April 16, 2012 -- intro: With only one day before the Internal Revenue Service's April 17 deadline, here's a look at a range of common and uncommon tax loopholes that, depending on your career, border on gray to you, but to auditors can come across as flashing red lights.
quicklist: title: Guard Dogs text:
"Every year someone asks me about guard dogs," Philadelphia tax attorney Kelly Phillips Erb said.
If the dogs are certified guard dogs for your business, they may be deductible. Erb said they can't be "junkyard dogs" to be deductible. Erb's family dog is a mix between a Boxer and Labrador, and while intimidating, Erb's pet would not deductible.
Sophie, the Boston Terrier that Erb's office manager brings to work would not count either.
"Sophie doesn't scare anyone," she added.
Similarly, private jets that are purchased for security reasons could be deductible for corporations, and not just if they offer convenience or comfort, Erb said.
quicklist: title: Gambling text:
Casual gamblers may not realize they can deduct their gambling losses as professional gamblers do. They can, but there are some things to note, said Erb. First, you may deduct gambling losses only if you itemize deductions, which Erb said is only a third of tax filers.
Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos, cash winnings and the fair market value of prizes like cars and trips.
Second, the amount of losses you deduct can't exceed the amount of gambling income reported on your return.
As a professional, if you have a gambling loss that exceeds your winnings, you cannot deduct the loss. Your tax loss from the business of gambling can exceed your gambling income but not your gambling loss.
"If it's your real job and you lose money, then you can deduct those losses," she said. "But if you're just a casual gambler, you're out of luck if you always lose."
In a note to casual gamblers, the IRS explains that casual gamblers must have receipts for their losses on gambling.
quicklist: title: Home Office Costs text:
In August, a U.S. Tax Court judge ruled in favor of the IRS who said a Florida taxpayer was not entitled to a deduction for the use of his bathroom as a home office expense.
"You could find a million things for home offices that people can wrongly think they can deduct," Erb said. But unless your home office is your primary place of business, auditors will take note if you deduct for related costs.
In the Florida taxpayer's case with the bathroom, the judge ruled that because the man's children's and personal guests used the bathroom, it wasn't used exclusively for his accounting business.
Erb told one of her clients, an artist, that storing a large work of installment art in a living room does not a home office make.
Many people treat their kitchen table or living room as your home office or home office storage area, but it's often not a primary place of work.
"If you choose to work from home because you want to, that doesn't create a home office," Erb said.
quicklist: title: Clothing text:
Ted Schwartz, president and chief investment officer of Capstone Investment Financial Group and ABC News personal finance columnist, said he once had a client who was a professional wrestler who tried to deduct formal clothing he wore for interviews or other public appearances. His reasoning was that he would never wear suits unless for work.
"I told him, 'if you have a wrestling uniform, that's an expense,' but clothing is not."
Erb has a friend who works at a high-end retail store and is required to wear acceptable, nice clothing. She wanted to deduct for the costs, which were significant on her budget, because said she said she would not wear that clothing of her own volition.
"She would never wear that clothing outside of work, but the IRS doesn't care," she said.
quicklist: title: Legal Expenses text:
Certain personal legal expenses could be deductible to a degree, said Erb.
"Sometimes you can write off legal expenses if they are related to producing income," she said.
Writing off tax services from a divorce attorney could be deductible. Writing off legal services related to a custody battle would probably not be.
"It's hard for people to understand the difference between the two," she said.
quicklist: title: Travel and Entertainment text:
Writing off travel and entertainment expenses is considered "low-hanging fruit" for auditors.
Mixing business with pleasure usually means a meal or trip is not deductible, said Erb.
"I've had a lot of folks who try to claim related expenses, which is where the fraud tends to be," she said.
She said her clients who have "honest" intentions, will give a speech in Orlando and decide to bring the whole family for the business trip. Though it is a business trip, those filers can't deduct the whole cost of the family trip as a business expense.
quicklist: title: Diet and Fitness Costs text:
While health and diet expenses that are prescribed by a physician can be deductible, advice from a doctor will not support an expense you try to write off.
"Dieters will say their doctor instructed them to lose weight," she said. "Or they try to deduct a club membership because the doctor said to exercise more. Those are only deductible if they are prescribed. Not if a doctor just told them to do something."