Masonry Magazine August 1992 Page. 35
TAX MATTERS
How to Multiply Your
Travel Deductions
The trick is to convert non-business travel days into business days, as the IRS allows deductions for personal days if they're sandwiched by business days.
Combining business and pleasure seems to be an inalienable right of business travelers. However, the IRS doesn't allow you to deduct non-business (personal vacation) expenses.
The trick is to convert non-business travel days into business days. When you succeed, you get a deduction (or tax free reimbursements from your company) for days on which no business is conducted. Here's the general rule: You get no deduction for the cost of meals and lodging for extra days you tack onto a business trip for personal pleasure-for example, visiting friends or sightseeing-but you do get a deduction for the personal days if they are sandwiched by business days.
Exactly how is this done? Just schedule your business trip so that the business days flank a weekend, a legal holiday (like Thanksgiving), or other reasonable standby days between business days.
Let's take a look at an example. Joe has business in San Francisco and wants to visit an old friend for three days during the Labor Day weekend. First, the wrong way. Joe does his business from Monday through Friday, sees his friend for the three day weekend, and flies home. Sorry, not a penny of the long weekend is deductible.
And now the right way. Joe schedules the trip so the three day weekend is in the middle of the five business days. What's the tax result? Now Joe can deduct all lodging expenses and eighty percent of meal costs for the entire eight day stay in San Francisco according to the normal business travel rules. Or Joe can receive a one-hundred percent reimbursement from his employer, which is tax free, and Joe's employer will stand in his shoes for the deduction.
How to Keep Getting Income
From Your Business
Mike, a reader of this column, founded and has run his family business, for twenty years. His son. Pete, has been running the business for about five years. Doing a good job. too. Mike, age 61, has cut back his working time to two or less days a week for eight months of the year. The other four months are spent in Florida and traveling.
As the company grew over the years, Mike took only enough salary to maintain his family's lifestyle. Simply put, profits were not taken out of the company but reinvested. The business is still profitable, and it is Mike's only source of income. The company is a C corporation (a tax-paying corporation).
In the past, Mike had taken a rather modest salary during the year, but he took a big bonus (when profits were available) to fund large family cash requirements (college, vacations, condo, etc.) His professionals had advised him to continue this compensation practice the same salary and bonus arrangement-even though Mike was putting in less than one-third of the time he worked in prior years. Mike called me to get a second opinion.
The IRS would probably attack Joe's current compensation arrangement on two fronts: first, the bonus would be regarded as a dividend, because it had not been taken until after the end of the year when the amount of the profit could be determined; and second, the salary would be regarded as unreasonable compensation. Would the IRS win? On the first attack, Mike and the business would not stand a chance. The IRS would win hands down with the result being a nonde-ductible dividend for the company, and a taxable dividend to Mike. Second, the IRS could probably knock out about half of Mike's salary as being unreasonable compensation, but the salary issue is tough to pin down with any certainty.
What should Mike do? He needs the current income to live. The answer is to kill the C corporation status by electing S corporation status. This would automatically remove the unreasonable compensation problem. What about the bonus? As an S corporation, Mike could take a tax free dividend from the company (up to the amount of S corporation profits). This means that the company's profits would only be taxed once when taken as an S corporation dividend, instead of twice, when taken from a C corporation. A big tax saving! Better yet, the same trick will continue to work when Mike completely retires.
One more thing: S corporation dividends (the equivalent of a compensatory bonus to Mike) are not subject to Social Security tax. Another big tax saving.
What's A Good Tax Idea Worth?
A picture is worth a thousand words! Of course! How about a tax idea? How much is it worth? Okay, let's play a game. I'll give your five tax ideas. You write down how much you can save. Here goes.
Idea #1-Commuting to and from work in your car is (and always has been) a nondeductible expense. New law-stop at a customer, supplier or