John M. Hoffman CPA

Frequently Asked Tax Questions

Business expenses (tax deductible ones)

This has to be one of the most commonly asked questions. “I am starting a business, what are the deductions I am entitled to”?

We like to coach people with the generality of any expenditure that is for the production of income, that is ordinary, necessary and reasonable is deductible unless statutes state otherwise. These “gray area” words lead us to the other discussion of the facts and circumstance matter of business expenses.  

What is ordinary, necessary, and reasonable for one taxpayer, may not be for another. Take Phil Mickelson the professional golfer as an example. If Phil wanted to go to Hawaii next week and play golf, and treat the trip as a business expense, I would argue that he could. If John Hoffman went to Hawaii at any time in his life for any reason I find it hard to argue that it is a business expense.

In Phil’s case, golf is his business. Playing on the specific courses in Hawaii where Phil will might this winter and practicing with the trade winds specific to golf in Hawaii are ordinary and necessary things for Phil Mickelson and golf as his specific profession. Is it reasonable for Phil Mickelson? Couldn’t he simply play golf in Florida or wherever he lives? Yes he could (and does) play golf in Florida but Phil Mickelson may earn well over $1,000,000 playing golf in Hawaii this year. Accordingly, a little trip to Hawaii sounds reasonable.

Now, while Phil is in Hawaii, he tips the bellhop at the airport. "Is that deductible" – yes of course. Phil then gets a speeding ticket driving from the airport to the golf course. "Is that deductible" – no; because it is a fine or a penalty and fines and penalties (along with bribes and illegal payments) are not tax deductible.  

Phil takes his caddy out to lunch to discuss course strategies and whether to hit driver off certain holes. "Is this meal deductible?" Yes it would be, however it is limited to 50% of the amount spent. "What if they ordered Beluga caviar by the bucket?" That would not be deductible as it would be considered lavish and extravagant (which the tax code addresses). It should be noted that if Phil Mickelson had spent the money on such a lunch and strategy session he would have won at least one U.S. Open.

Everybody has heard about Phil’s lovely wife and children. "What about the travel expense for bringing them along to Hawaii?" This is where it gets a little fuzzy. One might ask what the business reason is for the wife and child to accompany. One might ask whether this is turning into a family vacation and the business purpose is starting to fade. I might argue that Phil’s family has become a large part of his public profile and that his value in promoting family automobiles such as Ford, or golf attire and equipment from Callaway is enhanced by the family sightings that might come with this. I think you can see that Hoffman would have a hard time arguing any tax purpose for himself going to Hawaii and would not even begin to argue a tax reason for family members coming along, but could argue a lot for Mr. Mickelson. 

So you can see that business expenses are a facts and circumstance concept. Keep the concept of “for production of income” in the back of your mind as well as some common sense. If something sounds or feels like there is  big personal pleasure element, it probably is not tax deductible.