Author: Leon Clinton

If your children work in your business, consider giving them education fringe benefits. Doing this right creates

• tax deductions for the business, and
• tax-free fringe education benefits for the child.

You can accomplish this without a Section 127 plan when your child needs the education to do the job for your business or comply with a law or regulation.

In general, you can’t treat undergraduate degree programs as work-related education. If you pay for such programs outside of a Section 127 plan, you must treat the payments as taxable income to the child-employee.

But certain individual courses within a program may be evaluated separately, and certain courses, such as accounting courses for an employee-child with an accounting job, may qualify for tax-free working condition fringe benefit payments.

On the other hand, MBA programs can qualify as work-related education if they maintain or improve the employee’s skills for their current profession or business.

In addition to the possibilities above, if your child is age 21 or older, the Section 127 plan can offer up to $5,250 in tax-free education benefits.

Your ability to offer tax-free education benefits can be an excellent incentive for your employee-child and a cost-effective way to invest in your business’s future. Contact me at 408-778-9651 to discuss how we can assist you in establishing a tax-beneficial system.

• By Leon Clinton
• April 25, 2023

The current economic climate makes this a good time to focus on bad debt losses.

As an individual taxpayer, deducting bad debt losses has always been controversial with the IRS.

To claim the deduction, you must first establish that the loss was from a bona fide loan transaction that went wrong. So be alert.

• Avoid ill-advised moves, such as making a loan that turns out not to be a loan but a contribution to the capital of a business entity.
• Avoid the informal advance to a friend or relative that becomes an unintended gift.

As an individual taxpayer, you treat non-business bad debt losses as short-term capital losses, which fall under the annual limitation on net capital loss deductions of $3,000 ($1,500 if married, filing separately).

Should you have significant capital loss carryovers from last year’s stock and bond market adding to your loss deductions, you may have to wait until the non-business bad debt loss delivers any tax-saving results.

Establishing the existence of a bona fide debt is crucial in claiming a deductible bad debt loss, and you must use certain factors to prove this. You can use the Sixth Circuit’s 11-factor analysis to show that your loans are bona fide. Here are what we think are the most relevant from the 11 factors:

• Documents with loan descriptions look like loans.
• Loans should show a maturity date and repayment schedule.
• A fixed interest rate indicates a loan.
• Timely fixed-rate interest payments persuasively make the case that shareholder advances are loans.
• Purported loans made by shareholders strictly in proportion to their stock ownership interests indicate equity except when there is only one shareholder.

Remember, you want business bad debt losses. For this to happen, there must be a proximate relationship between your business and the loan for you to claim a business bad debt loss. The Supreme Court stated that to pass the proximate relationship test, you must have a dominant business motivation for making the loan.

In summary, it is essential to understand bad debt loss deductions and how they can impact your taxes. If you want to discuss bad debts, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 19, 2023

The $75 rule applies to certain business expenses where you do not need a receipt. But I emphasize that this rule does not apply to all tax deductions.

Many taxpayers mistakenly apply the $75 rule to all their tax deductions, which can result in a significant loss of deductions and penalties. I encourage you to know the $75 rule and its limitations to avoid potential negative consequences.

IRS Reg. Section 1.274-5(c)(2)(iii) contains the $75 rule, and Notice 95-50 provides a clear explanation of what it applies to. The rule applies to business travel expenses, vehicle expenses, and gifts that cost less than $75. But remember that the $25 limit on deductions for business gifts applies, meaning the practical limit is $25.

It’s worth noting that your bank and credit card statements do not provide sufficient proof of expenses for tax purposes. You need to have both the receipt (proof of what you purchased) and the canceled check or credit card statement (proof of payment) to substantiate the expenditure.

While the $75 rule may allow you to avoid having a receipt for some expenses, it is crucial to document all your expenses properly. To document a $60 meal consumed during deductible business travel with or without a receipt, for example, you need to prove the amount spent, the date of the meal, and the name and location of the restaurant.

While you don’t need a receipt for the $60 travel meal, your documentation life is easy with a receipt.

We encourage you to keep all your receipts for tax purposes, as they often take less time to keep track of and are better evidence in the event of an IRS audit.

If you want to discuss the $75 rule, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 12, 2023