For the most part, an individual’s travel expenses from attending conventions or seminars can be deducted (provided that attendance benefits the taxpayer’s trade or business). But, the following travel expenses cannot be deducted: family members’ travel expenses, or expenses from attending investment, political, social or other types of meetings not related to the taxpayer’s trade or business. The entire cost of transportation and lodging, plus 50% of the meal expenses, is deductible for meetings held within the North American area. For a detailed list of areas within North America, please consult IRS Publication 463.
Meetings Outside the North American Area – Deducting travel expenses for a convention or meeting outside the North American area has requirements:
- The meeting must be directly related to the taxpayer’s trade or business (whereas meetings within the North American area need only benefit the taxpayer’s trade or business), and
- It must be reasonable to hold the meeting outside the North American area. There is no specific definition of “reasonable” for this purpose, which places the burden of proof on the taxpayer. Considerations include the meeting’s purpose and activities and the location of the meeting sponsors’ homes.
Even if the above requirements are met, the amount of deduction allowed depends upon the primary purpose of the trip and on the time spent on nonbusiness activities:
(1) If the entire time is devoted to business, all ordinary and necessary travel expenses are deductible.
(2) If the travel is primarily for vacation and only a few hours are spent attending professional seminars, none of the expenses incurred in traveling to and from the business location are deductible.
(3) If, during a business trip, personal activities take place at, near or beyond the business destination, then the expenses incurred in traveling to and from the business location have to be appropriately allocated between the business and nonbusiness expenses.
(4) If the travel is for a period of one week or less, or if less than 25% of the total time is spent on nonbusiness activities (on a day-by-day basis), then the travel deductions are treated the same as they would be for travel within the North American area.
Meetings Held On Cruise Ships – When a convention or meeting is held on a cruise ship and is directly related to a taxpayer’s trade or business, the taxpayer is limited to $2,000 per year in deductions for expenses from attending such conventions, seminars, or similar meetings. All ships that sail are considered cruise ships. The following rules also apply:
- The cruise ship must be registered in the United States.
- All of the cruise ship’s ports of call must be in the United States or its possessions.
If you have questions related to the deductibility of expenses from conventions and meetings or from foreign travel, please give Dagley & Co. a call.
Image via public domain
When two married people are jointly involved in the operation of an unincorporated business, it is very common, yet incorrect, for all of that business’s income to be reported as just one spouse’s income, even when/if they both work in the business.
In such cases, the spouse not taking credit for his or her portion of the earned income loses out on the chance to accumulate his or her own eligibility for Social Security benefits. In addition, to claim a child care credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the spouse not including a portion of the income from the joint business has another source of earned income, the couple will not be allowed a child care credit.
There are ways to remedy this situation, however. One option is to file a partnership return for the activity, in which case each spouse will receive a K-1 that reports his or her share of the net profit. An approach that avoids the necessity of filing a partnership return, and that is probably less complicated, is a qualified joint-venture election, in which each spouse elects to file a separate Schedule C for his or her respective share of the business. This gives them both self-employed income for the purposes of the self-employment tax and for claiming the child care credit.
A qualified joint venture refers to any joint venture involving the conduct of a trade or business if:
(1) The only members of the joint venture are husband and wife,
(2) Both spouses materially participate in the trade or business, and
(3) Both spouses elect to apply this rule.
Generally, to meet the material participation requirement, each spouse will have to participate in the activity for 500 hours or more during the tax year.
If the net income from the business exceeds the annual cap on income subject to the Social Security tax, the combined self-employment tax for the spouses with split Schedule Cs will exceed what a single spouse would have paid if he or she had filed a single Schedule C.
An additional benefit when filing split Schedule Cs is the opportunity for both spouses to participate in IRAs and self-employed retirement plans.
If you have questions about how splitting the business income between spouses might apply to your specific situation, please contact Dagley & Co. today.
Image via public domain
Business owners often replace vehicles they have used in their business. When replacing a business vehicle, the tax ramifications are different when selling the old vehicle and when trading it in for a new vehicle. If the vehicle is sold, the result is reported on the taxpayer’s return as an above-the-line gain or loss. Since a trade-in is treated as an exchange, any gain or loss is absorbed into the replacement vehicle’s depreciable basis, thereby avoiding any current taxable gain or reportable loss.
Thus, it is generally better to trade in a vehicle that would result in a gain if it were sold and to sell a vehicle if doing so would result in a loss.
Let’s say a taxpayer sells a 100%-business-use vehicle for $12,000. The original purchase price was $32,000, and $17,000 is taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better to sell the vehicle and deduct the loss rather than trade in the vehicle.
Sale price $12,000
Original Cost $32,000
Depreciation Taken <$17,000>
Depreciated Basis $15,000 <$15,000>
Loss <$ 3,000>
On the other hand, had the business owner sold the vehicle for $16,000, the sale would result in a $1,000 taxable gain, and trading it in would be a better option. Caution: Sales to the same dealer are treated as trade-ins.
If a vehicle is used for both business and personal purposes, the loss or gain must be prorated for the proportion of business use, as the personal portion of any loss is not deductible.
If you are considering trading a vehicle in, determine whether the tax benefits exceed the additional money received from selling the old business vehicle, as trade-in values are generally less than actual sales values. You should also consider the time and energy it will take to sell the vehicle on your own.
This concept can also be used when selling or disposing of other business assets. If you have questions about how this tax strategy might apply to your specific tax situation, please give Dagley & Co. a call.
Image via. public domain