I just wanted to get some opinions (aned if anyone has a site that would be helpful).
I have a client who has many thousands in NSF fees.
asked 15 May '10, 23:52
Once again this proves that there will always be legitimate differences of opinion and intepretation among educated professionals. I see I disagree with most of my esteemed colleages responses. Here's my take -
Taxpayers are allowed to deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business - IRC Sec 162
To be deductible, an expenditure must meet both requirements - it must be BOTH ordinary and it must be necessary.
Ordinary in this context means normal, usual or customary. It does not imply that the expense must be habitual or normal in the sense that the taxpayer must incur it frequently. Rather, it refers to expenses that are normally or customarily incurred in response to a particular circumstance. An expense may be ordinary although it happens only once in a taxpayer's lifetime. Welch v. Helvering, 290 U.S. 111 (1933). The determination depends on whether the expense is one that has occurred or could occur in connection with businesses similar to the business claiming the expense deduction.
Necessary generally means appropriate and helpful as opposed to required or obligatory. Again see Welch v. Helvering, 290 U.S. 111 (1933). An expenditure is necessary if it is appropriate and helps develop and maintain the taxpayer's business.
Although there is no express provision limiting ordinary and necessary expenses to a reasonable amount, the element of reasonableness generally is considered to be inherent in the ordinary and necessary requirement. This has been confirmed by several court cases includingg - Commissioner v. Lincoln Elec. Light Co., 176 F.2d 815 (6th Cir. 1949), cert. denied, 338 U.S. 949 (1950).
Thus, taxpayers generally cannot deduct excessive payments as ordinary and necessary business expenses. Limericks, Inc. v. Commissioner, 165 F.2d 483 (5th Cir. 1948). Whether an expense is reasonable is a question of fact.
In Bailey v. Commissioner, T.C. Memo. 1991-385, the Tax Court disallowed bank overdraft charges which in 2 of 3 years exceeded $30,000. The Court observed that the taxpayers continued their practice of incurring and paying overdraft charges over a 3-year period, and the total amounts paid were substantial. The taxpayers argued that they were having financial difficulties and that they would intentionally overdraw their bank account as a substitute or alternative to borrowing funds. The Court rejected the taxpayers' argument and disallowed the deduction of excessive overdraft fees.
So we have to look to the facts and circumstances of the case at hand. The taxpayer has "many thousands in NSF fees". I believe there is no question that they are ordinary and necessary as most businesses will have some such fees from time to time, but are they reasonable under the circumstances? If so, deduct them. But if your client is using NSF fees as a means to borrow money you could find that they get disallowed under audit.
As a side note, you should not advise a client to play the audit lottery - doing so is an ethical violation. However, that does NOT mean that you should leave off a deduction that you believe to be legitimate.
answered 19 May '10, 19:01
For a business, I have no problem taking them as an expense.
Helen, EA in PA
answered 16 May '10, 01:22
Helen EA in PA
I agree with Helen, expense them. They are not any different than any other bank fee. You shouldn't confuse them with fines or penalties.
answered 16 May '10, 02:43
I think people get confused because "fines and penalties" are not allowed as business deductions. But Sec 162(f) says:
As overdraft fees don't fall into that category, I think they are legitimate expenses.
answered 17 May '10, 02:06
I myself do not take them as legitimate. They have a "choice" but if they fail to have enough funds, then essentially, why would you be allowed to deduct it?
I put credit card penalties and o/d fees in non deductible. Maybe I am too conservative
answered 17 May '10, 20:32