The Top 6 Bad Business Write-Offs, and How to Avoid Them

Bad business write-off
  • Taking a bad business write-off is one of the best ways to catch the attention of the IRS, which makes avoiding them one of your highest priorities.

    If you take a bad business write-off on your return, you’re essentially inviting the Internal Revenue Service to come sniffing around. Even if they don’t target you because of them, you’re much more likely to become the victim of an audit.

    Even worse, this might come after you get your refund. The IRS has no compunctions about disallowing expenses – even if that changes or cancels out your refund amount. That means you might owe them years after the fact. Nobody wants that.

    Luckily, you can avoid that outcome by avoiding bad business write-offs in the first place.

    Mind Your Meals and Entertainment

    Many people catch the IRS’s attention with meals and entertainment write-offs. Just because you’re considering bringing a good friend into business with you does not mean you guys can write off a week of lunches without compelling evidence. You’ll need evidence you spent those meals discussing work. Ditto on taking “potential clients” to the country club – unless those trips actually result in frequent sales.

    To avoid discrepancy, always keep careful records of and receipts from business meetings. Be ready to prove that a) the event took place and b) it was work-related. Also, if you take the per diem for meals when traveling instead of going all out, you’ll be safer.

    Tread Carefully with Travel

    Travel is another one that gets people in trouble. They often:

    • Take high dollar amounts when they’re not justified
    • Deduct “business trips” that are actually vacation-oriented
    • Spend big on M&E while they’re on the trip

    The IRS is not impressed by the one business lunch you have during your weeklong stay in Cancun, so don’t try to fib your way through a travel expense. Instead, refer to IRS Publication 463 for exact rules about travel deductions.

    Yield on Automobile Expenses

    Lots of companies (and their tax preparers) use the auto deduction liberally. They “estimate” a mileage amount that sounds right and call it good. The IRS doesn’t appreciate this, and will likely disallow any write off not backed by careful mileage logs.

    The best bet is to use a tracking app. It will help you track all your miles from day to day. That way you don’t have to cobble something together later.

    Be Smart with Internet and Cell Phone Bills

    Many business owners land in hot water by writing off their full cell phone and internet bill. Unless you use one hundred percent of phone and internet on your business, that’s not allowed.

    To be safe, you should have a secondary phone for business. You can also buy an upgraded business plan and only write off the upgraded portion. As for internet, write off the percentage you actually estimate spending on work.

    Avoid Full Write-Offs of Partial Business Use Assets

    Another mistake is to write off the full amount of a partial business use asset. Think computers, printers, phones, furniture, iPads, car or farm machinery. You’re only supposed to write off the percentage of an asset that you use for your business, so make sure you estimate carefully and honestly. You might be sorry otherwise.

    Pack Up that Office and Home Deduction

    Working from home is nice freedom. However, the office and home deduction is also a trap into which many business owners fall. Unlike other expenses, you must use your office exclusively for work if you want this deduction. You cannot deduct your office-and-television-and-workout room, so don’t try.

    A bad business write-off is one of the most common ways taxpayers get themselves in trouble with the IRS. If you run a business, you can avoid getting yourself into trouble by taking smart write-offs and avoiding the bad ones. Not quite confident in your own abilities? That’s okay. Get in touch with us here at Incompass Tax, Estate, and Business Solutions, and we’ll help you keep your nose clean – now and forever.

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