Author: Leon Clinton

The distinction between repair expenses and improvement costs can impact your tax benefits.

The tax law categorizes repair and improvement costs differently. Repair expenses are generally more beneficial for tax purposes, providing greater after-tax cash value than the depreciation deductions you would get from improvements or additions.

One key reason for this is recapture taxes. When you depreciate a building and then sell it at a profit, a percentage (up to 25 percent) of the straight-line depreciation you claimed on the building is taxed as “unrecaptured Section 1250 gain.” This effectively transforms what you might have considered deductions into something resembling a profit-sharing loan from the IRS, which is repayable upon sale.

Further, depreciation deductions come in small parts over long durations—27.5 years for residential rental properties and 39 years for commercial properties. In comparison, repair expenses can provide immediate tax benefits, depending on how the passive loss rules affect you.

Example. If you spent $30,000 on repairs to your business building and are in the 28 percent tax bracket, you could save $8,400. On the other hand, if you classified the same $30,000 as a capital expenditure (improvement), you would deduct depreciation and save approximately $215 a year.

And this $215 per year is not really $215 a year because it does not consider

• the time value of money, or
• the devastating effect of recapture taxes.

If you would like my help distinguishing between repairs and improvements, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 8, 2023

If you own your own business and operate as a proprietorship or partnership (wherein your spouse is not a partner), one of the smartest tax moves you can make is hiring your spouse to work as your employee.

But the tax savings may be a mirage if you don’t pay your spouse the right way. And the arrangement is subject to attack by the IRS if your spouse is not a bona fide employee.

Here are four things you should know before you hire your spouse that will maximize your savings and minimize the audit risk.

1. Pay benefits, not wages. The way to save on taxes is to pay your spouse using tax-free employee benefits, not taxable wages. Benefits such as health insurance are fully deductible by you as a business expense, but not taxable income for your spouse.

Also, if you pay your spouse only with tax-free fringe benefits, you need not pay payroll taxes, file employment tax returns, or file a W-2 for your spouse.

2. Establish a medical reimbursement arrangement. The most valuable fringe benefit you can provide your spouse-employee is reimbursement for health insurance and uninsured medical expenses. You can accomplish this through a 105-HRA plan if your spouse is your sole employee, or an Individual Coverage Health Reimbursement Arrangement (ICHRA) if you have multiple employees.

3. Provide benefits in addition to health coverage.There are many other tax-free fringe benefits you can provide your spouse in addition to health insurance, including education related to your business, up to $50,000 of life insurance, and de minimis fringes such as gifts.

4. Treat your spouse as a bona fide employee. For your arrangement to withstand IRS scrutiny, you must be able to prove that your spouse is your bona fide employee. You’ll have no problem if:

• you are the sole owner of your business,
• your spouse does real work under your direction and control and keeps a timesheet,
• you regularly pay your spouse’s medical and other reimbursable expenses from your separate business checking account, and
• your spouse’s compensation is reasonable for the work performed.

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

• By Leon Clinton
• August 9, 2023

As an owner of a corporation and an employee within that corporation, you may be eligible for a home-office deduction if

• you use the office in your home for the convenience of your employer corporation,
• you comply with the tax code rules for deducting a home office, and
• your corporation reimburses you, the corporate employee, for your home-office expenses.

It’s important to note that your home-office deduction opportunity changed with the Tax Cuts and Jobs Act, which discontinued employee business expenses as itemized deductions from 2018 to 2025. But your corporation can claim the deduction by reimbursing you for your home-office expenses.

Although not new, it’s also important to know that if you rent part of your residence to your employer corporation and use this rented space when working for the employer, you cannot deduct these home-office expenses.

You want your home office to qualify as a principal office, even when you have an office downtown. For this to happen, you need to

• use the home office exclusively and regularly for the corporate business,
• do almost all your administrative or management tasks at the home office, and
• use the home office for the convenience of the corporation, not for your personal convenience or comfort.

If your corporation doesn’t maintain an office outside your home office, it is clear that your home office is for the convenience of your employer corporation.

But when you have a downtown office, your use of the office in your home must be for the convenience of the corporation. Various reasons might justify using a home office, including preserving confidentiality, ensuring uninterrupted attention to business planning, or accommodating payables records, invoices, receipts, etc.

Additionally, the corporation should write you a letter mandating that you conduct your administrative or management tasks at home for the corporation’s convenience. This letter, written on corporate letterhead, should be kept in your corporate tax file.

If your home office qualifies as a principal office, there are numerous benefits, such as:

• You receive the employee business expense reimbursement as a tax-free fringe benefit.
• Your corporation can deduct the reimbursement as a business expense for office space.
• The home office’s principal-office status can eliminate personal-use commuting mileage, thereby increasing business use and deductions on the business vehicle.
• The home office can generate corporate business deductions from the business percentage of your personal home expenses.

Remember, tax planning is key, and this is just one of the many strategies we can explore to optimize your tax situation. Please call me on my direct line at 408-778-9651 if you have any questions.

• By Leon Clinton
• August 4, 2023