When it comes to running a successful business, understanding and adhering to the rules of taxation is essential. Unfortunately, there are some illegal business tax practices that you may not be aware of. Knowing what these are can help you avoid costly mistakes or even legal prosecution. This article will provide an overview of some of the illegal business tax practices that companies must be on guard against. So read on to learn more about how to protect yourself and your company from falling victim to these violations.
Illegal Business Tax Practices: Deductions
There are hundreds of tax deductions available for individuals and businesses to take every year. Some require that the taxpayer itemize their tax return, while others can just be subtracted from the amount a taxpayer owes the IRS or the state and local governing bodies.
But there are also lots of instances where someone thinks something should be deductible but it isn’t. Nearly all personal bills and living expenses are not deductible save a few choice areas that pertain to things like children, home businesses, and the like.
Business News Daily even shared some off-the-wall deductions their readers shared, like the guy who hoped to deduct the price of the motorcycle he recently bought because it’s his stress reliever and it helps him perform better in his professional role. Or the client who wanted to claim a dog as the company mascot and provide it with the same medical coverage employees are entitled to.
While these are extreme (and funny) examples, there are many things that seem like they should be deductible but aren’t. Let’s go through a few of them.
The first one we want to talk about is business-related entertainment. We’ve seen the movie scenes where everything from dinner and drinks to all-inclusive resorts are just put on the “company card.” And while certain businesses may be willing to incur such expenses to win over clients and grow their business, you can’t deduct 100% of those expenses on your business taxes. Previously, the IRS allowed businesses to deduct 50% of the costs for business-related entertainment. But for any tax year after 2018, these expenses are no longer deductible at all.
Another misconception is that your travel expenses for commuting, so long as it’s for work, can be deducted. This is only the case if you are self-employed. But there are stipulations and other considerations that come with that.
Next, not all charitable donations are taxable. Some social welfare and civic organizations don’t qualify (it’s similar to the lobbying expenses we talk about below).
There are scores of charitable organizations (many of which are 501(c)(3) organizations) that you can donate goods and services, but one thing it is illegal to deduct is your time. If you volunteer your HVAC services to a non-profit, you can deduct the amount in materials that you gave, but if you helped install it, or stayed after hours to help serve people in the soup kitchen or assist veterans with transportation or other services, for example, none of that time can be tracked and thus, can’t be deducted either.
One of the most abused deductions is taking deductions or tax credits for items that were not used or intended for your business. For example, buying a new truck that you will drive both for work and for pleasure is something many people try to write off completely as a business expense. The same is true with electronics. In most cases, if your activity or items isn’t 100% geared toward business use or consumption, it is illegal to deduct that from your business tax totals.
Working from Anywhere: A Tax Nightmare
One of the most popular tax topics of the last few years includes the effects of remote work on tax standings for individuals and businesses.
Firstly, working from anywhere creates a withholding problem – if someone is working for a company in Florida, but spent each quarter of the year in a new city or state, how do you ensure that person is paying the right taxes to the right cities, school districts, and states?
This also affects other taxable items and legalities – for example, workers’ compensation, unemployment insurance, benefits, and wage and hour laws are all different state by state and even city by city in some instances. You and your employees or the contractors you hired this year could much more easily be noncompliant when it comes to taxable income without ever knowing it!
Lobbying expenses – which include any funds spent on campaigns or items that are used to aid in the furthering of a specific political candidate or cause – are not tax deductible in any way, even if the campaigns or other expenses would be deductible in other business operations settings.
Justia has a great article that lays out some of the finer points about which business practices are excluded on the basis of illegal payments, and which payments may still be deductible if they meet certain criteria.
Keep Things Straight with eFile360
Unreported and underreported income, expenses, wages, and other financial activity is a great way to create issues with your business and the IRS. That’s why eFile360 helps you create, retain, and file your information returns in the correct legal and compliant ways to ensure the integrity of your business remains intact.
Sign up for a free eFile360 account today to help avoid illegal business tax practices when it comes to filing your information returns.