.
  • Attorney’s fee drawing up a will? No deduction.
  • Attorney’s fee concerning tax planning for estate and inheritance? Deduction.
  • Cost of improvements to your personal residence? No deduction.
  • Cost of improvements to rental property? Deduction: depreciation is deductible over the life of the property.

Small-business deductions: “ordinary and necessary,” “reasonable and customary”

According to the IRS, small business deductions you claim on your tax return have to be:

  1. directly connected with your business, such a copier or dedicated phone line
  2. “ordinary,” meaning customary or accepted in your line of work
  3. “necessary,” meaning helpful to your ability to conduct business

It must also be reasonable (think Cincinnati business trip, not Cancun snorkeling trip).

More tax deductions you may not know about

These are brief overviews. Please call us to discuss your particular situation.

Casualty losses

If you experience certain types of major personal casualties, you may be able to benefit from tax savings. An itemized deduction may be available for personal losses from fires, storms, car accidents, and similar “sudden, unexpected, or unusual” events, including theft. The deduction is only available for physical damage or loss to your property. Thus, if you are in an automobile accident and pay for the damage done to the other driver’s car, the cost does not qualify. Similarly, if you’re injured in the accident, your medical bills do not qualify as part of your casualty loss (although, of course, they may result in a medical expense deduction). The loss figure is reduced by three amounts first (so you may not end up with a deduction):

  1. To the extent you’re insured, you must reduce your loss by your reimbursement.
  2. For each casualty, you must reduce your loss amount by $100 per “event,” and not per item damaged. [If a storm knocks over a tree, which damages your car and home, you have three property losses (tree, car, house) and only one $100 reduction.]
  3. After combining all your losses under the above guidelines, you must reduce them by 10% of your adjusted gross income (AGI). Only the loss amount above this “floor” can be deducted.

Rental of Vacation Property

If you rent property for any part of the year, the tax treatment depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by non-relatives if a market rate rent is not charged.

  • If you rent the property for less than 15 days a year, it’s not treated as “rental property.” This can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial the amount). On the other hand, you can only deduct property taxes and mortgage interest—no other operating costs or depreciation.
  • If you rent the property for more than 14 days, you must include the rent you receive in income. However, you can deduct part of your operating expenses and depreciation, subject to a number of rules.

Home office expense deduction for self-employed individuals

If you’re self-employed and work out of an office in your home, and if you satisfy strict IRS rules, you will be entitled to favorable “home office” deductions for the following:

  • the “direct expenses” of the home office (the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.), and
  • the “indirect” expenses of maintaining the home office (a share of utility costs, depreciation, insurance, etc., for your home, as well as a share of mortgage interest, real estate taxes, and casualty losses).

Tests for home office deductions. You may deduct your home office expenses if you meet any of the three tests described below: the “principal place of business” test, the “place for meeting patients, clients or customers” test, or the “separate structure” test. You may also deduct the expenses of certain storage space if you qualify under the rules.

If you’d like to review your current deductions, make sure you’re including everything valid for your situation and pay less in taxes, give us a call at 207-774-0882.

Our financial articles are presented by Honeck O’Toole, Maine-based certified public accountants. If you ever have questions about your finances, please email us or call 207-774-0882.

If you’d like help in looking at your financial picture and mapping out a plan, make an appointment with a financial planner here at Honeck O’Toole.

Call us at 207-774-0882