Get more deductions with a home office

Lock Down Vehicle Deductions with a Home Office

The IRS gives you two possible strategies for turning otherwise personal mileage into business mileage:

  1. Going to a temporary work location
  2. Establishing an office in the home as a principal office

The temporary work location strategy contains some real unknowns, such as what is technically considered a temporary work location and whether the work performed at that location is for one year or less.

These unknowns make it difficult or impossible to use your facts and circumstances to produce your desired business-mileage results. The easy solution is the office in the home as a principal office.

The first reason this type of home office is an easy solution is that the rules are crystal clear, making compliance easy. The second reason is that with this office you know that all trips from home for this trade or business are business trips, including the trip from your home to your regular office outside the home.

S Corp Health Insurance 2018

,

Update: 2018 Health Insurance for S Corporation Owners

S corporations continue to enjoy good news in 2018 when it comes to health insurance, and this also applies to 2017 taxes.

You first have to thank the 21st Century Cures Act for:

  • Reinstating and extending IRS Notice 2015-17 to eliminate the $100-a-day penalty
  • Creating the qualified small employer health reimbursement account (QSEHRA) that works well if there are employees in the corporation

The good news is, the old rules still apply as we write this, and we don’t expect any changes in 2017 or 2018. Under these rules, the S corporation first establishes a health insurance plan for the owner in one of two ways:

  • Choice 1. The S corporation makes the premium payments for the accident and health insurance policy covering the owner-employee who has more than 2 percent ownership (and his or her spouse or dependents, if applicable).
  • Choice 2. The owner-employee makes the premium payments to the insurance company and furnishes proof of the premium payments to the S corporation, which in turn reimburses the owner-employee for the premium payments.

This is Step 1—getting the cost of the insurance on the S corporation’s books.

In Step 2, the S corporation has to include the health insurance premiums on the owner-employee’s W-2 form. The income is not subject to payroll taxes (Social Security and Medicare).

In Step 3, the owner-employee then claims the health insurance deduction on page 1 of Form 1040, providing he or she otherwise qualifies for the page 1 deduction.

Post TCJA Entertainment that is deductable

Entertainment That Survived Tax Reform

As just discussed above, you may no longer deduct directly related or associated business entertainment effective January 1, 2018.

Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities.

That’s the bad news. The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting. Under this section, you continue to deduct

  • entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
  • expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
  • expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
  • expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
  • expenses for goods, services, and facilities you or your business makes available to the general public;
  • expenses for entertainment goods, services, and facilities that you sell to customers; and
  • expenses paid on behalf of nonemployees that are includable in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.

When you are considering using the above survivors of tax reform’s entertainment cuts, you will find good strategies in the following:

  1. Renting your home to your corporation.
  2. Taking your employees on an employee party trip.
  3. Partying with your employees.
  4. Making your vacation home a deductible entertainment facility.
  5. Creating an employee entertainment facility.
  6. Deducting the entertainment facility, because facility use creates compensation to users.

If you would like our help implementing any of the strategies above, please don’t hesitate to contact us.

Luxury Cars now deductable?

Tax Reform Allows Bigger Vehicle Deductions 

Finally, lawmakers did the right thing by increasing the luxury auto depreciation limits on business cars. The old luxury limits were unrealistic, punitive, unfair, and discriminatory against any car that cost more than $15,800. The new limits don’t create parity in all respects, but they are a big improvement.

If you bought a car in 2017 and paid more than $15,800, you were driving a luxury car that lawmakers punished you for by putting a lid on your depreciation. For example, say in 2017 you bought a $40,000 car and drove it 100 percent for business. Your maximum depreciation deductions for the first five years would total only $15,060. To fully depreciate this car under the old rules would have taken 19 years.

It was ridiculous to take 19 years to depreciate that $40,000 car. And now, finally, lawmakers have fixed a big part of what the tax code calls “luxury automobile limits.” Under the new law, this $40,000 vehicle is fully depreciated in six years. Think about that: old law, 19 years. New law, six years. Essentially, the new law sets the so-called luxury automobile limit at $50,000. This means any vehicle that costs $50,000 or less is not penalized by the luxury vehicle limits when you’re using MACRS depreciation.

Under the new law, the annual limits are

  • Year 1: $10,000
  • Year 2: $16,000
  • Year 3: $9,600
  • Year 4 and each succeeding year: $5,760

What do the new limits mean? Before 2018, many business taxpayers were buying vehicles with gross vehicle weight ratings (GVWRs) greater than 6,000 pounds to escape the draconian luxury limit of roughly $15,000. Even today, SUVs, crossover vehicles, and pickup trucks can avoid the automobile luxury limits and even qualify for immediate write-offs of the full business cost using bonus depreciation or Section 179 expensing. Cars don’t qualify for unlimited bonus depreciation or any added benefits from Section 179 expensing.

But the big deal is that because of the higher, more realistic luxury auto limits, there’s far less need to buy the bigger, heavier SUV or crossover vehicle. With a car costing $50,000 or less, you realize 71.2 percent of your total vehicle depreciation deductions in the first three years.

S Corp Fringe Benefits post TCJA

S Corporation Fringe Benefits after the Recent Tax Reform

Fringe benefits are usually a good thing—but there’s a catch when you own more than 2 percent of an S corporation. The good news? Federal tax law allows the cost of these fringes as deductible expenses for your S corporation.

The bad news? You, the shareholder-employee who owns more than 2 percent, may suffer additional taxes on some of the benefits because the tax code requires your corporation to put selected benefits on your W-2. The outcome is sometimes favorable and sometimes not.

Here’s the ugly rule that causes this problem. Under the federal income and employment tax rules for the most popular fringe benefits, tax law treats the more than 2 percent shareholder-employee of an S corporation as a partner and denies the benefits. And—we know you are just waiting for this—there is more bad news: related-party stock attribution rules apply to the S corporation.

Under the related-party rules, tax law says that your spouse, parents, children, and grandchildren own the same stock you own—and if you employ them in your S corporation, their fringe benefits generally suffer the same ugly fate as your fringe benefits.

Four Beneficial but Somewhat Crazy Fringe Benefits

The following four fringe benefits work their way through a tax code maze to eventually produce a personal benefit to you, the shareholder-employee who owns more than 2 percent:

  1. Health insurance
  2. Health reimbursement arrangements (HRAs)
  3. Health savings accounts (HSAs)
  4. Disability insurance

As an example of the tax code maze, here is what you, the more than 2 percent shareholder-employee, must do to get any tax benefit whatsoever from health insurance:

  • Make the S corporation pay for your insurance premiums, either directly or through reimbursement to you.
  • Have the S corporation include the health insurance as wages not subject to FICA on your W-2.
  • Deduct (as an individual taxpayer) the cost of the premiums, using the self-employed health insurance deduction on page 1 of your Form 1040.

Six Stinky Fringe Benefits

What makes a fringe benefit stinky?

  • The stinky fringe benefit gives your S corporation a tax deduction for the compensation that it includes on your W-2. Effectively, this gives you a zero-tax benefit from the stinky fringe benefit.
  • The stinky fringe benefit increases the corporation’s FICA taxes on the compensation it has to add to your W-2.
  • The stinky fringe benefit increases your personal FICA taxes because of the compensation added to your W-2.

In summary, stinky fringe benefits—I’ve listed them below—are absolutely NO benefit to you, and they increase both your and your corporation’s FICA taxes. That’s really stinky.

  1. Group term life insurance
  2. Qualified moving expense reimbursements
  3. Qualified transportation fringe benefits
  4. Meals and lodging for the convenience of the employer
  5. Qualified employee achievement awards
  1. Qualified adoption assistance

Three Maybe (but Maybe Not) Fringe Benefits

The three fringe benefits listed below face special tax code disallowance rules that often take these benefits away from the S corporation shareholder-employee who owns more than 2 percent.

  1. Qualified educational assistance program benefits
  2. Qualified dependent care assistance program benefits
  3. Working condition fringe benefits (These currently suffer a tax reform impediment that could make them non-deductible—that’s why they sit in the “maybe, but maybe not” category.)

Four No-Problem Fringe Benefits

Your S corporation can provide you, as a shareholder-employee who owns more than 2 percent, and its other employees with the following fringe benefits, which are tax-free and deductible by the S corporation:

  1. De minimis fringe benefits. De minimis fringe benefits include occasional use of the company copy machine, holiday and birthday gifts with a low value, occasional parties and picnics for employees and their guests, and occasional tickets to the theater or sporting events.
  2. No-additional-cost services. No-additional-cost services are excess-capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free, at a reduced price, or through a cash rebate to employees working in those lines of business.
  3. Qualified employee discounts. This exclusion applies to a price reduction you give your employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. The employee discounts can be up to 20 percent on services and the gross profit percentage on merchandise.
  1. On-premises athletic facilities. Your S corporation can exclude the value of an employee’s use of an on-premises gym or other athletic facility from the employee’s wages if substantially all use of the facility during the calendar year is by the corporation’s employees, their spouses, and their dependent children.

As you know, you need to pay attention when it comes to the fringe benefits that your S corporation is going to offer you, a shareholder-employee who owns more than 2 percent. And of course, you have to pay attention when your S corporation offers fringe benefits to rank-and-file employees, too.

TCJA increases benefit of hiring kids

Tax Reform Increases the Tax Benefits of Employing Your Child

The recent tax reform eliminated personal exemptions for taxable years after December 31, 2017, and before January 1, 2026. This makes your child worthless to you on your Form 1040. But there is a way to get even or, perhaps, much more than even.

Let’s set the stage first. For taxable years after December 31, 2017, and before January 1, 2026, the standard deduction for a single taxpayer begins at $12,000 in 2018 and increases every year for inflation. The new standard deduction means that a single taxpayer such as your child can earn up to $12,000 in W-2 wages and pay not a penny in federal taxes.

As the owner of a business, you have the advantage of being able to hire your child to work in your business, and that creates tax-saving opportunities for both you and your child. The big dollar benefits of hiring your child go to the Form 1040, Schedule C taxpayer and the husband-and-wife partnership because such businesses are exempt from FICA when they employ their children who are under age 18.

S and C corporations and non-spouse partnerships do not qualify for this benefit. They have to pay the payroll taxes on all employees—period. There is no parental benefit.

Proving Travel Expenses post TCJA

Proving Travel Expenses after Tax Reform

As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut. And tax reform did not change the rules that apply to your other travel expense deductions.

One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. For example, you can travel to exotic locations using the seven-day travel rule and/or attend conventions and seminars in boondoggle areas. From these examples, you can understand why the IRS might want to see proof of your business purpose for any trips, should it examine them.

With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees. The entity claiming the tax deduction must keep timely records that prove the four elements listed below:

  1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
  2. Time. Your dates of departure and return, and the number of days on business.
  3. Place. Your travel destination described by city or town.
  4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.

When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove

  • every expenditure for lodging, and
  • every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available.

The receipt you need is a document that establishes the amount, date, place, and essential character of the expenditure.

Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains

  • the name of the hotel,
  • the location of the hotel,
  • the date, and
  • separate amounts for charges such as lodging, meals, and telephone.

Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the

  • name and location of the restaurant,
  • date and amount of the expenditure, and
  • number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.

You can’t simply use your credit card statement as a receipt. Like a canceled check, it proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).

In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:

  • Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
  • Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules)
  • Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
  • Costs for baggage and shipping of business items needed at your travel destination
  • Costs for lodging and meals (meal costs include tips to waiters and waitresses)
  • Costs for dry cleaning and laundry
  • Costs for telephone, computer, Internet, fax, and other communication devices needed for business
  • Tips to bellmen, maids, skycaps, and others

The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either

  • have the corporation reimburse you for the expenses, or
  • have the corporation pay the expenses.

Hiring your Kid in your rental

Hiring Your Children to Work on Your Rental Properties

Have you considered hiring your children to work on your rental properties? If so, were you concerned when you did not see a line item for wages on Schedule E of your Form 1040?

Don’t let that bother you. The IRS in its instructions explains that wages and other ordinary and necessary business expenses of the rental that are not named on Schedule E go on line 19.

Because you own more than one rental property, your children may work on more than one. No problem. You need to allocate the wages and associated expenses to the properties on a reasonable basis. The most apparent allocation basis for the money you are paying the children being time spent by the children at each property.

Could renting from your spouse result in tax savings?

,

The short answer is maybe. This strategy targets saving self-employment taxes. Entities that give rise to self-employment taxes are sole proprietors and general partners in partnerships. This means that if you have an s-corp, c-corp, or are a limited partner you are not subject to self-employment taxes. If you are a sole proprietor read on for more information on this tax savings tip.

Rent from your Spouse Strategy

As a sole proprietor, you know that the 15.3 percent self-employment tax can eat up your profits in a hurry. You may be able to use a simple strategy for tax savings.

If you own an office building or other assets, you can set up a rental arrangement with your spouse that could significantly cut your self-employment taxes.

Example

Wendy operates a sole proprietorship and earns $100,000 of net income. This income creates a self-employment tax liability of $14,129.55.

Wendy gives the office building to Jim, her spouse, who then rents the office space back to Wendy. Wendy pays Jim $2,000 rent each month (the fair rental value of the building), which moves $24,000 off Schedule C and onto Schedule E. Schedule E, unlike Schedule C, does not give rise to self-employment taxes. (15.3%)

Tax Savings

The rent-from-my-spouse strategy cuts Wendy’s self-employment income by $24,000, which puts an extra $3,391.09 of cash in her pocket at the end of the year. And she plans on doing this for at least 10 years, which means she’ll pocket $33,910.90 in tax savings before considering her investment earnings on this money.

Personal Home does not default to tax home

Your Personal Home Is Not Your Tax Home

The fact that your personal home is not your tax home is one income tax issue. Here’s another: Business travel is different from business transportation. Your tax deductions, tax strategies, and tax records hinge on the following federal income tax–defined terms:

  1. Personal home
  2. Tax home
  3. Business travel
  4. Business transportation

We know you don’t have an issue with your work deductions at the moment, but we want to make sure you are aware of what could happen if you moved your business location or personal home.

Meanings

Personal home This is where you live.
Tax home This is where you maintain your principal place of work.
Business travel You are in tax-deductible travel status when you travel away from your tax home overnight or long enough to require sleep.
Business transportation You deduct business transportation as a cost of going to and from tax-deductible business destinations, whether in town or out of town.


Five Good Things to Know

  1. Have your personal home within 50 miles of your tax home.
  2. When you have your personal home within 50 miles of your tax home, claim the home-office deduction under the administrative office rules so you can eliminate commuting to your outside-the-home office.
  3. Deduct overnight business travel when you travel on business outside the area of your tax home.
  4. If you have more than one business, the business on which you spend the most time and make the most money is the principal business. It’s the location of your tax home. Overnight travel outside the tax-home area of the principal business to a secondary business is deductible. For example, if you have your principal office in Worcester, Massachusetts, you can deduct your overnight travel to your second business in New York City.
  5. If you have one business with multiple offices in different cities, the office where you spend the most time, do the most important things, and make the most money is your tax home. When you travel away from this office overnight to a secondary office, you are in business travel status.