3 Business Tax Deductions that Are Illegal

There are many potential business tax deductions that you could take for your business. However, there are certain business tax deductions that are illegal and will most likely trigger an audit for you. Here are a few business tax deductions that you will want to avoid claiming for your business.

1. Large Gift Amounts

Many businesses regularly give gifts to clients. This can be a great way to harbor a good relationship between you and your customers. The only problem with this strategy is that many businesses get in trouble when they try to deduct the entire amount of these gifts. According to the IRS, you can only deduct $25 for each client that you give a gift to. This is true even if the gift is $10,000 each. Therefore, if you deduct an amount that seems large to the IRS, this will make it more likely that they will want to conduct an audit.

For example, if you deducted $3000 on your tax return for gifts, this would mean that you gave some type of gift to 120 different clients. While this is not impossible, this represents a fairly large number. Unless you are a very big company, the IRS is likely to be suspicious of this type of deduction. Therefore, you want to make sure that you adhere to the $25 rule when claiming your deduction.

2. Questionable Car Deductions

As a business owner, you are entitled to some type of deduction associated with a business vehicle. However, many business owners get into trouble because they do not fully understand the rules associated with this deduction. You are allowed to deduct expenses associated with business mileage only. Therefore, if you also use the same vehicle for personal use, you cannot deduct all of the expenses associated with the car. You need to determine how much of the car's use is personal and which part is associated with business. 

You need to choose to deduct either the expenses for the car or deduct the mileage. If you try to deduct both, you will be in trouble. Therefore, you need to pick one method of deduction and stick with it.

3. Personal Expenses

Many business owners try to get away with deducting personal expenses on their business tax return. While sometimes you might get away with it, this is not a habit that you want to get into. Anything that is associated with personal use should not be deducted on your business tax return. For example, if you have a cell phone that you use for personal and business use, you should not deduct the entire cost of the cell phone.

Many business owners also try to deduct things like personal meals on their business taxes. If you deduct too many things like this, the IRS will eventually begin to get suspicious. Therefore, you should only deduct things that are legitimate business expenses from your taxes.