Excuses and Tax Write-Offs [Post 33]

A tax deduction is an amount you can subtract from your taxable income, reducing the taxes you owe to the IRS. Common examples of tax deductions include mortgage interest, charitable contributions, or a business meal expense.

What can get lost about tax deductions however is when it is beneficial for them to be utilized. Was the money going to be spent regardless or was using a tax write off an excuse for unnecessary spending?

For instance, say you run a small business, will be taxed federally at 22% for this example (ignoring state tax), and are out to dinner with 3 associates.

Assume you’re in a situation where you are considering two options:

1. Pay for the whole table and utilize a business meal expense deduction

2. Only pay for your meal and forget about the deduction.

The IRS allows only a 50% deduction for business meal expenses from taxable income in 2023.1 Meaning if you pay $100 for the whole table’s meal, your taxable income gets reduced by $50, not the full $100. At a 22% marginal tax bracket, this results in $11 in federal income tax.

Conclusion: $0 in your pocket and $11 in taxes paid. Net -$111.

If you only pay for your $25 meal and did not deem the meal as a business expense, you will still have $75 in your pocket. However, the original $100 will all be taxed at the federal level, resulting in a 22% tax of $22.

Conclusion: $75 in your pocket and $22 in taxes paid. Net $53.

You may have paid more in taxes in the second scenario, but considering the total amount retained was greater, not paying for the table as a business meal expense was a net positive. The main point here is that acting in order to get a tax deduction isn't always advantageous. If you were going to pay for the table regardless of the circumstances, claiming the tax write off is logical. Paying for 3 additional meals just to claim the deduction is not.

No material on this website should be taken as tax, legal or investment advice.

1. IRC § 274(n)