Non-Compete Agreement

Today TaxMama hears from Tom in Durango, CO who wants to know, “If I pay a former employer money to let me out of a non-compete agreement can I deduct the amount from my taxes? If so, then on what form?”

Hi Tom,

You should be able to deduct it.

But if it’s a lot of money, you might want to get a formal opinion just to be sure. I can just see
IRS saying that this is not an “ordinary and necessary” business expense.

AND, if it IS a lot of money, you’re sure to be audited about it.

If it IS deductible, you would enter it on Schedule A as a miscellaneous expense, subject to the 2%
of adjusted income floor.

If you normally use Form 2106 for employee business expenses, you enter it on that form
instead, as other expenses, since it will still end up on the same line on Schedule A.

Regardless of where you end up putting it, be sure to attach a complete explanation of
this to your tax return. Be concise, but complete.

Then, if you ARE audited and they disallow it, you won’t face penalties for non-disclosure
and it will help you if you want to appeal the auditor’s decision.

Be prepared with a good explanation of why it was so urgent for you to leave this job that
you were willing to pay to get out of it. That might overcome a potential ‘ordinary and necessary’ argument by IRS.

And remember, you can find answers to tax questions about job-related deductions and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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