Hi Larry, I own a skincare studio and I often purchase retail products from drugstores and the like to be in the know when clients ask me about product lines they've heard of or tried. I am also constantly sampling products because there are new things coming out all the time and sometimes I end up bringing something new on as a result. I also occasionally get facials to scope out the competition and compare my services. Are these tax deductible? I wanted to classify them as Research & Development but my accountant said I wasn't able to do so. She doesn't specialize in the spa industry though so I thought I'd check with you. ~Abbey
Abbey, I think the key to your questions is documentation. With good documentation I think a reasonable amount of items could be purchased and deducted as an ordinary and necessary business expense. Of course, you couldn't purchase the same product over and over again, but if you had a listing of the products that you purchased and why you purchased them, I would presume that the IRS would allow a reasonable amount, as you call it, for research and development. Regarding going to other spas to get a treatment, I think it's documentation. Of course, you couldn’t go to the same spa over and over again because you would not be learning anything new. If you went to a spa and came back and used your minutes for a staff meeting about customer service and how the treatment went, I think this would satisfy the IRS that this is a reasonable expenditure.
If we think about it, I would imagine Pepsi Cola is always looking at what Coca-Cola is doing. You can’t tell me that the Marriott people aren’t having people go to the Hilton Hotels to see what they are doing. I’m sure they are deducting all of those things. Pizza Hut always has something new on the menu. I would imagine a lot of the items they have are part of the copying they are doing from other successful pizza restaurants. It’s part of doing business and if it sounds reasonable enough and with documentation, no guarantees, but I think you are fine.
Larry Kopsa CPA
Larry, thanks for the information. I can document everything but I am a 1 person business so although I am using the information to improve my services, I don't have any employees to train with the new info. Do you think that is still OK, as long as I document? ~Abbey
Abbey, if it were me I would still document my expenses and reasoning and take the deduction. The worst that could happen is that the IRS would audit you and disagree, and if you decide not to fight them you would pay the tax and some interest. You would not be committing tax fraud so there should not be penalties. I can guarantee this, if you don’t take the deduction the IRS will not give it to you.
Larry Kopsa CPA
