There's a fine line between looking to save money on your taxes and taking deductions that will raise eyebrows at the IRS. Some taxpayers are tripped up by expenses that they assume are tax deductions, but don’t qualify under IRS guidelines. Here are eight items that can lead to unpleasant surprises in case of an audit.
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1. Business-related entertainment
You may be taking clients out to win their business, but you’re probably having a little fun as well. At least, the IRS assumes you are.
For tax years before 2018, the IRS allows you to deduct only 50% of the cost of entertaining customers or clients, and for record-keeping purposes it’s best to document who you entertained and what the specific business goal of the event was. If not, you risk having the deduction disallowed in an audit. For tax years after 2017, generally, entertainment expenses are no longer deductible.
2. Business travel
There are deductions associated with business travel, but the IRS distinguishes between business and pleasure. If you take the family on a trip and meet with a client for dinner one night, the dinner with the client is deductible, but the primary purpose of the trip is pleasure. If you fly your spouse with you to a conference in Hawaii and stay an extra day, your spouse’s ticket and that extra day in Hawaii would not qualify as deductions.
3. Commuting costs
As far as the IRS is concerned, if you choose to work far from home, that’s your problem. It doesn’t let you deduct commuting costs to your primary place of employment, regardless of how far it is or what type of transportation you use. However, if you are self-employed and work at more than one workplace per day, you may be able to deduct the costs of traveling from one location to the other, or the costs of traveling to meetings.
4. Charities that don’t qualify
Just because an organization is a nonprofit doesn’t mean donations to it are tax deductible. Some social welfare and civic organizations don’t qualify; while donations to them might make you feel good, they won’t save you on your tax bill. You also can’t deduct the portion of a donation that provides something you benefit from. For example, if you donated $100 and attended a dinner in exchange, you must subtract the cost of the dinner from the $100.
The IRS allows a deduction for money that you actually gave, not money that you merely promised to give. This means you have to show proof that you actually gave the money during the tax year. If you agree to donate $500 annually to your favorite charity via payroll deductions in a September fundraising drive, for the following tax year you can deduct only the amount you paid between September and December.
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6. Undocumented cash donations
Recent tightening of IRS standards has made small cash donations more difficult to deduct. The IRS expects that you’ll be able to document all donations made to charity, and can disallow them in an audit if you’re unable to do so. Throwing some money into the collection plate, or into the jar at work for a charitable cause, risks being taken away if the IRS examines your return closely.
7. Political contributions
You might think it’d be a great thing for society if your favorite candidate or political party wins election, but those donations still aren’t tax deductible. If you give money to a specific candidate, or a group working on a candidate’s behalf, you can't take that money off your taxes. You might, however, get your candidate elected to office.
8. Volunteer time
You can deduct monetary donations to a charitable cause, but not your time. This holds true even if you’re performing the same duties you ordinarily do at work. If you’re a CPA and you also do the books for your church, you can’t deduct your time spent at the hourly rate you charge at the office. You can, however, deduct the expense of any supplies you need to do that work.