Category: Deductions

Posted on by Jan Roberg

Can I Deduct My Work Clothes as a Business Expense?

Locker room with lonely lab coat

Photo by Jean-Etienne Minh-Duy Poirrier on flickr.com

Now, if you’re a regular reader of my blog then you already know I’m going to say, “It depends.” But for about 90% of the people asking that question, the answer’s going to be, “No.” If you have to wear a suit and tie to work, or ladies, if you have to wear hose with your dress – that doesn’t count as a deductible work clothing expense. A lot of offices have dress codes, but adhering to a dress code does not qualify those clothes for a business deduction.

Okay then, so what does? A uniform, like for a police officer or a mail carrier. Clothing that’s not a necessarily a uniform but is required for the job – for example, a chef jacket or doctor’s scrubs. Or logo clothing that could also be considered a work uniform – like the shirt’s they wear at McDonald’s or the cleaning company that takes care of my office building.

What about Macy’s, where all the employees have to wear black? That’s a good example because wearing black at Macy’s is a requirement and I’ve heard Macy’s workers refer to that as their “uniform,” but unfortunately, that doesn’t meet the IRS test of a uniform. Although everyone has to wear black, there is no “standard” Macy’s uniform and the clothing has no Macy’s logo, so in a situation like that, there would be no tax deduction.

So let’s go back to the McDonald’s example again. Let’s say you have to wear the uniform shirt, but you can wear any pants you want to as long as they’re black, can you deduct the pants? No, because you can wear any pants as long as they’re black. If McDonald’s has special pants with a Mickey D’s logo on it, or something special to go with their uniform shirts, then that would be a deductible expense, but plain black pants are not.

Any kind of safety clothing would count as deductible: safety goggles, reflective vests, work gloves, and steel toe boots all come to mind there. If you’re in a job that requires protective gear, I count the gear as a deductible business expense.

If you’re self-employed, these expenses go right onto your Schedule C and it’s a direct offset against your income. If you’re working for someone else, then your clothing expenses would go on your form 2106 – Employee Business Expenses. They’re subject to the 2% limitation rule (meaning you have to spend more than 2% of your total income on work stuff before you qualify for a deduction).

Remember, if your clothing does qualify as deductible, then cleaning it is also deductible. I actually sat and worked this out with some med students that I was doing taxes for: scrubs only – one load a week. Scrubs and lab coats: two loads. For one load a week, take a $250 deduction; two loads, double it. If you have to dry clean your uniforms, save those receipts because that really adds up. Since most people do their laundry at home (and the laundromat doesn’t give out receipts), you do not need receipts for doing your laundry. Of course, cleaning of a regular business suit or laundering of regular business shirts does not count as a deductible expense.

Posted on by Jan Roberg

Charitable Donations: How Much Should You Tithe? Why Do It?

collection plate

Photo by rubber bullets on flickr.com

This is one of the most difficult questions I get asked every year. I think most people have heard the 10% rule (donate 10% of your income to your church), but what they’re asking me is, “10% of gross, 10% of net after taxes, or 10% of net after my deductions?” And here’s my classic cop-out answer: “You should ask your religious leader.” I always thought that was safe, and different churches have different opinions. (Although I’ve never heard any religious organization say 10% after deductions – just to be clear.) I always thought that referring it back to the church was a good answer until one of my clients came back at me with, “I talked to my minister first and he told me to ask you.”

For a moment I was terrified. If I got this answer wrong, it’s not like a tax return mistake, it’s messing with God. Screw it up and you go to hell, go directly to hell, do not pass go, do not collect $200. And the reason it was so scary was because for this particular person, I felt that she could not even afford 10% of her net income to go to charity, much less 10% of her gross. (Hindsight being 20/20, I think her minister was pretty much thinking the same thing and didn’t want to make a rule that would harm his congregant.) If we used the 10% after deductions rule then nothing would be going to charity and that wasn’t an acceptable answer for my client. So we sat down and worked out a budget for her church donations. I figured that God wanted her to have a roof over her head and food on the table and we went from there. Her tithe didn’t work out to 10% of her income, but she was happy, I was happy, her minister was happy, and I didn’t get struck by lightning—a good sign.

So, how much should you tithe? If your church doesn’t have definitive rules on tithing, I think 10% of your take home pay is the best answer: ten percent into savings, ten percent into charity and the rest to handle your day to day living expenses. Now, if putting 10% into charity means you can’t put food on the table and maintain a roof over your head then we need to get you to a better financial place first. Donate what you can.

What if I don’t go to church? Even if you’re not donating to a religious institution, the idea of 10% going to charity is still a healthy one. There are thousands of worthwhile charitable organizations that need help. And, for many of us, we have friends or family members that need our charity just as much as the United Way or the ASPCA does. Remember, true charity isn’t always a “tax deductible” event.

If I tithe, what’s in it for me? For some people, charitable donations are tax deductible. That’s the obvious answer from a tax blog, right? But more importantly, I find that persons who regularly make charitable donations tend to weather the difficult economic times better. You could argue that’s because persons of faith have their faith to help them through hard times, and there’s certainly a lot of truth to that. But I also find that even people not associated with religious institutions who donate generously seem to fare better in difficult financial times than people who don’t contribute.

I heard someone suggest that it’s the discipline required to donate part of your income to charity that gives people the discipline to handle financial setbacks. I can’t say for sure. I do know that I prepare a lot of tax returns. I prepare a lot of tax returns for people going through bankruptcy and/or foreclosure. What I don’t see on those tax returns is charitable giving. Now you might say, “But, they’re going through bankruptcy, they have no money!” True, but the charitable giving isn’t there in the years before the bankruptcy either.

It’s only anecdotal evidence; I really don’t have hard numbers. I’ve talked with other tax people who’ve noticed the same thing. Perhaps the old adage is true, when you donate to charity, the person you’re helping the most may just be yourself.

Posted on by Jan Roberg

Audit Proofing Your Employee Business Expenses

20000

Photo by Kelly on Flickr.com

I recently attended the national conference of the National Association of Tax Preparers. It was easy to get to as it was in St. Louis this year. As much as I enjoyed taking the classes and meeting new people, sometimes the best information you get at these things is not in the actual classes, but in the scuttlebutt that you hear about what’s going on across the country. One of the issues that people were talking about was that the IRS has really stepped up the audits on Employee Business Expenses (Form 2106).

Just because certain types of forms might be susceptible to an audit doesn’t mean you shouldn’t claim legitimate deductible expenses on your tax return. If you are entitled to a deduction, you should take it. (Let me tell you, Warren Buffet’s not skipping out on his legal deductions). Just make sure you can back up your claims.

If you plan on claiming Employee Business Expenses on your tax return this year, the one thing you’re going to want is a copy of your company’s policy on employee reimbursements. If you get audited for your Employee Business Expenses, the first thing the IRS will ask you for is your official company policy on official company letterhead. If your company has a full reimbursement policy—you will automatically lose the audit. You may not claim a deduction for expenses that could have been reimbursed by your company.

Major companies like GM or Citibank will definitely have a policy. Smaller companies often don’t. To be honest, on more than one occasion I’ve written the reimbursement policy for a small company so they could submit something to the IRS when an employee was being audited. (Now that I think about it, I guess I should write one for my own company).

If you are claiming business mileage, you want to have a mileage log. This is the big IRS “gotcha” because so many people just guess a number and it’s wrong. For some reason, people seem to think that they drive 20,000 miles a year for business. Some people actually do. Some drive even more. But if you say that you drive 20,000 miles for business, you had better be able to back it up with a mileage log. For one thing, “20,000” is like a guaranteed audit flag. If you keep a mileage log, all you have to do is just whip it out and show the IRS agent and you’re done, end of story.

People who claim 20,000 miles and don’t keep mileage logs have a tougher sell. You’ll need outside proof, like your oil change statements to show your overall mileage, plus some type of record to show where you’ve been. Like hotel receipts to prove you drove to various places on business. I charge $100 an hour to recreate those statements for you and it takes time to recreate 20,000 miles. You’ll save yourself a boatload of money and a big headache if you just keep the log.

Don’t make up mileage numbers. I’m serious about the 20,000 being an audit red flag. One audit I worked on the gentleman asked me why I thought he got pulled for an audit. It was obviously his miles. Everything about his tax return had looked pretty normal, except for his 20,000 business miles. Hint: round numbers in multiple thousands look suspicious. He had no mileage log so I had him get me his odometer readings from his oil change company. Well it turns out, not only did he not have 20,000 miles of business driving, he drove less than 5,000 miles during any given year for the past three years!

I’m good at what I do, but this guy wound up paying the IRS some money. I asked him, why did he claim so much in mileage when he only drove 5,000 miles altogether. He said that was what the other guys in his office claimed. Don’t do that! Use your own numbers.

The other thing that gets a lot of IRS attention is the meals and entertainment expense. This trick is so easy it’s ridiculous. Let’s say you take John Smith to lunch to talk about him buying your product. The waitress brings you the check and you get out your credit card. She brings the receipt back for you to sign and add the tip. You also write on the top copy: John Smith sales widgets. Or you may write Jane Doe, advertising; or Fred Bird IT consulting; or whatever. The bottom line is that this note tells you who you were with and what the meeting was about. The receipt itself gives the date, time and place. The waitress may wonder why you wrote about Jon Doe and the widgets on the receipt, but that’s fine, (she’s seen it before.) But by writing on the top copy of the sales receipt, you made the yellow copy a time recording stamp. As the yellow copy of your sales receipt ages it changes color. This shows that you wrote your note a long time ago – remember that an audit will be two or three years after the fact. This proves to the IRS that you were – time for the big word here—contemporaneously recording your business expenses. It gives you street cred with the IRS agent. You took care of business, back when you were supposed to instead of trying to make up stuff after it’s too late.

Bottom line, if you want to audit proof your employee business expenses, you want a copy of your company’s expense reimbursement plan, a solid mileage log, and notations made on the top copy of your meal receipts.