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Tax Court: Tune Out Personal Expense Deductions

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May 29th 2018
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If your clients are in a field involving recreational activities they may be able to write off costs and equipment associated with those activities, but a recent Tax Court case shows there are exceptions.

As shown in a new case, Nicholson, TC Summary Opinion 2018-24, 4/18/18, you can’t deduct personal expenses just because they make you more productive in your job. Under Section 162 of the tax code, you can generally deduct expenses that are “ordinary and necessary” to carrying on the business activity. This is defined as an expense that is “normal, usual, or customary” in your regular business.

In the new case, the taxpayer was an engineer residing in California, who found his work to be stressful. To reduce the stress, he developed his talents as a musician and produced two full-length albums. He completed all recordings in 2013, worked with a music producer and released the music for sale on Internet-based digital platforms and CDs in 2014.

The taxpayer has three daughters and one son who participated in various ways in his musical activities. He testified that he is most creative and productive as a musician when he is happy and that he enhanced his artistic creativity and productivity by dining out with his children, engaging in recreational pursuits such as bowling, hiking and camping and traveling to new destinations.

On his 2013 federal tax return, the taxpayer attached three Schedules C, Profit or Loss From  Business, identifying the underlying activities as Music Production/Record Company, Photographer and Musician. He reported zero gross receipts from these activities and cumulative expenses of $48,017 for 2013.

The expenses included:

  • contract labor of $31,237 (including unspecified amounts apparently paid to his children)
  • vehicle expenses of $4,164
  • advertising expenses of $3,285
  • books, camera and other equipment expenses of $2,906
  • audio and music equipment of $3,065
  • repairs and maintenance expenses of $1,012
  • other miscellaneous expenses including meals and entertainment, utilities, supplies, bank fees and rental items

On his 2014 federal return, the taxpayer attached six Schedules C, identifying the underlying activities as Music Production/Record Company, Photographer, Musician, Business Administrative Support, Graphic Arts and Writer. He reported zero gross receipts from these activities and cumulative expenses of $21,080.

The expenses there included:

  • contract labor expenses of $4,624 paid to a studio
  • $3,374 (apparently paid to his daughter)
  • vehicle expenses of $788
  • advertising expenses of $287
  • books, equipment, software, and business property expenses of $6,014
  • repairs and maintenance expenses of $335
  • meals and entertainment expenses of $1,810; travel expenses of $3,629 and other miscellaneous expenses

The IRS denied deductions attributable to the taxpayer’s personal activities with his children and the Tax Court agreed. The Court concluded that these expenses were primarily for taxpayer and his family’s personal benefit.

Any business purpose was distinctly secondary and incidental. This included contract labor payments to taxpayer’s children; travel, meals and entertainment; hiking and camping trips (and related equipment); most vehicle expenses; and miscellaneous expenses.

This ruling doesn’t close the door completely on deductions for clients relating to recreational activities during the summary. But the expenses must, again, be “ordinary and necessary” for a client‘s business to be deductible.

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