This is the second in a three-part series on tax filing that looks at how business owners can maximize their tax savings. Here’s the first part.
It’s nearly the end of the tax year, and that can only mean one thing; it’s almost time to lodge your tax return.
Sure, it can be a stressful and time-consuming chore to get all your receipts together, even more so if you then choose to lodge your return yourself rather than using an accountant. Still, the chances are at the end of it, you’ll get a nice refund cheque back from the ATO to spend on your next holiday or to pay down your debt.
The key to maximising that refund is to make sure you claim all the deductions you’re entitled to. Most of those will relate to things you’ve purchased as part of your job or business. The general rule is that if a purchase is made to enable you to earn income or to operate your business, you can claim a deduction. Some of those deductions will be obvious, but some could be just a bit unusual….
Can you seriously claim a tax deduction for your pet pooch? Well, probably not. But there are circumstances where a deductible dog could be a real possibility. If your business uses a guard dog to keep your premises secure, a dog is indeed deductible. It’s regarded as a capital asset of the business, and you can claim an immediate deduction for the whole cost using the very generous temporary full expensing tax break. Obviously, it needs to be a dog suitable for the purpose; a poodle is unlikely to cut it. The same logic applies to dogs on a farm, such as a sheepdog.
If you’re a professional performer (actor, musician, dancer, magician, circus performer, etc), there are all manner of strange deductions which you might look at claiming. Mime lessons? Absolutely. The cost of ceremonial swords? Certainly, if you’re a professional sword swallower. Acting classes, dance classes, musical instruments, magic tricks….if you make a living on stage or screen, a whole world of odd and interesting claims opens up to you.
Most offices these days have an array of pretty pictures dotted about the place, often in customer focussed spaces like reception areas and meeting rooms. Using the temporary full expensing tax break, you could be looking at an immediate tax deduction for your business for that fine canvas you’ve had your eye on. Just make sure it really is used in your business.
If the ATO finds out that the picture you claimed was in your office reception area is really hanging in your lounge room at home, your business will lose the deduction and end up paying more tax plus some interest and penalties! Again, provided they are used in a business context (perhaps as part of a communal recreation room in a factory or office), they should be deductible. If you just plan to put them in your own rumpus room at home, however, forget it!
It’s well established that you can claim a deduction for the tools you use in your trade. But depending on what your trade is, your tools could be very different to the hammers, spanners and drills usually claimed. If you work in the adult industry, you could be looking at a deduction for sex toys, lube, and “accessories”. You can only claim the business use element of course; if you use them in your personal activities, forget the tax deduction.
If you’re an exotic dancer, you could even consider a deduction for fake breasts; whilst we’re not aware of anybody making such a claim in Australia, it’s been successfully done in the USA, and there’s no reason in principle why it couldn’t be done under our law. Expect an awkward conversation with the ATO if you try it though. The key to claiming any tax deduction is to keep records such as invoices, receipts and bank statements.
If you are claiming something unusual, expect to be challenged by the ATO but if the way you earn your assessable income is aligned with the items you’ve claimed a deduction for, you should be OK, no matter how strange it is. And one final piece of advice; if in doubt about what you can claim, talk to a tax adviser at H&R Block, who’ll be able to give you specific guidance on your situation.
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See various ways to save money as well as how to save on taxes. Keep more of your money! Then, prepare your current year return on eFile.com and see how well your tax planning and saving went during the year – eFileIT.
Read below for various real-life scenarios to claim a tax break you may not have thought of.
- Pets: There are some notable expenses you may be able to deduct relating to pets or animals:
- Moving Expenses: If you lost your job and are relocating to start a new job, these moving expenses are tax deductible if you are an active duty military member or if you are an employee who has reimbursed expenses dated before January 1, 2019 and did not claim them on a prior tax return. The expense of moving your cat, dog, bird, or other pet from your old to new home is treated the same as moving your other personal properties.
- Guard dog: If you have a dog that watched over your business location, pet care costs may be deductible as business expenses.
- Pest control: A cat or other animal that keeps your business free of pests may come with deductible pet care expenses.
- Foster or shelter volunteering: fostering animals may be eligible for charitable contributions and volunteer mileage is generally tax deductible.
- Farming: the IRS may allow you to depreciate your farm animals as they age if they are used for breeding. The IRS once allowed a Louisiana farmer to depreciate the costs for his ostrich.
- Service animal: expenses for a service animal may be deductible as medical expenses.
- Cat Food Expenses: Under certain conditions, the cost of cat food might be considered a legitimate deductible expense. A junkyard owner bought cat food to attract local stray cats in order to drive away mice and rats. He claimed it as a business expense and it was approved by the IRS. The average house cat will likely not qualify because the cat would need to perform some task associated with the upkeep of a business.
- Parenting, Lifestyle, Home:
- Clarinet Lessons: A parent was able to deduct the expenses for clarinet lessons for her child because she claimed it corrected her child’s overbite. This was based on a 1962 case where an orthodontist argued that playing the clarinet helps correct a child’s overbite, thus allowing it to be claimed as a medical expense.
- Babysitter Expenses: A mother claimed her babysitter expenses as a deduction because she was performing charitable deeds while she was away from her child. This would mean that you pay somebody to look after your child while you perform volunteer work for a charity. In this case, the tax court rejected and overruled an IRS revenue ruling when, despite not having the money go directly to a charity, a parent used the baby sitter expense as a charitable contribution while volunteering for a charity.
- Leftover Wedding or Party Items: donated leftover decorations, food, flowers, or attire can be donated and may be deductible.
- Family Wages Deduction: if you run a family business, wages you pay your kids may be deductible as business expenses.
- Legitimate Business Expenses:
- Cost of Body Oil: For one bodybuilder, it worked. He claimed a deduction for the cost of body oil that he used in competitions. The IRS didn’t seem to have any problem with this as it was a legitimate business expense.
- Cost of Breast Implants: In 1994, one erotic dancer’s attempt to get more tips led her to undergo breast augmentation surgery. She then proceeded to deduct the expense from her taxes. A tax court judge ruled in favor of the dancer, stating that the implants were a stage prop, and thus a legitimate work expense that can be deducted.
- Lawn Care Expenses: These expenses might be deductible, but your house will have to be your workplace and the state of your lawn would have to have relevance to the performance of your business. In one situation, a sole proprietor successfully deducted lawn care expenses as business expenses because he met his clients in his home office.
- Private Airplane Expenses: A couple owned and rented out a condo that was a 7 hour drive away from their primary residence. To save time and money, they bought a private airplane and were able to deduct airplane expenses, like fuel and depreciation for business use, for the property management trips to their condo. However, it turned out that the expenses increased the overall loss on the rental condo.
- Business Trips: Any business trip viewed as “ordinary and necessary” to the course of doing business by the IRS is eligible for a travel expense deduction. In one case, the owner of a dairy took a trip to Africa to conduct research on wild animals, and successfully claimed it as a business expense because it was relevant to his business.
- Whaling Boat Repairs: Whaling boats need repairs and, since 2004, captains of whaling boats can deduct up to $10,000 for repairs, equipment purchases, and other expenses associated with the business. However, starting a whaling business to claim a deduction is not a smart move. Whaling is banned by the United States government and only certain Native American tribes are allowed to engage in it.
- Medical Expenses:
- Swimming Pool Costs: If you have a medical condition that would improve with a swimming pool exercise regimen, your swimming pool expenses might qualify as a deductible medical expense. This happened in the case of an arthritis patient who was prescribed to swim regularly in order to treat his condition. He installed a swimming pool on his property and deducted the expenses from his taxes. After some investigation, the IRS approved the deduction, but if the pool were used for recreational purposes, it wouldn’t have been approved.
- Sex-Change Operation Expenses: A man who was diagnosed with gender-identity disorder (he felt he was a woman trapped in a male body) wanted to deduct almost $22,000 in out-of-pocket medical expenses for various surgeries—including hormone therapy, sexual-reassignment surgeries, and breast augmentation—in order to become a woman. The tax court decided that the hormone therapy and the sex-change operation in the amount of $14,500 was a qualified medical tax deduction. However, the expenses for the breast augmentation was not; it was deemed nondeductible cosmetic surgery by the court.
- Medical Expenses to Quit Smoking: You might qualify to deduct expenses for smoking cessation programs, nicotine patches, stop-smoking aides, and other programs geared towards stopping smoking.
- Costs for Getting in Shape: Weight-loss expenses may be deductible if a doctor signs off on it and claims that your life might be in danger if you don’t start exercising and lose weight. The cost for remedies that help you drop a few pounds, improve your heart rate, or reduce your cholesterol might all be deductible.
These people saved money by claiming deductions and taking advantage of tax breaks. Now, here are some more practical ways to save money on your taxes.
Strange Tax Breaks from Across the U.S. and Around the World
Find state specific tax breaks below as well as other stories from the United Sates and countries with their own tax codes.
- States: many states have their own tax code which are often full of bizarre tax deductions and other rules.
- In Wisconsin, cloth diapers are not subject to sales tax, but disposable diapers are.
- In Texas, cowboy boots are exempt from the sales tax, but hiking boots are not.
- In Ohio, a corpse in a mortuary gets makeup applied on it without getting taxed, but a living person is taxed for the makeup that gets applied in a beauty salon.
- In South Carolina, one can get a $50 deduction if they donate a dead deer to the poor.
- In Maryland, oyster farmers get a tax break, but those who farm other types of shellfish don’t.
- Hawaii gives a $3,000 tax deduction to those who grow state-approved trees.
- People who were persecuted by the Ottoman Empire between 1915 and 1923 were exempt from taxes in California (learn more about the history of taxes in United States).
- A business owner bought a racehorse and claimed it as a business expense. No, he was not in the horse-racing business; he claimed that he needed to entertain his clients and that a racehorse would do just that. The economic stimulus package allowed for a tax deduction as large as $25,000 to be claimed for buying a racehorse, but the deal expired without creating many new purchases.
- In one case, the use of a yacht was deducted as a business expense because the owner tried to impress his customers and encourage them to do business. Maintenance and cleaning of the yacht, however, was not allowed to be deducted because the IRS code prohibits it.
- One man who owned several properties hired his girlfriend to manage them. She looked for furniture for the houses, made sure the proper repairs were made, and managed his home. He was able to deduct $2,500 of the $9,000 he paid her as a business expense.
- A dentist submitted fraudulent insurance claims. When the fraud was discovered, she was ordered to pay the money back as well as serve some time in jail. However, she was able to deduct her repayment to the insurance company as a business expense. That is because the repayment was done to compensate for a loss sustained by the insurance company and therefore was not considered a fine.
- A man was arrested for drunk driving after he wrecked his car; he had waited to sober up—but obviously not for long enough. His insurance company refused to compensate him for the wrecked car because he broke the law. The driver, however, was able to deduct the cost of his car as a casualty loss because he acted reasonably. If he hadn’t waited to sober up, then it would have been gross negligence and thus nondeductible.
- In 1981, a drug dealer from the Minneapolis area was caught in possession of large amounts of cocaine, amphetamines, and marijuana. He was arrested and later audited; the tax audit found that he owed $17,000 in taxes. The drug dealer argued that he should be able to deduct a significant amount of the back taxes as business costs incurred by running his business from his home. He was successful in getting a deduction, but still went to jail for drug possession.
- A man working for a graphic design agency bought a pair of skis from Yamaha Snowmobiles, a company for which he was making a catalog. He used the company discount and then successfully deducted the skis as a business research expense.
- A hair stylist successfully deducted the entire cost of her wardrobe that she wore while working with her clients as a business expense.
- Across the world: various countries abide by their own tax code which has certain odd rules.
- In Germany, one can deduct bribes. While the deduction is seldom used, it does exist as part of the tax code. All one has to do to report it is disclose their name and the name of the official that they bribed.
- The United Kingdom gives tax breaks to video game companies that create “culturally British” games. The criteria for being culturally British is not very clear; the game must score a minimum of 16 out of 31 points on a test that has been designed to measure the cultural content and contribution of the game.
- In the Netherlands, those who study and practice witchcraft can claim a tax break given out by the government. It has existed for quite some time, but in 2005 it gained the attention of the public after a judge upheld the tax break in court.
- During the 2010 FIFA World Cup in South Africa, stadiums and businesses in the immediate area surrounding them were exempt from the value added tax as well as the income tax from profits. This allowed FIFA to keep more of the money for itself. Critics did not care for this measure, however, as it deprived the government of South Africa of tax revenue associated with the World Cup matches.
- In Italy, almost a third of all men over 30 still live at home. To encourage them to move out, the government issued a 1,000 euro tax break to those who rent their homes. However, the problem is considered to be tied to the difficult job market in Italy that prevents young men from obtaining jobs that will support their independent lifestyles. Critics say it’s unlikely that the tax break will encourage many young Italian men to move out on their own.
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