Most business deductions aren’t enumerated in the Internal Revenue Code. In any case, there’s no place where it specifically states that you can deduct expenses such as office supplies and utilities.
Section 162 of the tax code details some expenses and several others are specified in other sections, but the general authority is contained in the first sentence of Section 162, which specifies that companies can deduct “ordinary and necessary” expenses in carrying on the business.
One tax case shows how the Internal Revenue Service and Tax Court don’t always agree with taxpayers about what is ordinary and necessary.
Flight Lessons for Realtors?
Robert Hand was a commercial realtor. He began chartering airplanes in 2005 in order to find and evaluate properties from the air. He continued doing so for the next two years.
During each flight, a licensed pilot flew the airplane while Hand took aerial photos of properties to include in the marketing brochures that he presented to prospective buyers.
In late 2007, Hand began taking flight lessons so he could obtain a private pilot’s license and pilot his own plane. He purchased a Cessna 172 and deducted the cost of the flying lessons as a business expense on his Schedule C.
No Flight Lessons for Realtors
The IRS wouldn’t allow the deductions.
The Tax Court noted that expenditures for obtaining or furthering education are not deductible unless they qualify as business expenses under both Section 162 and a related regulation. The regulation provides that expenditures made by an individual for education may be deductible if the education maintains or improves skills required by the individual’s trade or business.
The Court stated that the burden of proof was on the taxpayer “to show that there was a direct and proximate relationship between the flight lessons and the skills required to be a commercial realtor.”
While Hand argued that the flight lessons were directly related to his business, the Court was not convinced. The Court agreed that the taxpayer was “skilled at finding properties and creating marketing brochures for prospective buyers” but said “a disconnect exists” between those skills and the flight lessons.
While evaluating properties from the air and using aerial photos in marketing might be “helpful” to his business, Hand was able to perform those tasks without piloting a plane.
Hand presented no evidence to explain why flying lessons were required to evaluate and photograph the properties. He also failed to prove that the flight lessons were ordinary and necessary, providing no evidence to suggest it was “normal, usual, or customary for commercial realtors to take flight lessons.” (Robert L. Hand, et ux., T.C. Summary Opinion 2012-1).
Generally, if an expenditure sounds like it’s not normal in the industry — or if it’s considered fun or personal in nature — consult with your tax adviser for guidance.