Deductions the IRS Cannot Stand

By Jason Watson, CPA
Posted Saturday, September 28, 2024

Here is a quick list of the rental property tax deductions that the IRS cannot stand. That isn’t phrased correctly. The IRS actually likes these tax deductions since most business owners and rental property owners either incorrectly deduct them or cannot substantiate an otherwise qualified tax deduction for lack of proper record keeping.

The IRS plays pot odds on the following rental tax deductions since the recovery of taxes is probable and therefore profitable for the government. In poker, if it costs you $10 to bet and there is $100 in the pot, then you can be wrong 90% of the time and still break even. This is the essence of the pot odds: You’re paying a fraction to win a larger sum, and the IRS is no different.

Here we go-

• Meals (shocker)

• Car and Truck Expenses, Mileage Logs (another shocker)

• Travel (abused regularly, say it isn’t so)

• Home Office (probably not as much anymore)

There are others, but these are the biggies. The benefit for rental property owners is that only auto expense and travel are listed as a separate expense line on Schedule E of your Form 1040 tax returns (they are combined on line 6). As such, the IRS can directly track these expenses as portion of rental income and apply their massive database of statistics to your tax return. The other expenses such as meals and home office get tucked into other expenses. While this is less glaring, the IRS likely have or will have tools to read your clever list of disguised other expenses looking for certain buzzwords like meals, office, facilities, occupancy, etc.

This should not have a chilling effect on you deducting these expenses. You should not be afraid of an audit. You should not be afraid of losing an audit. You should only be afraid of having an unreasonable or indefensible position. Sure, easy for us to say.

At the same time, if you have legitimate expenses and you can back them up with proof, then happily deduct them. Like Muhammad Ali once said, “It’s not bragging if you can back it up.” Well, the same can be said of small business tax deductions that are at higher risk of audit. If you can back it up then deduct it!