ALBUQUERQUE, N.M. — Q: As a self-employed person I deduct all my business expenses on schedule C. My question relates to parking tickets. I travel a lot for business and deduct all my car expenses, including parking charges. Over the past year, I have had maybe a dozen meetings that ran over time and I ended up with a parking ticket for an expired parking meter. These tickets occur only because I have to drive for business. So can I include the cost of the tickets as a business expense?
You cannot include parking fines as a business expense. This is so even if the basic parking charge that you paid before the meter expired was tax-deductible because you were there for a bona fide business purpose.
The tax law refers to deductions as being a matter of legislative grace. That means that nothing can be deducted unless the law specifically says so. Your parking charges can be deducted under Section 162 of the tax code, which refers to ordinary and necessary expenses of operating a trade or business.
Parking fines are not ordinary and necessary business expenses for two reasons. First, it is neither ordinary nor necessary to pay a fine for an expired parking meter. Second, the tax law has a general prohibition on deducting items that violate public policy.
Fines and penalties of all varieties are nondeductible under the violation of public policy provision. The idea is that allowing a deduction means the government is subsidizing the cost of the fine or penalty.
Q: My wife is an attorney who worked as a salaried employee until March. She left her firm to stay at home with our daughter, but she does contract work for the same firm out of our house. Everything that I read about the new business deduction says it will apply to her contract work. We have had to tighten our budget, and this tax break would mean a lot to us. My 2018 income will be about $65,000 and my wife’s salary for 3 months is about $25,000, and her contract work might be about $27,000 (I think about $3,000 per month). Would she get a $5,400 deduction for the contract work and would that be federal, state, or both? And if she continues to earn $3,000 per month, would that then be a $7,200 deduction in 2019?
Based on the figures that you have provided your wife will absolutely be entitled to a deduction for 20 percent of her contract business income. There are various limitations that may apply to an attorney who does that type of work, but none of them apply to your situation.
This deduction is called the “qualified business income deduction,” or QBID. It is generally equal to 20 percent of the taxpayer’s business income, which would be schedule C (proprietorship) income in your wife’s situation.
It is not available to W-2 wages, so the 2018 salary income would not be included. It is also limited to 20 percent of your joint taxable income. Since your taxable income exceeds the contract income, the 20 percent of business income limit would apply.
As an attorney, your wife’s work is called a “specified” service activity for the QBID. This matters only if your joint taxable income exceeds $315,000 for the year. You will be well below this threshold, so the source of her business income does not affect the deduction.
The deduction is scheduled to continue forever, which means until Congress changes it, so you will get the same 20 percent deduction in 2019. If your wife’s contract income is $36,000 in 2019, the deduction will be $7,200.
Recognize that any allowed business deductions that she claims on her schedule C will reduce the QBID by 20 percent of the deduction. So every dollar of deductible expenses will reduce your taxable income by only 80 cents.
If your wife wants to contribute to a retirement plan, such as a simplified employee pension, that deduction would not affect the QBID because it is not claimed on her schedule C.
New Mexico begins with federal adjusted gross income, which is before this QBID. Unless New Mexico changes its laws, you get no QBID for state purposes.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.