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Can You Get Tax Breaks for an Honorary Position?

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Tax rules themselves may not be the most fascinating, but the court cases are a different story. In the third installment of his series on IRS Code 162, Julian Block relates the story of the man who took an honorary, unpaid post and tried to deduct some business expenses from his taxes.

Jul 14th 2022
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For those of you who just entering into the discussion, go back to parts one and two for IRS rulings and court decisions on whether deductions for expenses satisfy the “ordinary and necessary” requirements imposed by Code Section 162. More on such requirements in part three. 

Travel and entertainment. Long-standing IRS regulations disallow deductions for travel and entertainment expenses that are “lavish” or “extravagant.” But what’s extravagant for one taxpayer might be an ordinary and necessary expense for another, according to a 1977 decision by the Tax Court. 

It dismissed the IRS's pinched view of extravagant and permitted Mr. Denison, an investment adviser, to claim the cost of transporting potential customers in chauffeur-driven Cadillacs. What proved persuasive? The nature of the adviser's business, testimony that many of his clients were wealthy Europeans, and the court's awareness of "the generally obnoxious traffic situation in midtown and lower Manhattan." 

No tax break for “honorary” director. Suppose some friends ask you to serve as a director of their corporation. Be aware that becoming a director can have its perils. Whether you take a director’s seat for money, power, prestige or just to be obliging, you assume certain responsibilities when you accept the position. 

Let’s say that you agree to do a favor for a friend and serve as an “honorary” director without pay. Later, you have to come up with the cash to cover the company’s losses. What you might belatedly discover is that the IRS refuses to allow you to deduct your payments. 

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