Advisory Tax Service, Inc.
What are deductible expenses?
For example, cookbooks and knives certainly are taxable deductible to a chef and probably not to a yacht captain, while dive gear is tax deductible to a yacht captain. The general rule used to decide whether an expense is deductible or not is to determine if the item purchased is used in the pursuit to generate your income. Now this is not the technical language used by the Internal Revenue Service. The technical language used by Regulation 1.162-1 of the Internal Revenue Code is that generally an expenditure may be deducted from gross income that are ordinary and necessary expenses of carrying on a trade or business. Whether expenditure is ordinary and necessary is based upon the facts surrounding the expenditure. An expense is necessary if it is appropriate and helpful to the taxpayer’s business. An expense is ordinary if it is one that is common and acceptable in the particular business activity. (IRS Regulation 1.162-1) The best way to determine whether or not an expense is deductible is to take first a good hard look at the industry as a whole; take for instance the yachting industry. Asking yourself would others in the industry have similar ordinary expenditures, such as networking at the Quarterdeck, then combining it with the fact that it is necessary to conduct your business as a captain or crew to network. Networking after all is one of the keyways that business gets done in yachting. There are certain general expenses that are common to almost every business, such as cell phone, licenses, travel, meals, etc. Depending on the industry as a whole the expenditures for certain items may be unusually high compared to other industries. For example, travel, and meal expenses would be expected to be in a lot higher percentage for those in yachting that for an accountant. The type of business formation also determines the amount of deductibility in some accountant’s view. Taxpayers who are employees of the yacht who have large expenditure in total that add up for example to be 15 - 20 % of their gross pay would certainly be more subject to audit than a general taxpayer. Starting with the premise that these expenditures are first limited anyway under the tax code by the need to meet the miscellaneous deduction floor and by the need to itemize, which most single crewmembers do not itemize. The other two major scenarios independent contractors or “S” corporations do not have the need to meet the minimum threshold or the need to itemize. Independent Contractors would have the additional concern of running the type of expenditures that most captain and crew have on their tax returns simply because it just not meet the smell test for some accountants. To those accountants it looks like the amount of meals, travel, auto expenditure, gear etc. looks too outrageous and could be considered to be personal expenditures masked as business expenditures. However, most corporations have these expenditures in spades. Most corporations as a percentage of their gross income have at least 15 - 20% of their gross income as expenses. Therefore giving even the conservative accountant a degree of relaxation. Eric Yankwitt, Advisory Tax Service, Inc. 1975 East Sunrise Blvd., Suite 522, Ft. Lauderdale, Florida 33304, (954) 763-2829
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