Tax-Saving Tips - July 2019
Tax-Saving
Tips
July 2019
Proven
Tax Reduction Strategies for Sole Proprietors
If
you operate your business as a sole proprietorship, there are many strategies
to reduce your taxes.
Let’s start with the following 10:
- Use the Section 105 plan to make your health
insurance a tax-favored business deduction on your Schedule C.
- Employ your under-age-18 child to make taxable
income disappear.
- Employ your spouse without paying him or her a
W-2 wage.
- Rent your office, even your home office, from
your spouse to save self-employment taxes.
- Establish that an office in your home is your
principal office to increase (yes, increase!) your vehicle deductions and
also turn personal home expenses into business expenses.
- Give yourself flowers, fruit, and books as tax-deductible
fringe benefits.
- Combine the home office and a heavy SUV,
crossover vehicle, or pickup truck to grab big deductions this year.
- Design a business trip that includes some
personal days—days you treat as 100 percent business even though you don’t
work on those days.
- Use the seven-day tax deduction travel rule to
create a business trip that is 87 percent personal vacation.
- Deduct your smartphone and provide smartphones to
your employees as tax-free fringe benefits.
If
one or more of these look good to you, let’s talk about how to make them work.
Incorporation Is Not for Everyone
If
you’re not good at paperwork, the corporate form of business is probably not
for you.
Let
me tell you about a tax court case involving William H. Bruecher III. He
learned a lesson by paying more than $27,000 in taxes on monies his corporation
supposedly loaned to him. Mr. Bruecher’s corporation did not pay him a salary;
rather, the corporation paid his personal expenses, classifying the payments as
advances.
Advance
Account on Corporate Books
Advances
handled properly do not create a tax problem. The IRS in an audit, or the court
in a decision, first looks to see whether the advances are loans or dividends.
If repayment by the owner and collection by the corporation seem assured, or
actually take place in a later year, the advance is a loan.
Intent
to Repay
To
decide whether there is intent to repay, the court looks at factors such as the
following:
·
Promissory
notes or other written promises to repay the advance
·
Interest
charges on the advance
·
Collateral
to ensure repayment
·
Past
history of repayment
Neither
Mr. Bruecher nor his corporation could produce any of these. Further, the very
personal nature of some of the advances (such as divorce settlement payments,
child support payments, and payments to the grocery store) got the court’s
attention.
In
court, Mr. Bruecher delivered his self-serving testimony and presented as
evidence the corporate tax return, on which the advances were classified as
loans. Not good enough, ruled the court, as it made the advances taxable
dividends to Mr. Bruecher.
Takeaways
When
you operate as a corporation, the corporation is a separate legal entity, and
you should have a corporate paper trail that clearly reflects intent and
action.
·
C corporation. Clear out the advance account and make
the advances interest-bearing loans, with specific repayment dates.
·
S corporation. Either offset the advances with the
distribution account or evidence the advances as interest-bearing loans.
How to Deduct Cruise Ship
Conventions, Seminars, and Meetings
If
you want to attend a convention, seminar, or similar meeting onboard a cruise
ship and deduct all your costs, you face some very special rules. But it can be
done.
When
you know the tax code rules, you will find an enlightened workaround that
removes almost all the hassle and gives you what you want. The IRS considers
all ships that sail cruise ships.
In
1982, your lawmakers were attempting to give the U.S. cruise ship industry a leg
up by outlawing all cruise ship conventions, seminars, and similar meetings
other than those
·
that
take place on a vessel registered in the United States, and
·
for
which all ports of call of such vessel are located in the United States or in
possessions of the United States.
The
1982 law remains on the books. Lawmakers have not updated the limits for
inflation. Here’s the cruise ship convention tax code rule as it existed in
1982 and as it exists today:
With
respect to cruises beginning in any calendar year, not more than $2,000 of the
expenses attributable to an individual attending one or more meetings may be
taken into account under Section 162 . . .”
Had
the $2,000 been indexed for inflation, the 2019 amount would be a reasonable
$5,431, and that would likely encourage more 2019 U.S. cruise ship
convention-type travel.
The
$2,000 is pretty skimpy when you consider that the expenses include
·
the
cost of air or other travel to get to and from the cruise ship port;
·
the
cost of the cruise; and
·
the
cost of the convention, seminar, or similar meeting.
Bigger,
Better Deductions with Less Hassle
This
is a way you can avoid the $2,000 limit, take the cruise you want, and likely
deduct all your costs. And this does not have to involve a U.S. ship. Any ship
from any country works.
Here’s
the strategy. You take the cruise ship to a convention, seminar, or meeting
that’s held
·
on
land, say at a hotel, and
·
in
the tax-law-defined North American area.
When
you meet the two easy requirements above, you deduct (a) the full cost of
getting to and from the location; (b) the full cost of the convention, seminar,
or similar meeting; and (c) likely the full cost of the cruise if your onboard
ship expenses are less than the 2019 daily luxury water limits.
Using
the 2019 luxury water limits, if your average daily cost of the cruise is $692
or less, you can use this strategy to deduct all cruise ship costs to travel to
and from the seminar.
Impact of Death, Retirement, and
Disability on the 179 Deduction
What tax effect would death, retirement, or disability
have on you or your business? Here’s an easy example to illustrate.
Let’s say that in 2017, you purchased for business use
a pickup truck with a gross vehicle weight rating greater than 6,000 pounds.
Asserting that you use the pickup 100 percent for business, you expensed the
entire $55,000 cost.
What happens to that $55,000 expensed amount if you
die, retire, or become disabled before the end of the vehicle’s five-year
depreciation period?
Death
If your heirs are not going to pay estate taxes, your
death is about as good as it gets. Here’s why: You get to keep your Section 179
deduction. (It goes to the grave with you.)
Your pickup truck gets marked up to fair market value.
(Remember, you expensed it to zero, but now at your death, the fair market
value is the new basis to your heir or heirs.)
Example.
Using Section 179, you expensed the entire cost of your $55,000 pickup truck.
You die. Your daughter inherits the pickup at its fair market value, which is
now $31,000, and sells it immediately for $31,000. Here are the results:
·
You get to keep your Section 179
deduction—no recapture applies.
·
Your daughter pays zero tax on her sale of
the pickup truck.
·
Your estate includes the $31,000 fair
market value of the pickup, and if your estate is less than $11.4 million, your
estate pays no estate taxes.
Disability
This is ugly. If you become disabled and you allow
your business use of the pickup to fall to 50 percent or below during its
five-year depreciable life, you must recapture and pay taxes on the excess
deductions generated by the Section 179 deduction.
To make matters worse, you must use straight-line
depreciation in making the excess-deduction calculation.
Retirement
With retirement, you have exactly the same problem as
you would have if you were to become disabled. In fact, with retirement, you
disable your business involvement, and that makes your pickup truck fail the
more-than-50-percent-business-use test, resulting in recapture of the excess
benefit over straight-line depreciation.
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