Month: November 2023

Say you are going to travel from your home in Washington, D.C., to San Francisco.

Will the tax law allow you to travel to San Francisco by car, train, plane, or boat, your choice?

Answer. Yes. But special rules apply. You need to know these rules to guarantee your deductions.

Travel by Car

The tax code does not dictate the fastest or cheapest form of travel. Therefore, you can travel for business by automobile or other vehicle from Washington, D.C., to San Francisco.

When you travel by automobile, your direct route expenses for meals, lodging, and other costs of sustaining life on the road are deductible in addition to the vehicle expenses.

Side trips, say to the Grand Canyon, count as personal days and miles. You can combine business and pleasure, but you can deduct only the business part.

Business Day

You might ask: how many miles do I have to drive in my direct route to qualify the day as a business day? There’s no guidance here. This is a facts and circumstances test. Here are some facts and circumstances.

You need to prove that your days traveling in the direct route to San Francisco were business days. In general, this requires passing the primary purpose test, where time spent is an important factor.

Example. On day three of the trip, you spend one hour packing and unpacking and five hours driving 300 miles in a direct route from Washington, D.C., to San Francisco. Day three of this trip is a business day. Your miles are business miles. In addition, you deduct your meals, lodging, and other expenses of sustaining life for the day.

What If You Bring Your Family?

When you travel by car, you spend nothing extra to have the family in the car.

But family presence makes the trip smell more like a vacation than a business trip. This gives you another good reason to make sure your records are in good shape.

Example. You stop at a hotel and the single rate is $209 a night and the two-person rate is $229. You are limited to the $209 rate—what it would have cost you if you traveled alone.

With meals, your business meals are deductible. Meals for your other family members are non-deductible personal meals.

Travel by Train

Your travel by train faces no special rules other than the reasonably direct route.

You can deduct the cost of the tickets if you buy sleeping rooms or simply travel by first class or coach.

Example. You travel for business from Washington, D.C., to San Francisco by train. You buy a sleeping room on the train for the trip. Your Amtrak travel fare is $3,000, and it is fully deductible.

Travel by Plane

By plane, you can travel in coach, in first class, by charter, or in your own aircraft.

No special rules apply to commercial travel. You simply deduct the cost of getting to your business destination by a reasonably direct route.

Example. Say that on your trip from Washington, D.C., to San Francisco, you take a side trip to Kansas City. You figure your deduction based on the direct route airfare and deduct that. Say you spent $900 on the trip that included Kansas City. If the direct route fare to San Francisco was $500, you deduct $500, and $400 is the cost of your personal side trip.

Travel by Boat

Special rules apply to travel by boat. For this purpose, your boat is considered a cruise ship, and any vessel that sails is a cruise ship.

If you travel by cruise ship from Washington, D.C., to San Francisco, you may not deduct more than the daily luxury boat limits, which for 2023 are as follows:

• $1,128 a day from 1/1 to 3/31
• $996 a day from 4/1 to 4/30
• $796 a day from 5/1 to 5/31
• $1,076 a day from 6/1 to 9/30
• $776 a day from 10/1 to 10/31
• $734 a day from 11/1 to 11/30
• $1,128 a day from 12/1 to 12/31

Example. You travel from Washington, D.C., to San Francisco in November by cruise ship. It takes 10 days. The law limits your cruise ship deduction to a maximum of $7,340 per business traveler ($734 x 10).

If you want to talk to me about your business travel, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 22, 2023

Here’s an easy question: Do you need more 2023 tax deductions? If the answer is yes, continue reading.

Next easy question: Do you need a replacement business vehicle?

If so, you can simultaneously solve or mitigate the first problem (needing more deductions) and the second problem (needing a replacement vehicle) if you can get your replacement vehicle in service on or before December 31, 2023. Don’t procrastinate.

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2023. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.

Now that you have the basics, let’s get to the tax deductions.

1. Buy a New or Used SUV, Crossover Vehicle, or Van

Let’s say that on or before December 31, 2023, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four benefits:

1. Bonus depreciation of 80 percent
2. Section 179 expensing of up to $28,900
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

Example. You buy a $100,000 SUV with a GVWR of 6,080 pounds, which you will use 90 percent for business use. Your write-off can look like this:

• $28,900 in Section 179 expensing
• $48,880 in bonus depreciation
• $2,440 in 20 percent MACRS depreciation, or $611 if the mid-quarter convention applies

So the 2023 write-off on this $90,000 (90 percent business use) SUV can be as high as $80,220 ($28,900 + $48,880 + $2,440).

2. Buy a New or Used Pickup

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2023, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of up to 80 percent
2. Section 179 expensing of up to $1,160,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

• a GVWR of more than 6,000 pounds, and
• a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Example. You pay $55,000 for a qualifying pickup truck that you use 91 percent for business. You use Section 179 to write off your entire business cost of $50,050 ($55,000 x 91 percent).

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for expensing of up to the $28,900 SUV expensing limit and 80 percent bonus depreciation.

3. Buy an Electric Vehicle

If you purchase an all-electric vehicle or a plug-in hybrid electric vehicle, you might qualify for a tax credit of up to $7,500. You take the credit first, and then follow the rules that apply to the vehicle you purchased.

If you would like to discuss these vehicle strategies and more, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 20, 2023

When you leave the U.S. to live in another country, you essentially have two choices from a tax perspective, both of which can cost you a pretty penny.

First, you can simply leave the country and take up residence elsewhere. But if you choose this option, beware: the U.S. continues to tax you on your worldwide income, no matter where you earn it or derive it from.

Second, you can formally renounce your American citizenship or long-term residency and expatriate. This option is also not without its potential financial pitfalls, because the U.S. may impose an “exit tax” on you before you leave.

The rules behind this exit tax are complex, but whether you will be required to pay it depends largely on whether you are classified for tax purposes as a “covered expatriate.”

Are You a Covered Expatriate?

American citizens and long-term residents can, of course, voluntarily give up their status as citizens or residents and expatriate.

Once you give up your status, the IRS will consider you either an “expatriate” or a “covered expatriate.” If you’re simply an expatriate, the exit tax will not apply, and you’re good to go. There’s really nothing more to it. You still have U.S. assets, and you have to pay U.S. taxes on those assets.

But if the tax law deems you a covered expatriate, you have to pay the exit tax.

In most cases, a covered expatriate is a person who meets one of the following three tests:

1. Income tax test. You’ll be deemed a covered expatriate if you paid an average of $190,000 in income tax in the five years before you expatriate.
2. Net worth test. You’re also a covered expatriate if your net worth is $2,000,000 or more on the date you give up your U.S. citizenship or long-term residency.
3. Compliance test. Finally, if you fail to certify, under penalty of perjury, that you met all your tax obligations for the five years preceding your expatriation, you’re a covered expatriate.

What Is the Exit Tax?

Under the exit tax regime, the government requires you to pay income taxes on the unrealized gain in all your property, subject to a few minor exceptions, as if you sold that property the day before your departure.

In other words, the law deems that you sold all your property at fair market value on the date of your departure, even though you did not. You then pay taxes on this imaginary gain.

Mercifully, under today’s law, you can exit in 2023 and exclude up to $821,000 of gain (adjusted annually for inflation).

You Can Pay Later, But…

In the mark-to-market deemed sale of your assets, you didn’t collect any cash, so you might be short of the cash needed to pay your taxes. The U.S. government might help you by allowing you to pay later if you can post “adequate” security as collateral for the debt, such as a bond. The following rules also apply to this payment deferral election:

• Once you make the election, it’s irrevocable.
• You can elect to defer tax on some pieces of property but not others.
• You must waive any right under any U.S. treaty that would otherwise prevent collection of the taxes.
• You pay interest on any taxes you defer.
• You or your estate must pay the expatriate taxes due when you dispose of the property or die.

Easing the Pain

To ease the pain slightly, eligible deferred compensation items, such as IRAs, pensions, and stock option plans, are not part of the deemed sale, and thus are not taxed at the time of expatriation.

Rather, the government makes the payor withhold 30 percent on any taxable payment made to a covered expatriate.

Note that to qualify for this temporary relief, the deferred compensation must be “eligible.” That means

• the payor of the deferred compensation must be a U.S. entity or a foreign entity that has agreed to submit to U.S. withholding and other requirements;
• you tell the payor that you are no longer an American citizen; and
• you permanently waive any claims you might otherwise have had to the reduction or elimination of the tax under a tax treaty.

I’m a Covered Expatriate—What Can I Do?

Though the situation is certainly a sticky wicket, all hope may not be lost.

According to the net worth test, you are a covered expatriate only if your net worth is $2,000,000 or more. With some thoughtful planning, you might structure your assets to avoid this classification.

Depending on the circumstances, direct gifting before expatriation might be one solution. Another solution might be through the creation of trusts before the big day.

You need to exercise extreme care in any such effort. It’s best to use a tax professional who understands expatriation. If you want my help, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 18, 2023