Summary: Many business owners have learned the expensive way that just because they incurred expenses doesn’t mean outlays can automatically qualify as deductibles. Click through for a case study that shows what “ordinary and necessary” really means.
The operative word for business deductions is business. Generally speaking, the money that people spend to improve their appearances, their general health or their sense of well-being proves to be nondeductible personal expenses.
Still, the line between business and personal is often so thin that the courts must intervene, notes Julian Block, who was with the IRS as a special agent (criminal investigator) and an attorney. The following case study may border on the ridiculous at first glance, but Block notes the tax laws are very serious.
Cynthia Hess, who is also recognized by a variety of pseudonyms, engaged in a legal battle with the IRS. The set of circumstances that unraveled revolved around her profession as an exotic dancer.
She found herself having to go through the difficult task of persuading the U.S. Tax Court to uphold a business-related deduction for surgical implants that enlarged her breasts. Let’s take a closer look at the events that took place and what the court ultimately decided.
Boosting a career
Hess had concluded that a breast enlargement would provide her with a strong competitive advantage over other dancers in the same career field. So she took her agent’s advice to undergo the surgery, and she even changed her stage name to highlight the physical changes she made to her body.
After the surgery, Hess continued performing as usual. As she had hoped and expected, Hess quickly experienced an increase in her earnings, which she fully attributed to her accentuated features.
The physical change that she made even landed her increased attention on the talk show circuit, with well-known hosts such as Sally Jesse Raphael and Howard Stern further boosting her career.
However, despite these career-enhancing changes, the IRS denied the deduction at first. The agency’s argument was not about the salacious nature of the change, but rather it claimed that the changes should be classified as nondeductible personal expenses, not business expenses.
Luckily for Hess, Tax Court Judge Joan Seitz Pate took a more nuanced view, ruling that the surgery Hess engaged in did in fact create business assets. The implants were deemed a necessary stage prop in the eyes of the judge.
It’s not personal
As a result of the ruling, Hess did not draw any personal benefits from her particular implants, which, pointedly noted the judge, are not the type that women usually seek for the sake of enhancing their appearance for personal reasons. Instead, it was Hess’ financial desires that motivated the dancer to undergo the surgery.
Furthermore, an important argument that cinched the business argument was that Hess testified to the fact that she and her husband routinely endured off-color, vituperative comments from people they encountered after the surgery. As a result, she decided to have the implants permanently removed when her career as an exotic dancer came to an end.
The judge likened the implants to work-related necessities, such as work clothes or uniforms, which, under the then-applicable rules, were allowable only when they satisfied a two-step test:
- Required as a condition of employment.
- Unsuitable for everyday use.
Hess easily dispensed with the first hurdle. Her implants were regarded as a costume that she needed in order to retain her employment as a professional exotic dancer. As for the second requirement, the court cited Hess’ testimony that she would have removed the implants when she left work every single day, had that been a possibility.
Seeing as they caused bacterial infections and other serious medical problems in the long run, her understandable preference would have been to not have them outside the hours during which she was working.
Now it’s highly unlikely that your business deduction issues will be as seemingly controversial as those of Hess. However, this case shows how important it is to make sure your arguments are well reasoned and that you’ve drawn a clear line between your personal expenses and your business-related purchases.
Let us know if you have any questions about your business expense deductions. A visit to the U.S. Tax Court probably won’t be necessary, but by getting the details in order now, you can avoid problems later.