I have a friend who started her own business. It's a plant business where she offers her services to plant different type of flowers in people's yards to make them look artisitc.
She told me she makes a profit about $3000 a year but said she is going to plan a trip to Hawaii to learn about plants that grow in Hawaii. And since it's business related, she will write it off for $2000 and as she described it, would a 'FREE' trip.
So how does that work? Let's say the IRS agree's the trip is business related and writes off her $2000. It's not like they're going to pay her $2000 right? She still would need to spend the $2000 out of her pocket to take the trip. So I don't understand why she says it's 'free' since the government isn't giving her $2000 back. Or is it?
Posted by OkFlow4327
4 Comments
For one, yes, you’re right. Business expenses just mean you don’t pay income or self-employment tax on those expenses, but both of those are just percentages of the actual cost of the expense; you’re still spending money on the expense.
For another, it’s going to be very difficult to justify a trip to Hawai’i as a legitimate business expense if the IRS looks at her return at all.
Taxes are complicated, but if we assume a 10% tax rate as an example, if she had a profit of 3000, she’d owe taxes of 300 on it.
If we assume she can actually write the trip off, writing off 2000 dollar trip, takes her profit down from 3000, to 1000, and she’d owe taxes of 10%, or 100 dollars.
So she took a trip, paid 2000 to go, and since it was for her business, she actually ended up paying 200 dollars less in tax.
The trip cost her 1800 instead of 2000 when all is said and done because it was a business expense.
Your friend may have a green thumb, but doesn’t understand how write offs and deductions work.
If the majority of your friend’s income is in the 20% tax bracket, she saved $400 in taxes by writing this off. She didn’t save $2000 and this is not even close to being a free trip.
But if she gets audited or if they question her return, she better have tons of proof that the trip to Hawaii was indeed a business trip.
It’s not free. At best it’s discounted.
Say she’s in a 25% tax bracket. She’d save maybe $600. So she still spent $2K to save a few hundies. The IRS isn’t giving her $2K back. I wish it were like that though.
So what she actually “saves” is the tax on that $2K.
Also. learning about plants in Hawaii is going to look like a personal trip to the IRS unless it’s very structured and directly tied to income. And there’s only certain expenses that would be able to be deducted.