If you receive a free meal, can you take a tax deduction for it? That’s a simple question, and I’d guess that 99.99% of the public would use common sense to answer the question: No, of course not. How can you take a deduction when you’re getting something for free?
However, one inventive tax preparer had a different slant on the question. Martin Kapp, a CPA from El Segundo, California, believed that individuals in the transportation industry could get the “Mariner’s Deduction” for meals that were provided by their employers.
I had never heard of the “Mariner’s Deduction,” so I investigated Mr. Kapp’s website. I note that he states, “While retaining travel receipts is always very desirable, the Johnson decision clearly states taxpayers can rely upon the government’s written statements that taxpayers may indeed elect to deduct the pre-approved OCONUS and CONUS incidental rates – all without receipts.”
The IRS and Justice Department alleged that Mr. Kapp had “…prepared returns for the mariners claiming deductions for the costs of meals they received for free from their employers.” The DOJ brought suit in Los Angeles to stop Mr. Kapp.
And that’s why I wrote the he had a different slant. Judge George Schiavelli ruled that Kapp must no longer prepare federal tax returns with the “Mariner’s Deduction.” He must also turn over his client list to the DOJ/IRS. His clients can look forward to receiving a “Dear Soon-To-Be Audited Taxpayer” letter from the IRS.
The judge noted that Kapp “knew or should have known” that the deductions were illegal. And, indeed, this is not the first time the “Mariner’s Deduction” has led a tax preparer into hot water. In 2004 – 2005, the DOJ and IRS successfully stopped five Louisiana tax preparers from using this sham deduction.
So remember my rule: If it sounds too good to be true, it probably is. You can deduct legitimate business expenses, including unreimbursed business expenses and meals. But if an expense costs nothing, that’s how much you get to deduct—nothing.