You’ve filed your tax return for the year. You feel good about it. However, I’m here to warn you about 5 tax deductions that could get you in trouble.
It’s super common for taxpayers especially self-employed individuals to make write-off mistakes. It’s simply because you never learned the dos and don’ts of write-offs.
You might think you’re doing your best to save money on your taxes. At the same time, you’re not realizing that you might be putting yourself at risk of an audit. No amount of tax savings is ever worth the hassle of an audit.
I wish I could deliver happier news regarding many of the write-offs but there are some deductions, write-offs, expenses that simply aren’t allowed.
Let’s go over the 5 tax deductions that could get you in trouble.
5 Tax Deductions
Taking mileage can be a lovely expense for your business but it’s also one of the 5 tax deductions that can get you in trouble. Whether you’re driving to get supplies, meet with a client, have a business meeting over coffee, etc., the miles can certainly add up to a nice deduction for your business.
However, taking ALL your miles driven as an RVer as a business deduction = a big NO-NO.
But you have a YouTube channel and you record during your drives or you write about roads, places, etc.
That doesn’t make ALL your mileage a business deduction.
The IRS doesn’t consider every mile a business deduction. The driving must have a business purpose. You also need to keep a log with the date, purpose of the drive, miles driven for that event, etc.
There’s also the rules of where’s your tax home and taking travel expenses.
To reiterate, the ONLY mileage that counts is for business errands, client meetings, and/or driving from your campsite to an outing/museum/park, etc. that will be featured on your blog or YouTube channel.
2. Personal Grooming
Another big no-no for deductions is hair cuts, manicures, make-up, and other personal grooming items.
Why can’t you take these especially if you’ll be on camera and want to look your best? Because the IRS sees these services as having a personal benefit. For example, if you get your hair cut, the benefit lasts beyond the video or photoshoot. Basically, you can “keep” that hair cut or manicure and it will be used even during personal times. Hence, why it’s not a deductible business expense.
The personal service no-nos include:
- Eyelash extensions
- Permanent tattoo make-up
For the good news, if you get your makeup or hair professionally styled for a specific photo shoot or video production, then that DOES count as an expense. This means you hire a professional to do your makeup and style your hair for a specific event. It does not mean you get a regular haircut the day of a photoshoot that you can count that hair cut.
I know. It’s a strange line but those are the rules taxpayers must follow.
You cannot deduct clothing just because you’re going to wear it for a photoshoot or a specific video. If the clothing is something you can wear again even if you may never do that, then it’s a personal expense.
This applies even to yoga pants if you’re a yoga instructor or if you buy a professional outfit for a meeting. Those clothes can be worn outside of that specific business activity, therefore they are NOT a deductible expense.
For an item of clothing to qualify as a business expense, it needs to be ordinary and necessary for your business operations. The attire should be in line with industry standards (ordinary) and it should be essential in order to run the business (necessary).
However, the line between what clothes can and can’t be deducted CAN get a little blurry, so let’s look at a few examples.
- Uniforms – This includes nurse’s scrubs, costumes for theater, a lab coat, etc. Again, these are not items you would wear out on the street as everyday clothing.
- Online personality/YouTube star – You cannot deduct a specific outfit you buy for a specific video. If that outfit can be worn outside of that video, then it’s NOT a business expense. It’s simply a personal clothing expense.
- Contractors – You CAN deduct hard hats, special protective boots, gloves, etc. These are items that you will not be wearing outside of your job.
- Clothing with your company logo – These ARE deductible as a promotional or marketing expense. Buy some T-shirts with your company logo and it will count as a business deduction. Woohoo!
With the examples, you can start to see where clothing serves a business purpose, and when it doesn’t.
4. Crowdfunding donations
Don’t try to pass off sending your friend money via a crowdfunding website as a charitable contribution. This is a huge mistake.
To count as a charitable contribution, a donation must go to a specified charity. Sending money to a friend or family member in need is simply a gift. Chances are that the individual is not a registered charity.
When can you take a charitable donation? If the place or company you are donating to specifically states they are a 501(c)3 non-profit or your donation is tax-deductible because “we are a tax-exempt non-profit”, then it’s ok to take the deduction.
Giving a gift to someone to help with surgery, a product launch, to recover from a fire or a natural disaster is just that, a gift. While it might feel like you are doing something good and making a charitable donation, it is still a gift to that person.
Let’s also take a look at giving to a Kickstarter or Indiegogo. In these instances, you are most likely getting something for your donation. It might be a cool new laptop stand or the latest camera bag to carry around your gear on a photoshoot. In these cases, you have a legitimate business expense. These can most definitely count as an office expense as long as they are business-related.
While we’re on the subject of charity, let’s talk about volunteering. While you might like to deduct your time for volunteering hours, volunteer time is NOT deductible.
Let’s take a look at an example. Say you’re a photographer and you charge $175/hour for your time. You volunteer for a charity run to take pictures of the people running and the event. You might spend 5 hours volunteering your time for this event for a total of $875 at your hourly rate. Unfortunately, you cannot deduct this amount.
However, you CAN deduct your miles to drive your towed vehicle or truck to the event and back to your RV. The 2020 rate for charity mileage is 14 cents per mile. This is taken as part of your itemized deductions.
Now let’s say you stop at the party store on your way to the event to buy some balloons and also at the grocery store to buy bottles of water for the runners. Those expenses would be deductible.
I know. It’s confusing.
Here’s what you need to remember:
You CANNOT deduct the actual time you spend volunteering. You CAN deduct any extra expenses for volunteering.