Unusual But Legitimate Tax Deductions
As a small business owner, there are many deductions that you may be surprised to know even exist. Although small business owners tend to typically try to “fly under the radar” and avoid raising any red flags to the IRS, there are quite a few legitimate deductions that you should consider taking on your tax return. Here, we will discuss 10 unusual but legitimate deductions that can end up saving small business owners money on their tax bill.
1. Home Office Deduction
The home office deduction is slightly controversial, but it is legitimate and should be considered. Generally, the home office deduction is thought to be a “red flag” deduction to the IRS because it requires a space in the home that is exclusively dedicated to the business operations. In other words, you cannot deduct a home office if it solely consists of a small space in your family room or den. The burden of proof rests with the taxpayer to show that the deduction is legitimate. The “red flag” does mean that it can elevate your chances of being audited, but as long as your claim is legitimate you are in the clear.
2. Insurance Premiums
If you are self-employed and paying for your own health insurance, your health insurance premiums are 100 percent deductible, subject to certain limitations. The primary limitation on the deductibility of health insurance premiums is that the deduction cannot be more than the net profits of the business. It is also disallowed if the individual taxpayer claiming the deduction had the opportunity to be covered under another health plan, for example, their spouse’s health insurance plan.
3. Child Labor Deduction
A deduction that typically surprises small business owners is the child labor deduction. If you operate a sole proprietorship or a partnership in which you and your spouse are the only partners, then you may deduct salaries that you pay to your children (aged 17 and younger) employed by the business. Moreover, there is no need to pay Social Security taxes for children employed who are under the age of 17.
4. Travel and Meal Deductions
One of the greatest and possibly underutilized deductions available to small business owners relates to travel. Specifically, when a small business owner travels for a business-related purpose, the entire cost of lodging is deductible on the business owner’s tax return. Many small business owners do not realize that the cost of lodging is 100 percent deductible, so they skimp on their accommodations instead of staying in a nice place! Similarly, the costs of travel and incidentals incurred during the course of the trip – other than meals – are fully deductible.
5. Guard Dog Deduction
Another unusual but legitimate small business deduction is the guard dog deduction. If you use a guard dog to protect your small business premises, then you may deduct the cost of feeding and maintaining the dog. This includes vet bills, food, training and toys. In order to legitimately claim this deduction, you cannot simply try to pass the family dog off as a guard dog. The guard dog must also be a member of a traditional “guard dog” breed, such as German Shepherd, Doberman Pinscher or Rottweiler.
6. Bad Debt Deduction
Sometimes, businesses expect income from particular transactions, but never actually receive the income. This scenario is referred to a bad debt. An example of a bad debt occurs where a business provides goods or services to a customer, invoices the customer, but never receives payment. When a small business incurs bad debts, the amount can be deducted at the lower of fair market value or face value.
7. Legal Fees for Illegal Activity
Another surprising deduction allows small business owners to deduct all legal fees associated with defense work completed for criminal proceedings against the business owner. Thus, if you are a small business owner and you are prosecuted for a criminal offense related to your capacity as the business owner, your legal fees and expenses are deductible. These legal costs are deductible regardless of the outcome of the case.
8. Cosmetic Surgery
In a famous case, a stripper attempted to deduct the cost of her breast-enlargement surgery on the grounds that it was necessary for her to successfully operate in her profession. Amazingly, the court allowed the deduction as valid. This case set a precedent for other interesting and related tax write-offs in the entertainment industry.
9. Private Airplane Deduction
Sometimes, a business just needs to use a private jet! The IRS allows small businesses to deduct the costs associated with the use of a private jet if the taxpayer can demonstrate that the plane was used for a purpose that directly impacts the “bottom line” of the business. Legitimate uses of a private place can include the transport of goods for meetings or conventions, or transport of people for these purposes.
10. Lawn Care Deduction
The lawn care deduction can apply to small businesses with stand-alone storefronts or to small business owners who operate out of their own home office. If the maintenance of the lawn surrounding the business has the ability to impact customers’ perception of the company, and in turn affect the success of the business, then lawn care expenses can be deducted. Here, business owners can reasonably claim that customers will judge the look of the lawn to be indicative of the quality of services rendered by the business.