Deductible Expenses are “Reasonable” on case by case basis

Deductible Expenses are “Reasonable” on case by case basis

To be deductible expenses, a business expense must be ordinary, necessary and reasonable in amount. The part of that three-pronged test that seems to give taxpayers the biggest problem is the reasonable amount.

If you follow the court cases in this area, reasonable in amount seems to be determined on an individual, case-by-case basis. The facts and circumstances and various customs of each case are important.

In a case involving a very high-end investment adviser who worked in the New York City market, it was determined that the costs of a chauffeur-driven Cadillac limousine were reasonable in amount. The court commented in this decision that there is no “formula” in determining what a reasonable amount is.

What the court did take into account was the nature of the investment adviser’s business and the fact that many of his clients were very wealthy Europeans. The judge also factored in the obnoxious traffic situation in midtown and lower Manhattan.

In a case involving a couple from Missouri who owned a number of apartment buildings that they rented out in Florida, it was determined that the costs of owning, maintaining and operating a small Cessna airplane were not reasonable in amount.

The main factor the court looked at in this case was that the costs of owning, maintaining and operating a small plane greatly outweighed the costs of leasing a comparable plane or flying on a commercial airliner. The taxpayer, on occasion, did fly on a commercial airliner to Florida. But on a number of occasions, he used his own airplane because it was more convenient. The taxpayer failed to explain why he could not have flown on a commercial airliner instead of using his own plane.

While there is no formula for determining what is reasonable, there is a great deal of case law on the subject. The facts, circumstances and various customs of each case rule.

About MKS&H:

McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.

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MKS&H is committed to providing personalized tax and accounting services while developing a deep understanding of you, your culture, and your business goals. Our full view of financial systems and the people behind them allow us create and evolve the best solution that will help you and your business thrive. The accounting experts and consulting professionals at MKS&H work together to help you achieve the financial results you want.

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