Five Unusual 'Loopholes' the IRS Allows

The term "loophole" is often interpreted as an unethical, albeit legal, way to dodge compliance with a regulation. However, in the context of paying taxes, "loopholes" can also be defined as an alternative that is incorporated into the tax code as an incentive to spur investment. They create deductions and tax credits that benefit individuals, small businesses and corporations.

Loopholes by Legislating, Lobbying, Appealing

Usually, tax "loopholes" are approved by the IRS at the behest of elected Congressional representatives acting on behalf of a particular constituent, or in response to lobbying by a trade group or professional association. Some are granted during appeals before the U.S. Tax Court. The following are five examples of unusual tax "loopholes" currently available to those who may qualify for them:

  1. Struggling Performers: This one is specific to entertainers, for example, a local musician that plays at nightlife venues. The musician may be able to cash in on specific deductions if they managed to perform for two or more employers and if they were paid at least $200 by each employer during the course of a year. Also, if costs related to performing exceeded 10 percent of derived income and the entertainer claims less than $16,000 in adjusted annual gross income. If this is the case, they can deduct related expenses, such as their clothing, piano tuning, and even singing or guitar lessons.
  2. Landscaping: Those taxpayers who work out of their home and exclusively consult with clients in an office within their home can deduct part of their landscaping costs, including lawn maintenance and planting flowers and shrubs.
  3. Pool Installation: If a doctor prescribes swimming therapy for a patient suffering from a range of ailments, such as emphysema or bronchitis, a homeowner could have a pool built in his/her home and deduct the amount that the cost of installation exceeds the home's subsequent increase in value. Depending on the circumstances, operating costs such as chemicals, electricity, insurance and repairs, could also be deducted.
  4. Essentials for Competing: A professional who relies on a specialty product that is not available through normal outlets can potentially deduct that products costs from their taxes if it is shown that it is essential for competition. For example, in 2004, a Wisconsin bodybuilder successfully appealed to the IRS to have the costs of oils and tanning products deducted because they were essential to his competitive success and only for sale through bodybuilding magazines.
  5. Food for Pets: Many taxpayers have pets but not all can take advantage of this loophole, but those who can may be able to deduct the cost of pet supplies including food for their pets. Taxpayers cannot write off the cost of pet food unless the pet performs a critical service for the taxpayer. The IRS allowed junkyard owners in South Carolina to deduct the cost of buying cat food that they used to lure feral cats onto their property to kill snakes and rats. In order to be a deductible expense the pet must be considered a "working animal".

The Only Limit may be Your Creativity

An often-discussed taxpayer "loophole" was the ability for an exotic dancer to deduct the cost of cosmetic surgery for breast augmentation. As discussed earlier here, taxpayers have been provided deductions for clothes purchased by performing musicians, lawn care for individuals working from home, even body oils for competition. It seems the only limit to U.S. "tax loopholes" may be a taxpayers' creativity in presenting their case to the IRS.