Can I deduct money that I paid for gifts to my clients and customers?

by Viktoriya Khusit | Sep 13, 2016 

Very often  clients come in and want to deduct expenses for gifts they send to their clients, partners or employees.  But how much is really deductible?

Rule is that you can deduct $25 per gift you gave a tax year . Meaning if you spent $45 for flowers for the gift to your client, you can deduct only $25 of the price you paid. If you sent flowers four times during a year $40*4=$160, you can deduct $25*4=$100 of your gift expenses.

If you have to pay for delivery of the gift, usually this “incidental cost” does not included into $25 gift expense calculation.

Any item priced  at $4 or less and

– have your name on it (such as pen, plastic bags, magnet calendars, desk sets, etc)

or

-signs, display racks and any other promotional items to be used on the recipient premises

ARE NOT considered gifts. (Those are promotional items and will be discussed in another blog post).

Can I deduct my coffee?

‘I want to deduct all my meals, oh and please don’t forget coffee “.  All tax professionals hear this way too often. But truth is: NO, you cannot deduct your coffee or lunch or dinner. Generally, tho cost of meals considered a personal expense and are not deductible, unless substantial amount of business discussion happened before, during or after a meal, or you expect to receive a business benefit by providing a meal.

According to IRS Publication 463, these tests have to met in order to take a deduction:

• The main purpose of the combined business and entertainment was the active conduct of business,
• You did engage in business with the person during the entertainment period,
• You had more than a general expectation of getting income or some other specific business benefit at some future time, and
• Meal can happen directly before or after a substantial business discussion

In general, meals are deductible at 50%, by both employees and independent contractors. Pilots, flight crews, interstate truck drivers, railroad employees, merchant mariners, and other transportation industry workers can deduct 80% of the unreimbursed meal expenses.

Employers can deduct some meals at 100% such as employer sponsored holiday party or a lunch for employees

However there are some meals that are not deductible at all- lavish and extravagant, as they are not ordinary, necessary and reasonable .

Can I deduct travel expenses for my spouse?

Travel expenses are expenses that occurred while taxpayer was traveling away from their ” tax home”.  “Tax home” is the place where taxpayer conducts business on regularly basis regardless of where he/she lives, but for majority taxpayers “tax home” is place where they live. Deductible travel expenses might include cost of transportation, meals, tips, and  hotel cost.  If your trip was personal in nature  none of the expenses are deductible even if you engaged in some business activity during a trip.

Cost of bringing your spouse or  child is considered personal expense  and is not deductible, unless it is a partner or an employee.

If you travel for convention in North America and its related to your business any transportation and lodging expenses deductible at 100% and meals are at 50%.

If convention happens on a cruise ship, it must to be directly related to your business, and it has to be on board of US flag ship and all the ports of calls must be in the US.   $2000 worth of expenses for the cruise convention  can be deducted.

If you have to travel outside of the US, to maintain or acquire new business, travel expenses can be partially or fully deductible. As long as a trip lasts one week or less, taxpayer can deduct  100% of transportation cost.

For trips more than one week, there is  25% rule, which states that taxpayer can deduct 100% of transportation cost if he/she spent less than 25% of the total days vacationing.

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You can deduct medical expenses payments that you made for your ex-spouse.

Medical expenses are subject to 10% of AGI and are deductible on schedule A.

But did you know you can deduct payments that you made for medical expenses for your ex-spouse? Even if couple is not filling joint return, one partner who paid for another one’s medical expenses can deduct those on his/her tax return.  Remember, couple had to be married, while payment occurred for medical expenses or when medical treatment was received.

Deduction is taken in the year payment is made, even though treatment might have happened in the different year. If a payment for medical expenses made with a credit card, deduction is claimed in a year charge was made, not a credit card statement was paid.

Also to be able to deduct medical expenses paid for someone else, this “someone else person” needs to be either qualifying child (age 19 and under, or until 24 if a child full time student, or any age if child is disabled) or a qualified relative- someone who is closely related to you.

Per IRS publication 502, deductible medical expenses may include but are not limited to the following:

• Payments of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners
• Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, for participation in a smoking-cessation program and for drugs to alleviate nicotine withdrawal that require a prescription
• Payments to participate in a weight-loss program for a specific disease or diseases diagnosed by a physician, including obesity, but not ordinarily payments for diet food items or the payment of health club dues
• Payments for insulin and payments for drugs that require a prescription
• Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for guide dogs for the blind or deaf

Don’t forget to get tax ID from your child summer camp! Fees are deductible

Did you know that cost of summer camp your child attended this summer is deductible?

Day or summer camp fees are deductible, even if it’s a sport camp, as long as care was provided while parents were at work. Check with your camp, because if overnight care or tutoring provided, those camp fees are not deductible.

Per IRS  Publication 503 “the credit can be up to 35 percent of your qualifying expenses, depending on your income and you may use up to $3,000 of the reimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit”.

This credit directly reduces your tax liability thus increasing amount of your refund.

There are a few points that needs to be met in order to deduct summer camp fees:

• You (and your spouse, if you are married filing jointly) must have earned income for the tax year, meaning – parents need to have a paycheck. If one parent is not working, this credit is not allowed
• The child or dependent care service (summer camp )  must have been used so that you could work or look for employment.
• Your filing status must be anything but married filing separately.
• Your child or dependent must be under 13 or must be disabled and physically or mentally incapable of caring for herself.
• The childcare provider cannot be your spouse or dependent or the child’s parent.

And don’t forget to ask for the name, address and tax ID of the facility, your tax professional will need it in order to claim this summer camp fees credit.

Tax deductions for teachers

You are a teacher; you constantly buy supplies for your classroom. Can you deduct any of the expenses?

Yes, if you are an eligible educator who is:

•  a kindergarten through grade 12:
  • Teacher
  • Instructor
  • Counselor
  • Principal, or
  • Aide, and
• You work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

Unfortunately starting 2015, a lot of teachers lost educator (teacher) expenses deduction, as it becomes above the line itemized deduction subject to 2% AGI.

For example, your AGI is $30,000, your 2% is 30,000*2%= $600. If you spent less than $600, there is nothing you can deduct, if you spent $850, than you can deduct $250 only . $875-600=$275, but IRS limits you only to $250. $500 if couple filled married filing jointly and both spouses are eligible educators.

So to summarize, before 2015, you could have deducted $250, granted you spent $250 or more.

Starting 2015, you need to spent 2% of your AGI plus $250. This deduction is taken now on Schedule A, Itemized deductions. See a video that shows where it goes.

Home office deduction for self employed

So you are self employed, and use part of your home for business. If you use space regularly and exclusively to conduct business you can deduct certain expenses.   Starting 2013 tax year there are two ways of doing it: Simplified option where taxpayer takes $5 per sq foot all inclusive ( up to 300 sq feet)  or regular method -calculate a percentage of your rent or mortgage, utilities, insurance devoted  to your business use of the home.

Below is a comparison of both methods:

Simplified Option	Regular Method
Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes	Same
Allowable square footage of home use for business (not to exceed 300 square feet)	Percentage of home used for business
Standard $5 per square foot used to determine home business deduction	Actual expenses determined and records maintained
Home-related itemized deductions claimed in full on Schedule A	Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)
No depreciation deduction	Depreciation deduction for portion of home used for business
No recapture of depreciation upon sale of home	Recapture of depreciation on gain upon sale of home
Deduction cannot exceed gross income from business use of  home  less business expenses	Same
Amount in excess of gross income limitation may not be carried over	Amount in excess of gross income limitation may be carried over
Loss carryover from use of regular method in prior year may not be claimed	Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year

If you owe a home, you should discuss with your tax professional if its beneficial for you to claim a home office deduction vs taking a full mortgage deduction on Schedule A.