The Most Commonly Abused Tax Deductions

August 23, 2018

Taxpayers interested in maximizing their financial situation look for legitimate ways to reduce their tax burden. They find tax deductions, credits, and other ways to shrink their tax bill and pay as little as possible. That’s why they often consult with a qualified accountant, tax attorney, or other tax professional.  Everyone should pay their share of tax, of course.  Still, no one needs to overpay their taxes.

As it turns out, the IRS scrutinizes certain deductions more than others. That’s understandable, because certain types of deductions typically allow for greater tax savings.  In this blog post, we identify and discuss a few of the most commonly abused types of tax deductions.  These are the deductions which are falsely claimed or exaggerated most often by filers. In this post, we give a short overview of how thees deductions operate and why they tend to be frequently abused by taxpayers.  

Home Office Tax Deductions

The so-called “home office deduction” is easily among the most widely-abused provisions of the tax code.  For that reason alone, those claiming it face a higher likelihood of audit. Essentially, this deduction allows business people to deduct costs associated with maintaining a home office used to conduct a business. To claim the deduction, however, business people need to meet two conditions.  First, the defined area must be used exclusively for a business purpose.  Second, that area must be the primary place in which the business is conducted. These conditions are intended to prevent the deduction from being used by those not actually using their home as a legitimate office. 

There are two methods for calculating this deduction. One is to simply take the square footage of the defined area for the home office and multiply that number by $5. So, for example, if a home office is 10 x 10 feet, the deduction is $500.  That is, 100 square feet x $5, or $500. The other method is to find and document all expenses associated with maintaining the home office and add them together. For instance, rent, utilities, maintenance, repairs, pest control and so forth. After adding all expenses, the deduction is adjusted according to the actual square footage of the home office.  The home office deduction has become more common with the rise of the internet and the sheer number of home-based businesses. Accordingly, it should come as no surprise that the deduction is most commonly abused by e-commerce businesses, lawyers, psychologists, etc.

Business Mileage Deduction 

If you use a vehicle for business purposes for more than the typical commute, you can deduct its cost. Instances might include meeting clients at an offsite location, or running errands for your boss or your own business.  Attending a business-related presentation?  All of these mileage expenses are eligible for the deduction. The problem usually arises, though, when taxpayers claim exclusive use of a vehicle  for business purposes. Exclusive use is difficult to prove and usually involves detailed contemporaneous records.  Of course, it’s entirely possible that a vehicle might be used exclusively for business.  Think of a hearse or a limousine, for instance.  Nonetheless, exclusive use is rare and is still tough to sufficiently document. 

Tax Deductions for Meals, Travel & Entertainment

Money spent on meals, travel or entertainment related to a business purpose, is generally 50% deductible. The Tax Cuts and Jobs Act (the “Act”), however, made several important changes to these rules.  Taken together, the deduction for these expenses is known as the “meals, travel and entertainment deduction.” To write off these expenses, there must be a sufficient nexus between the expense and the business activity. If a lawyer takes a prospective client out to dinner and discusses specific business issues, the meal expense is deductible.  As a direct result of the Act, though, if you utilize this deduction, you putt yourself at risk of an audit.  In part, that’s because there’s inherent subjectivity in determining whether a given expense is deductible or not.

A New York Tax Attorney Can Help

If you don’t have a formal background in tax, finance or accounting, this information can be overwhelming. But that’s precisely why it’s helpful to seek out guidance. Our tax professionals do the research, so you don’t have to.  The attorneys at Mackay, Caswell & Callahan, P.C., speak fluent tax so you don’t have to. If you have a tax or business law issue and need assistance, give us a call.  A top New York City tax attorney can get started on your case immediately. 

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