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
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
Less Turmoil, Bigger Deduction
This is a way you can avoid that 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.
Book a Business Consultation Today, we will help you strategize.
Here are three quick things to know about working abroad.
Issue 1: Section 199A
To qualify for the Section 199A deduction, your business income must be effectively connected with the conduct of a trade or business within the United States. The preamble to the proposed Section 199A regulations clarified that in almost all circumstances, this means the income has to be U.S.-source income to qualify.
Under the tax law, you source your compensation for personal services based on where you perform the services.
For example, you perform all services for U.S. citizens living in the United States from your office in Norway. The services for the U.S.-based citizens do not generate U.S.-source income; therefore, you do not qualify for the Section 199A tax deduction.
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.
Intent to Repay
To decide whether there is intent to repay, the court looks at factors such as the following:
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.
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.
If you operate your business as a pass-through entity, such as a proprietorship, partnership, or S corporation, the profits of that business can generate the Section 199A tax deduction.
You qualify for the Section 199A deduction—period, regardless of pass-through business type—when you have
• pass-through qualified business income (QBI), and
• 2019 Form 1040 taxable income equal to or less than $160,700 single (and head of household) or $321,400 married, filing jointly.
With Form 1040 taxable income equal to or less than the thresholds listed above, doctors, lawyers, accountants, financial planners, stockbrokers, manufacturers, retailers, consultants, and all other businesses with pass-through income qualify for the deduction.
There’s no out-of-favor specified service business problem with income below the thresholds. And the calculation is easy.
With taxable income equal to or less than the thresholds, you qualify for the Section 199A deduction. Your deduction will equal the lesser of:
If you operate your business as a sole proprietorship, there are many strategies to reduce your taxes.
Let’s start with the following 10:
If one or more of these look good to you, let’s talk about how to make them work.
If you filed your business income and expenses as a proprietor in 2017 and reported $100,000 or more in gross receipts, your chances of IRS audit were 2.4 percent (2017 returns are still open for audit, so the percentage could increase). Had you reported this income as an S corporation, your chances of audit were only 0.20 percent.
You have probably read that the home-office deduction increases your chances of IRS audit. We’ve read that, too, but we don’t believe it. Regardless, let’s assume that you’re a little paranoid about audits, and you want to claim the home-office deduction in a way that doesn’t attract the attention of the IRS.
If you operate as a corporation, your home-office deduction does not show on either your personal return or your corporate return if you have the corporation reimburse the office as an employee business expense.
With reimbursement, the corporation claims the deduction for the expenses it reimburses to you. The corporation probably puts the reimbursement into a category called “office expenses” or something similar. Thus, the home-office deduction as a name or title does not appear in the corporate return.
You receive the reimbursement from the corporation as a reimbursed employee expense. You do not report employee-expense reimbursements as taxable income on your personal return. Thus, you do not identify the home office on your personal return.
With this method, the home-office deduction does not appear under a home-office label on either the corporate or personal tax return.
The $100-a-day Penalty is quite simple for certain entities. You may have wondered why certain entities can pay for or reimburse a solo owner-employee’s individually purchased health insurance without worrying about the $100-a-day penalty.
The answer is that some entities payments of the solo shareholder-employee’s individual health insurance premiums are exempt from the $100-a-day penalty.
The exemption does not apply to health coverage for the rank-and-file employees. For the rank and file, you need either
If you would like me to review your health coverage for compliance with the tax rules, please call me on my direct line at 262-358-8297.
Here’s a heads-up. The 30 percent residential solar credit
• drops to 26 percent for tax year 2020,
• drops to 22 percent for tax year 2021, and
• terminates in 2022.
Also, unlike the 30 percent commercial solar credit, where you can qualify for the 30 percent tax credit when you commence construction (as defined by the IRS, but easy to do), your 30 percent residential credit is granted when you place the solar property in service.
If you are thinking of the 30 percent tax credit for a solar installation on a residence you own, don’t let the time slip away, because you must have the solar property in use before December 31 to qualify for the 30 percent tax credit (dollar for dollar).
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.