Tax Saving Tips for Your Business - Spring 2019
Submitted by Desmond Wealth Management, Inc. on April 24th, 2019Here are a few tips for saving on taxes in your business. Did you know that you can take the home-office deduction, even if you spend more time at a separate location? You may also want to be aware of the survival of the Employee Recreation and Parties tax code through TCJA Tax Reform and how to claim the most benefit. Lastly, we'll give you some pointers on how you can calculate and improve your qualified business income from a Partnership.
When the Second Office in the Home Is a Principal Place of Business
When possible, you want to claim that your office in your home qualifies as a principal place of business, because this classification:
- Gives you the home-office deduction, and
- Eliminates commuting from your home to your regular office.
Current law gives you two ways to claim your office in the home as a principal office:
- First, as a principal office under the rules that the Supreme Court finalized in Soliman.
- Second, as a principal office under the alternative after-Soliman rules, wherein lawmakers added this alternative: “... the term principal place of business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business”
If you have an office downtown where you spend 40 hours a week, can you claim that you have an office in your home that qualifies as a principal office if you spend only 12 hours a week working in the home office?
With the administrative or management rule, you can have your principal office in your home with 12 hours of work a week, even when you work at your other office for 40 hours.
Employee Recreation and Parties Survive TCJA Tax Reform
When you know the rules, you can party with your employees and deduct 100 percent of the cost. Interestingly, if you feed your employees during a training program, your deduction is only 50 percent. Make sure you know the rules that give you the 100 percent deduction for employee entertainment.
The IRS says that the following types of entertainment qualify for the 100 percent employee entertainment tax deduction:
- Holiday parties, annual picnics, and summer outings.
- Maintaining a swimming pool, baseball diamond, bowling alley, or golf course.
The IRS makes it clear that the above are examples and that other types of entertainment may also qualify for the 100 percent entertainment deduction. The tax code states that “expenses for recreational, social, or similar activities (including facilities therefore) primarily for the benefit of employees” qualify for the 100 percent deduction.
Who Are These Employees?
Technically, the law requires that the entertainment expenses be primarily for the benefit of employees other than a “tainted group.” The tainted group consists of:
- A highly compensated employee (an employee who is paid more than $125,000 in 2019);
- Anyone, including you, who owns at least a 10 percent interest in your business (this is called a “10 percent owner”); or
- Any member of the family of a 10 percent owner, i.e., brothers and sisters (including half-brothers and half-sisters); spouses; ancestors (parents, grandparents, etc.); and lineal descendants (children, grandchildren, etc., including adoptees).
As the business owner, you belong to the tainted group. That’s not a big deal. You just need to make sure that partying with the employees is primarily for the benefit of the employees.
“Primary” Means “More Than 50 Percent”
In tax law, the words “primary” and “primarily” mean “more than 50 percent.” For employee recreation, that means the untainted group of employees has to have more than 50 percent use of the entertainment facility, or in the case of a party, a majority of the attendees come from the untainted employee group.
Documentation tip: You can measure “primary” by days of use, time of use, number of employees, or any other reasonable method. Regardless of how you measure use, the keys to your deductions are the records that prove the uses.
How to Calculate and Improve Your QBI from a Partnership
A general partner is taxed on partnership income that comes to him or her in the form of guaranteed payments and profit distributions. Profit distributions are qualified business income (QBI) for the Section 199A 20 percent tax deduction. Guaranteed payments and Section 707(a) payments are not QBI.
To increase QBI, you need to increase the profit distributions and reduce the guaranteed and Section 707(a) payments. Getting to this simple solution is not so easy; after all, this is tax law.
Two points to consider: First, are the guaranteed payments really guaranteed payments or simply a lazy man’s way to distribute profits? Second, should you use the more sophisticated Section 704 partnership allocation rules to get the results you want?
As always, we are here to answer any questions you might have. Feel free to email or give our team a call anytime.