Being a Rockledge tax professional, I get all kinds of questions throughout the year when it comes to taxes.
But whether at social gatherings, sporting events or even business networking functions, one of the most common ones I receive is: Can I write this off?
Well, allow me, today, to set the record straight on all this for you.
In my experience, there are 3 primary mindsets of people out there:
Mindset 1: These are the people who want to write off everything, whether it’s legal or not, and figure the cost of an IRS audit won’t be “that bad”. Or else they think they can’t ever get caught. They are invisible, or so they think. That’s more common than you would ever want to know.
Mindset 2: These folks don’t want to write ANYTHING off. In fact, I’ve known some who will tell me that they want to purposely overpay their taxes. If the tax due is $10,000, they’ll write a check for $11,000. They figure that will keep the IRS away.
But the IRS doesn’t take bribes. This plan doesn’t work.
Mindset 3: These are the people who want to pay less in tax, but they are cautious. They still want to sleep at night.
Well, I’m going to help you if you fall within that category today, with an illustration at the end …
Dan Henn, CPA’s Strategy for Writing Off Almost Anything
“The people who get on in this world are the people who get up and look for the circumstances they want, and, if they can’t find them, make them.” – George Bernard Shaw
I’ve got good news and bad news. First the good: this is easier than you might think. But the bad: you really have to do it right.
There are four primary steps for this, and you have to follow them all…
#1: You must have a business. If you’ve been running a tax loss in your business after you take all of your deductions, you could run the risk of the IRS calling your business a hobby. If you have a hobby, you can’t take the deductions.
There are actually 9 factors that the IRS uses to determine if you have a business.
These 9 factors break down into 4 categories:
Are you running your business in a business-like manner?
Are you putting in enough time and effort to reasonably expect success in your business?
Do you have past success in a business like this? Or, if not, do you have a mentor, coach or advisor who does have past success?
And finally, the big one, do you have a true profit motive for your business? You might be losing money now, but do you have a plan that will get you to the cash?
This first step is the hardest. It trips all kinds of people up. BUT, at the end I’ll give you an example for how it may not be as hard as you think…
#2: The expense must have a business purpose. The expense must be “ordinary and necessary to the production of income”. But, that’s about all the guidance you’re going to get. And that’s the reason why so many people get stuck, especially in the beginning. What’s deductible?It depends!
If you can prove that this expense helps your business, you’ve covered #2. I’m going to go over the next two steps and then, again, an illustration for how you can write off almost anything (provided you follow the steps, of course).
#3: You have proof you paid the expense. This is pretty much a no-brainer. No receipt = no deduction. When you’re out, use your smartphone to take a picture of receipts. It’s a whole lot easier to keep track of pictures than it is loose slips of paper. Then, if you paid for the deduction with cash, check or credit, you’ve got the deduction.
#4: Make sure you properly report on your tax return. There are three steps to a successful tax strategy.
Strategy + Implementation + Reporting.
The tax return is the final part of a strategy. That’s where we come in, of course.
Now for my illustration…
Let’s say your spouse has a thing for eating organically.
Well, here’s a plan that would get this spouse writing off some of that food.
(And how about you? Do you have something you really wish you could take a write-off for? Consider that through the lens of this illustration.)
Your spouse is familiar with social media like Twitter and Facebook and had been talking about starting a blog. Perfect! You set up a blog about eating organically. Then, you set up an arrangement with an “affiliate marketer” for a variety of organic food and supplement suppliers.
On the blog, your spouse highlights various foods, and talks about things like taste, price, how to cook them, what to pair them with, downsides to eating too much of them — essentially all the things that fellow organic food lovers would care about.
The spouse now has a business. Commissions are coming in as food is purchased from the site. And your spouse necessarily must purchase, prepare and eat organic food, in order to write about it for her readers — that is, in order to deliver her business’ fundamental service.
Is that all it took? No, the spouse has to meet the 4 steps above as well.
But here’s the thing: Sometimes the best way to get the answer is to change your question.
If you’ve been asking, “What can I deduct?” Change it to “How can I deduct THIS?”
The answers may surprise you.
And, as always, we here at Daniel Henn, CPA, CTR are here to help. Now is a GREAT time to still affect your tax strategy for the rest of this year and take some nice deductions. Let us help you.
Dan Henn, CPA
Daniel Henn, CPA, CTR