Month: September 2023

Can you deduct the costs of real estate seminars and boot camps?

The ability to deduct these costs largely depends on the nature of your real estate activities—are they considered a business or an investment? This distinction is crucial for understanding your tax obligations.

If your real estate activities are a business, you may be able to deduct all costs related to real estate education, such as seminars or boot camps and related travel expenses.

These costs typically cannot be deducted if your real estate activities are merely an investment.

Identifying your real estate activities as either an investment or a business is fact-specific:

• Indicators of investment activities often involve less direct involvement in property management, such as collecting rent under a net lease or owning property managed by others.
• Indicators of business activities usually involve a greater level of personal involvement in property management. Examples include personally managing rental units, seeking new tenants, and handling properties through an agent.

Your specific circumstances and involvement in your real estate activities determine their classification. A hands-on relationship with your properties may lead to your activities being considered a business for tax purposes.

If you would like to discuss your real estate activities, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 19, 2023

I hope this message finds you well. I am writing to provide valuable insights regarding the tax implications of business meals.

As you may already be aware, there is a contradiction in the tax laws regarding personal living expenses, specifically personal meals and business meal tax deductions.

This is best illustrated by what tax professionals call the “Sutter rule.” Dr. Sutter, from whom the rule takes its name, lost the deductions for his chamber of commerce lunches and his lunches while serving on a hospital board, all because the cost of those business lunches did not exceed his personal meal costs.

The IRS invokes the Sutter rule without any specific standard, generally focusing on what it perceives as abuse or a disproportionately high number of business meals deducted. Interestingly, the IRS has applied this rule only to in-town business meals, not to those consumed while traveling for business.

Given this complex landscape, it is important to formulate an effective defense strategy. This essentially involves two elements: logic and legislation.

• The logic defense involves demonstrating that your business meals are more expensive than your personal meals.
• The legislative defense rests on the lawmakers who reduced business meal deductions to 80 percent and later to 50 percent, thereby accounting for the personal benefits.

To ensure your meal deductions, it’s critical to have the following:

• Receipts showing the purchases (food and drinks consumed)
• Proof of payment (credit card receipt/statement or canceled check)
• Names of the people with whom you had the meals
• A record of the business reason for the meal

For example, if you and a client, Harry Smith, have a Dutch-treat dinner that costs you $100, you should keep the receipt showing the food and drink as well as the second receipt showing the $100 charge to your credit card. On the receipt, you should write: “Harry Smith, client, $100 (my half), maintain relationship.”

Note in our example that you did not have to pay for Harry’s dinner to deduct your dinner. You simply had to have an ordinary business reason for dinner with Harry. But both Dutch-treat and business meals where you pick up the tab for all face the Sutter rule.

Understanding the Sutter rule, identifying its triggers, and building a defense are crucial steps in managing your business meal deductions. Please feel free to call me on my direct line if you would like to discuss the Sutter rule.

• By Leon Clinton
• September 15, 2023

The individual coverage health reimbursement arrangement (ICHRA) allows businesses of all sizes, from large corporations to small businesses like yours, to reimburse employees for their personally purchased health insurance expenses.

The ICHRA is particularly beneficial for businesses with fewer than 50 employees because they are not obligated to provide health benefits under the Affordable Care Act. But when they do provide coverage, they expose themselves to a $100-per-day penalty for each employee. The ICHRA avoids this penalty.

The ICHRA offers several benefits to the employer, including

• the flexibility to choose the reimbursement limits,
• the ability to offer different plans to different employees based on classifications, and
• the ability to offer a cafeteria plan that allows employees to pay pre-tax for additional insurance coverage above what the ICHRA reimburses.

There are restrictions on who can participate. Employees eligible for an ICHRA are those enrolled in individual Exchange coverage, other individual insurance coverage, or Medicare. More-than-2-percent S corporation shareholders, their family members, and Form 1040, Schedule C taxpayers are not eligible to participate in an ICHRA.

If you plan to offer an ICHRA, you need to provide your employees with at least a 90-day notice before the beginning of the plan year. We encourage you to start planning now if you wish to offer an ICHRA on January 1, 2024, as this gives you a target date for the ICHRA notice of October 2, 2023.

As your trusted advisor, I am here to guide you through these changes and help you make the best decision for your business. I recommend we discuss whether the ICHRA could be a suitable option for your organization. If this sounds good, please call me on my direct line at 408-778-9651, and we’ll set up a meeting.

• By Leon Clinton
• September 12, 2023