Month: September 2023

For 2024, you can elect the de minimis safe harbor to expense assets costing $2,500 or less ($5,000 with audited financial statements or similar).

The term “safe harbor” means that the IRS will accept your expensing of the qualified assets if you properly abided by the safe harbor rules.

Here are three benefits of this safe harbor:

1. Safe harbor expensing is superior to Section 179 expensing and depreciation because you don’t have the recapture period that can complicate your taxes.
2. Safe harbor expensing simplifies your tax and business records because you don’t have the assets cluttering your books.
3. The safe harbor does not reduce your overall ceiling on Section 179 expensing.

Here’s how the safe harbor works. Say you are a small business that elects the $2,500 ceiling for safe harbor expensing, and you buy two desks costing $2,100 each. On the invoice, you see the quantity “two” and the total cost of $4,200, plus sales tax of $378 and a $200 delivery and setup charge, for a total of $4,778.

Before this safe harbor, you would have capitalized each desk at $2,389 ($4,778 ÷ 2) and then either Section 179 expensed or depreciated it. You would have kept the desks in your depreciation schedules until you disposed of them.

With the safe harbor, you expense the desks as office supplies—your tax records life is easier.

You and I do a two-step process to benefit from the safe harbor. It works like this:

Step 1—You. For safe harbor protection, you must have in place an accounting policy—at the beginning of the tax year—that requires expensing an amount of your choosing, up to the $2,500 or $5,000 limit. I can help you with this.

Step 2—Me. When I prepare your tax return, I make the election on your tax return for you to use safe harbor expensing. I do this with an election statement on your federal tax return and file that tax return by the due date (including extensions).

If you want to use this safe harbor in 2024, we need to set this up so that it is in place on January 1.

• By Leon Clinton
• September 29, 2023

Many of our clients have taken opportunities to live and work in various parts of the world, such as Switzerland, and have concerns about their U.S. tax obligations.

We want to alert you to the tax implications you might encounter as a U.S. citizen living or working abroad. We’re going to use Switzerland in our examples.

As a U.S. citizen, you remain subject to U.S. tax obligations, even living abroad. But your government has granted you certain tax breaks and mechanisms to mitigate the risk of being doubly taxed by the U.S. and Switzerland on your income. Here are the key points:

• Foreign Earned Income Exclusion allows you to exclude a portion of the wages you earned in Switzerland from your U.S. taxable income, up to $120,000 for 2023.
• Housing Exclusion/Deduction allows you to exclude or deduct a certain amount of foreign housing costs, including rent, utilities (excluding telephone), and insurance.
• Foreign Tax Credit helps you avoid double taxation by reducing your U.S. tax liability by the taxes you’ve paid in Switzerland.

The income and housing exclusions require that you pass a residency test. You have two choices: the physical presence test or the bona fide residence test. The physical presence test requires you to reside in Switzerland for at least 330 days within 12 months. The bona fide residence test requires you to live abroad for the entire tax year.

Another essential point to remember is reporting your foreign financial accounts. Suppose the combined value of all your foreign financial accounts exceeds $10,000 at any time during the year. In that case, you must file the Report of Foreign Bank and Financial Accounts (FBAR) and potentially Form 8938 for additional disclosures.

Moreover, the U.S. has income tax treaties with many countries, including Switzerland, that can influence your tax obligations. These treaties help prevent double taxation and could allow you to be eligible for certain credits, deductions, exemptions, and reductions in the rate of taxes on certain items of income you receive outside the U.S.

Finally, it’s crucial to note that international agreements known as “totalization agreements” eliminate double Social Security taxation. The U.S. has such agreements with 25 foreign countries, which provide exemptions from the Federal Insurance Contributions Act (FICA) taxes if your earnings are subject to similar taxes under the social security system of a foreign country.

If you have questions or need further clarification, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 26, 2023

If you operate your business as a C or an S corporation, and if you loan money to the corporation or the corporation loans money to you, you need documentation that the loan is indeed a loan.

With the S corporation, the loan that fails as a loan can result in taxable wages to you.

With the C corporation, the loan that fails as a loan can result in taxable dividends to the shareholder.

Good News, Bad News

Nariman Teymourian got a real shock when, at the end of his IRS audit, the IRS claimed that he owed over $600,000 in taxes and penalties, primarily because he had received advances from the corporation in which he had majority control.

Good news. Mr. Teymourian won his case in court and paid zero additional taxes.

Bad news. Mr. Teymourian had to go to court.

If you own a C corporation, pay attention to your advance account. When the IRS looks at your advance account, it decides between two options:

1. The advances are loans from the corporation to you.
2. The advances are disguised dividends that should be taxable to you.

Obviously, there is a huge difference between a loan and a taxable dividend.

Here’s the Teymourian Story

Mr. Teymourian was building a home. His corporation made some big advances during this building effort. The paperwork between Mr. Teymourian and the corporation was not close to perfect, and that triggered the problems with the IRS.

Key point. Operating as a C or an S corporation requires that you be pretty good at paperwork.

Mr. Teymourian won his case, but he also had the displeasure of the IRS’s company in court.

To Do List for You

Here are seven magic questions to which you want to answer “yes” to ensure that your advances are treated as loans. We structured these as after-the-fact questions, because you would be giving your answers to the IRS after the fact.

1. Did you sign a promissory note or other document promising to repay the money to the corporation?
2. Did you pay interest on the advances?
3. Did you make payments on a fixed monthly, quarterly, or other schedule?
4. Did you give the corporation collateral to secure your repayment?
5. Did you repay the loan?
6. Did the corporation check to make sure you had the ability to repay the loan (i.e., did it look at credit reports and statements of net worth)?
7. Did both you and the corporation conduct yourselves as if the advances were loans?

Remember, if you are asked these questions today about last year or the year before, you want “yes” answers. The more “yes” answers, the better.

If you would like my help with your corporate advances account, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 22, 2023