What falls within the classification of expenses
This type of expenses deduction includes most expenses in connection with rental property or investment property, such as investment advisory fees, maintenance expenses and repairs of rental real property, and any other ordinary and necessary expense incurred to produce income or to manage, conserve or maintain income-producing property. It also includes expenses incurred in connection with the determination, collection, or refund of any tax. Thus, it includes tax preparation fees for preparing individual income tax returns, among other things, and the costs of tax litigation or other disputes.
Production of Income with Real Property
Under IRS law, “On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 11, you can deduct expenses that you pay...To manage, conserve, or maintain property held for producing such income.” This means that any rental properties including houses, apartments and office space are subject to this deduction. According to the IRS, this includes damage to fixtures on the property by renters, investment fees, costs for repairs such as broken water lines, upgrades to property such as solar panels, and any unpaid rent (bad debt).
Production of Income with Tax Preparation
Under IRS law, “On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 11, you can deduct expenses that you pay...To produce or collect income that must be included in your gross income (and) To determine, contest, pay, or claim a refund of any tax.” Under this provision when a client fails to send you the correct tax document, you can deduct the time and expenses incurred for tracking down that client and obtaining the correct paperwork. In addition, you can hire a tax professional to do you taxes at the end of the year and their fee will be deducted as well. The purpose behind this rule by the IRS is to encourage accurate accounting. Remember that the audit process is expensive for both you and the IRS.
Other Examples of Production of Income Deductions
Under the same IRS statute, the following are all considered tax deductible, though some have been revised or eliminated by the Tax Cuts and Jobs Act of 2017, effective for tax years 2018 through 2025:
- Appraisal fees for a casualty loss or charitable contribution.
- Casualty and theft losses from property used in performing services as an employee.
- Clerical help and office rent in caring for investments.
- Depreciation on home computers used for investments (eliminated for 2018-2025 tax years)
- Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust.
- Fees to collect interest and dividends.
- Hobby expenses, but generally not more than hobby income (repealed for tax years 2018 through 2025).
- Indirect miscellaneous deductions from pass-through entities.
- Investment fees and expenses (gone for tax years 2018-2025).
- Legal fees related to producing or collecting taxable income or getting tax advice.
- Loss on deposits in an insolvent or bankrupt financial institution.
- Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you (repealed for tax years 2018-2025).
- Repayments of income.
- Repayments of social security benefits.
- Safe deposit box rental (eliminated 2018--2025 tax years).
- Service charges on dividend reinvestment plans.
- Tax preparation fees (eliminated for 2018-2025 tax years).
- Trustee's fees for your IRA, if separately billed and paid (repealed for tax years 2018-2025).
To find out more about deductions and amortization go to the IRS website or contact a tax specialist.