Business owners should expect a hard time from the IRS and the courts when they decide to take business-expense deductions for outlays that are normally personal expenses. And it’s even harder for them to salvage deductions when they incur the disputed outlays on almost a daily basis.
For instance, the Tax Court denied daily-dining deductions claimed by Richard Hankenson, a physician who practiced and taught medicine at a hospital. For the year under review, the physician’s records revealed that he picked up the tab for lunches several times a week with nurses and doctors.
He claimed hefty write-offs for close to 400 lunches—178 meals for himself and for a hospital nurse who worked almost exclusively with him,115 for other nurses, 70 for resident doctors and 6 for practicing doctors. At meals with nurses, the discussions dealt with general office matters, such as important phone calls received during the morning, scheduling of patients in the afternoon and how to boost productivity. At meals with doctors, the conversations covered patient treatment.
The Tax Court refused to allow any deduction. It held that Code Section 262, which bars the deduction of personal expenses, takes precedence over Code Section 162, which allows deductions for business expenses.
The court observed that “Daily meals are an inherently personal expense, and a taxpayer bears a heavy burden in proving they are routinely deductible.” While occasional luncheon meetings with practicing physicians to apprise them of current treatment techniques may be deductible as business expenses, outlays for meals eaten three or four times a week, 52 weeks a year, are nondeductible expenses.
The court was dismissive of Dr. Hankenson’s contention that the primary purpose of the luncheons was to generate patient referrals. It pointedly noted that nurses and residents can’t directly refer patients.
At best, these luncheons may have indirectly contributed to the success of his practice. Nevertheless, inherently personal expenses aren’t converted into business expenses just because they contribute to the success of a physician’s practice.
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About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.