There is an old Looney Tunes cartoon where Daffy Duck is portraying Sherlock Holmes. Daffy is seated at a desk stacked with papers vigorously working the calculator. Porky Pig, portraying Watson, walks in and asks, “Whatever are you doing, Holmes.” “Deducting, my dear Watson. Deducting,” came the frantic reply.
Deductions come in a variety of flavors. We are all familiar with deductions matched with an expense. Donations to charity are deductible on Schedule A. Business owners deduct marketing expenses dollar for dollar.
There is another elusive deduction taxpayers only dream about: the non-cash deduction. The appeal of the non-cash deduction is the large write-off without a matching real world expense. Capitalizing on non-cash deductions can supercharge your retirement or debt reduction plans. The list of non-cash deductions is long. We will explore several ways you can reduce your taxes without spending a penny or taking a deduction significantly higher than the actual expense and stay out of jail in the process.
It’s All Legal
Accountants mentioning non-cash deductions frequently mean things like depreciation. We are not. Depreciation is a non-cash deduction, but it required the full cash investment at some time in the past to achieve the deduction. What we mean here by non-cash deductions are those expenses claimed on a tax return where the deduction allowed is greater than the cash outlay.
The weak of heart sometimes get nervous about these deductions, worried they might not be legal. I assure you they are. The IRS has even codified many of these strategies.
Most non-cash deductions affect business owners and folks with a side gig. Individuals sometimes think they are getting a special deduction when they have non-cash charitable deductions, but once again, there is a greater cash outlay at some time in the past to get the deduction. The exception is donations of highly appreciated assets. Individuals get special tax treatment when they donate artwork, property, stocks, et cetera, to a qualified nonprofit organization. If the asset has increased in value, the non-cash donation fits our description of non-cash deduction for this post. Therefore, your friendly accountant likes it.
Taking Care of Business
Business owners and those with a side gig have ample opportunity to deduct things they never spent money on. A required receipt is not the deciding factor. For example: A receipt is not needed for a meal expense if the expense is under $75. You still need a record of the expense and that makes it deductible, but an actual receipt is unnecessary. That said, you still only deduct the actual cost of the meal unless you are cheating. And there is no reason to be here if you are cheating. We only use legal methods around these parts to lower our tax liability.
Miles: Talking about receipts, mileage is a non-cash deduction worth more than the actual expense unless you are driving a big-ass, gas-guzzling SUV. The 2017 mileage rates for deductions are as follows:
53.5 cents per mile for business miles driven;
17 cents for medical or moving miles; and,
14 cents a mile driven for nonprofit organizations.
A few qualifiers are required. Business miles are straight forward. If you drive for business (or for your employer) you can deduct 53.5 cents per mile. Sole proprietors deduct on Schedule C, landlords on Schedule E and farmers on Schedule F. Employees claim non-reimbursed business miles for an employer on Form 2106 which flows to Schedule A. There are additional limitations on the deduction for individuals.
Business miles can be paid to the employee by the employer even if it is your own company. The employer takes the deduction and the employee does NOT claim the reimbursement.
Medical miles are claimed on Schedule A, but are also allowed for Health Savings Accounts. Schedule A has serious medical deduction limitations. But your employers Health Reimbursement Arrangement might allow the expense, putting additional tax-free cash in your pocket. Medical travel is an allowed distribution from Health Savings Accounts.
Moving miles only apply to those claimed on Form 3903. This means the move must be work related and of a greater distance. A move down the street does not count; a move across country probably does if it is for a new job.
The mileage rate for nonprofit driven miles is smaller, but does add up if you enjoy helping out. Miles driven to church do NOT count, even if you are a Sunday School teacher or an usher. Similar, miles to council meetings are not deductible. What miles ARE deductible? If you drive to church to do maintenance work or repairs. Miles driven to a work site for Habitat for Humanity. Miles driven to a national conference for your church would also count. Only the routine miles probably driven anyway do not count.
Office in the Home: The office in the home for your business, side gig, or even your employer can turn into a nice non-cash deduction. The home office must be regular and exclusive for the business/side gig. That means a spare bedroom used as the office and for nothing else counts; a corner of the living room does not. The home office for an employer must be for the convenience of the employer in addition to the regular and exclusive rule.
I consider the home office a non-cash deduction because you get to deduct something you were spending on anyway. And there is a way for certain taxpayers to get a real non-cash deduction above actual expense too!
For easy figuring we will assume a 1,000 square foot home with a 100 square foot qualified office. In this scenario 10% of the home is office. You use Form 8829 to claim home office expenses. Ten percent of mortgage interest, property taxes, utilities, homeowners insurance, et cetera count toward the home office expense. Additional deductions are allowed for expensed directly related to the home office. Office furniture and office remodeling are fully included in the amount allowed for the home office expense.
A few years ago the IRS offered a simple way to claim the home office by providing a safe harbor or $5 per square foot up to 300 square feet, a $1,500 maximum home office deduction. Your personal circumstances will determine if the safe harbor is a better deal than actual expenses.
The home office is complicated. Daycares, for example have significant additional rules. A short blog post only provides the concept. I have added links where I feel additional reading is required. The links allow this post to remain modest in size while retaining flow. You can research deeper into subjects affecting you.
Meals & Incidental Expenses: Meals and incidental expenses are deductions for businesses and for employees in limited circumstances.
Normally you claim the actual meal expense. But when you are traveling the rules change and for the better in most cases. Rather than keep loads of receipts while traveling, you can use a per diem instead. The per diem is allowed if your travel includes an overnight stay.
There are two methods available when using the per diem instead of actual expenses: High-Low and CONUS/OCONUS rates. The high-low method is easiest. Except for a few high costs areas of the U.S., the meal per diem is $52 with an additional $5 added for incidentals, for a $57 per diem.
If you love keeping perfect records you can use the CONUS (continental U.S.) table for U.S. travel and the OCONUS (outside continental U.S.) rates set by the Department of Defense based on each city traveled to. You can use only one method on your tax return. No cherry picking between methods. You can change the method from a prior year if desired. I included several links so you fully understand this non-cash deduction, including calculators for finding your per diem rate.
This is not a full non-cash deduction, but for people reading blogs like The Wealthy Accountant it is a way to receive a larger deduction than the actual expense. Frugality pays when the IRS has a per diem.
Renting Your Home to Your Business: There was a time I thought I was the only guy doing this. Then reality set in. I was in a continuing education class a few years back when the presenter talked about this. Now I will share it with you.
There is a little section of the Internal Revenue Code which says you don’t claim rental income if you rented the property less than 15 days in the year and you used the property personally at least 15 days per year (IRC Sec. 280A(g).) There is a planning tip in there.
A vacation home can be a powerful tax-free cash generator in these instances. I’ll let you research that subject with the links. What we are talking about today is non-cash deductions and I have a whopper for you.
Business owners frequently have a summer picnic for clients or employees, Christmas parties, et cetera. You can always have the event at the workplace, but it still feels like going to work when it should be a time to unwind from work. You can also rent a banquet hall. Or, better still, have the event at your home!
As an example, assume you decide to have the Christmas party this year at your home rather than at a local hotel or banquet hall. You can do a quick search of rates around town of what it would cost if you did use the outside venue. Now you decide to have the event at your home. Here is what happens:
The cost of the event is still a business expense. Let’s say a reasonable fee for such an event is $1,500 in your area. Your business writes you a check for $1,500 and takes the deduction along with the cost of the food and any other related expense. YOU DO NOT CLAIM THE $1,500 AS INCOME! Since you rented your home less than 15 days during the year you do not claim the rent income, but the business does deduct the expense.
Before you salivate too much, let me remind you reasonable rent is required. You can’t say rent for one day is $20,000 unless you have a mansion and a large enough company to justify such a rent rate. In my business I make a few calls to get an idea of rates around town and use that as my guide. I keep a record in case the IRS comes a knockin’. I want to keep my tax-free income and deduction!
As we finish up I want to make one more point. When I write tax posts I usually get plenty of email telling me I am wrong. I know I am wrong! I can’t possibly include all possibilities so I provide concepts here with plenty of links for deeper research. It also keeps tax posts moving forward at a reasonable clip. (Of course, you are more than welcome to expand on these topics in the comments section below.)
There are plenty a juicy non-cash deductions out there. The ones I included here should give a majority of readers at least one way to line their pocket at IRS expense. Use this as a starting point. Don’t stretch the rules; it isn’t necessary. Follow the rules and you will enjoy the fruits of non-cash tax deduction loopholes.