4 Creative and Unusual Tax Deductions that IRS has Allowed
As tax season is kicking off it is no secret that U.S residents want to limit their liabilities as much as possible, however, there are some tax filers who have gotten pretty creative over the years in claiming unusual deductions.
CNBC reporter Darla Mercado recently wrote about a few strange tax deductions that the IRS has allowed. By now you have probably heard that legitimate charitable donations are tax-deductible. The “celebrity college cheating scandal” puts a new light on charitable giving but what about the costs of caring for your pet or putting a doctor ordered lap swimming pool? In a few select cases, the deductions were challenged in tax court, where the taxpayer ended up winning and the IRS allowed these unusual expenses on their tax returns.
The main point in each expense is: the costs must meet certain rules or circumstances; they cannot just be a personal expense. Such as if the cost falls under a qualified medical expense or they are an entrepreneur’s “ordinary and necessary“ business expense. For example, pets are not usually deductible, but if you can prove a medical necessity for a service animal, then you can deduct their expenses.
The full tax season is getting into full swing after the Tax Cut and Jobs Act took effect in 2018. The new tax law eliminated personal exemptions and itemized deductions and basically doubled the standard deduction to $12,000 for singles ($24,000 for married filed joint filers).
According to data from the Joint Committee on Taxation, because of the new law and changes for itemized deductions, only about 18 million households will itemize in 2018, compared to 46.5 million in 2017, which was more than double. However, this means it might be more difficult for a taxpayer to claim unusual itemized deductions on their returns.
Nevertheless, let’s jump into a few creative tax expense deductions that filers have declared and received on their tax returns.
Cosmetic Breast Implants
Just because you incur expenses for business reasons doesn’t mean that they automatically qualify as deductible. In general doing any kind of cosmetic surgery, like breast implants does not allow you to take a tax deduction write-off for the expense. But in 1994, a self-employed exotic dancer from Fort Wayne, Indiana won the U.S. Tax Court case of Cynthia S. Hess. Ms Hess, who is known as “Chesty Love” in her show biz endeavors as an exotic dancer, underwent a series of breast augmentation plastic surgeries in 1988. She tried to claim a $2,088 deduction tax break on her new breast implants, declaring them as a deductible business expense. At first, the IRS contended that the Tax Court should characterize the outlays as nondeductible personal expenses. She argued to the court that she got the implants in order to get more exotic entertainer gigs and appearances on the Howard Stern Show and that she had decided to have the implants permanently removed when her exotic-dancing career ended.
The judge compared the implants to work clothes and uniforms, which are allowable only if they satisfy a two-step test: (1) required as a condition of employment and (2) unsuitable for everyday use. It was a cinch for Cynthia to get over the first hurdle; her large, cumbersome breasts are a “costume,” needed to retain her employment as a professional exotic dancer.
As for the second rule, the court cited Cynthia’s testimony that she would remove the implants each day, if were that possible. As they cause bacterial infections and other serious medical problems, her understandable preference would be not to “wear” them while offstage. The decision was that implants so extraordinarily large are “useful only in her business” and, therefore, deductible only as a business expense.
Private Jet Travel
Whether you can justify private plane travel and treat the cost as a business expense depends on your unique situation, how much you use it, and more. Wealthy CEOs take advantage of this quite often.
On June 25, 1990, the U.S Tax Court ruled in favor of the FRENCH v. COMMISSIONER, for the married couple John and Joanna French, who in 1984, filed to deduct private plane travel costs off their tax returns. Under section 212, the airplane costs and depreciation as ordinary and necessary expenses paid or incurred during the taxable year for the management, conservation, or maintenance of property held for the production of income.
John French was an entrepreneur and licensed pilot based out of San Jose California, and they owned a rental condo in Mammoth Lakes, California. The condo rental management was not making a profit under a local real estate agency, so they decided to manage it themselves. To travel for the purpose of managing, advertising and renting their property several times in the year they had the choice of taking a 5 1/2 hour car ride or 1-hour airplane flight to look after it. At first, the IRS contested and made the argument that Mammoth Lakes is a vacation destination and they could have flown there to ski in the winter and swim in the summer months. The IRS was trying to state they thought the trip was nondeductible personal travel and not business related travel.
The Tax Court ruled in favor of the Frenches and permitted the income-expense write-offs: “We do not consider the expenses here to be unreasonable given the surrounding circumstances if it is considered reasonable for petitioners to personally manage the condo.” What’s more, the Tax Court allowed this even though the aviation costs increased their overall rental loss on the condo.
The IRS ruled in favor of a junkyard business owner couple to deduct all the cost of cat food. In US Tax Court case SEAWRIGHT v. COMMISSIONER, the taxpayer argued that the food was a necessity to feed a bunch of feral cats in order to keep the rats and snake infestation under control at the vast property. The tax court approved the $300 deduction as a valid business expense.
In another instance, if a taxpayer has a disability and needs to purchase a service animal or guide dog for vision or hearing impairments, psychiatric or other medical conditions, they may be able to deduct the cost of buying, training and maintaining as a legitimate medical expense. The IRS allows you to deduct pet-related expenses such as food, veterinary care, and specialized training is when a pet is a business expense, such as a guard dog or a “mouser” (a cat “employed” for rodent control case listed above). Generally, the animal must live full time on the business premises. The breed will be relevant for claiming it as a guard dog, the IRS will be more likely to approve a Doberman vs. a Chihuahua. The key issue is that your pet’s activities must be proven and/or considered a business expense— not a hobby — in order for those expenses to be deductible.
Forbes contributor Rob Clarfeld states “In some cases, pet-related deductions could offset income when the pet generates income for its owner. This includes famous animals that “act” in movies, television, social media posts and advertising. Also, individuals who commercially breed animals, subject to the hobby loss rules, can deduct related expenses.” Make sure you keep accurate records for all expenses you claim should you get audited or they could get disallowed.
The IRS has a nine-part test to help you make the determination, addressing the time and effort spent into making your activity profitable and whether you maintain accurate books and records.
Swimming pools and weight loss
Normally, you cannot deduct the cost of permanent improvements to your home to increase its value. The famous home renovation personality Bob Vila has said that putting in a pool “could be a money pit renovation project”, except when you can get your doctor to prescribe it for treating your medical condition. In a U.S tax court case an osteoarthritis patient who was prescribed swimming several times per day as a treatment by their doctor was allowed the deduction.
If you have a medical condition such as severe arthritis that would be improved with a swimming pool exercise regimen, and your doctor prescribes swimming to treat it, then your pool installation costs could be deducted as a medical expense.
Similarly, weight-loss aids that may be prescribed by your doctor to treat a specific disease could be deductible, but only if it is not covered by your insurance.
The IRS investigated and then approved the deduction for having a renovation of a shallow indoor lap pool with specifically designed entry stairs and a hydrotherapy device. Given these features, the IRS concluded that the pool was specially designed to provide medical treatment not simply for recreational fun purposes. Under section 213 of the Code. Rev. Rules. 54-57, 1954-1 C.B. 67 and 59-411, 1959-2 C.B. 100 modified. When deducting a medical expense the taxpayer expense should be properly documented with receipts and should have a written recommendation from your doctor expressing the medical need. A doctor’s recommendation does not guarantee IRS approval. The IRS does examine and occasionally challenge large medical deductions so be sure to obtain expert tax advice. Spinal cord injury victims sometimes use a range of activity based therapies such as aqua therapy, gate training and underwater treadmill. If you are living with a disability or have someone in family that does, you can look into certain renovations made to accommodate a home to for a disabled condition. These include expenses for having an air conditioning installed to remedy a kid’s asthma, putting in an elevator for an adult who can’t walk upstairs, and special modifications for a disabled person.
According to IRS Publication 502, medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These include the costs of equipment, supplies, and diagnostic devices needed for these purposes. However, medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health.
For every tax case you find involving a taxpayer winning against the IRS in Tax Court you’ll find more who lost so be careful. The key to every tax deduction write-off is understanding tax laws and proving the claim with documentation. Or consulting with professional CPA firm. Every businesses tax circumstances are different. It’s not just about what you earn, it’s what you keep. In today’s turbulent economy it’s important to have an experienced tax consultantancy who understands your specific needs. We are experts in all areas of accounting, including tax, business advisory, CFOconsulting, section !99A consulting, charitable contribution giving. There is always a tax deduction to be found. Contact us for a free consultation.