Tax

You may not have thought of this, but taking a cruise ship to Mexico for a business meeting is acceptable as a deductible form of transportation.

Because Mexico is in the tax law–defined North American area, the law says that you need no stronger business reason to deduct your trip to Mexico than you need to deduct a trip to Chicago, Illinois, or Scottsdale, Arizona.

Less-than-one-week rule. If your trip is outside the 50 states but inside the North American area, and if the trip is for seven or fewer days (excluding the day of departure), then the law allows you to deduct the entire cost of travel to and from this business destination. Mexico fits this location rule.

Cruise ship transportation. The law authorizes any type of transportation to and from your travel destination, so long as it is not lavish or extravagant. The cruise ship cost is not a lavish or extravagant expense, as the law precludes this possibility by placing luxury water limits on this type of travel.

The daily luxury water limit is twice the highest federal per diem rate allowable at the time of your travel.

Example. Say you are going to travel by cruise ship during September 2022. The $433 maximum federal per diem rate for September 2022 comes from Nantucket, Massachusetts. Your daily luxury-water limit is $866 (2 x $433).

Thus, for you and your wife, two business travelers, the daily limit is $1,732. On a six-night cruise, that’s a cruise-ship cost ceiling of $10,392. If you spend $12,000, your deduction is limited to $10,392. If you spend $8,000, you deduct $8,000.

If you would like to discuss how you can use a cruise ship for business travel to a North American location, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 23, 2022

We absolutely, positively don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible.

But with knowledge, it’s avoidable.

Let’s eliminate commuting and make those trips from your home to your office deductible.

The law gives you two ways to eliminate commuting from your home to your outside-the-home office:

Make a temporary business stop on the way to the office.
Establish a home office that qualifies as a principal office.

Temporary Business Stop

The temporary business stop strategy is designed for the home that contains no home office. In this case, the stop turns a commute from your home to the office into a deductible business trip.

Example 1. Sam, a property and casualty insurance agent, does not claim a home-office deduction. He has to photograph a property before the insurance company will issue the policy. Sam’s trip from his home to the property and from the property to his downtown office produces business miles.

Example 2. Sam, the guy from Example 1, drives from his home to his downtown office. That’s a non-deductible commute.

Caution. If your only office is in your home and that office does not qualify as a principal office, then the IRS labels your trip from your home to a business stop the “first stop,” and that trip is a non-deductible commute.

Example 3. You have an office inside your home that does not qualify as a principal office, and you have no office outside the home. You drive 17 miles to a business stop and then return home. Because your only office is inside the home and it does not qualify as a principal office, your 34-mile round trip is a personal non-deductible commute under the IRS’s first and last stop rule.

Home-Office Solution

If you have both a downtown office and a principal office inside your home, you have no commuting mileage from your home to your downtown office. You don’t need to work in your home before you leave for the office. You simply need an office in the home that qualifies under the law as a principal office.

Example 4. You have an administrative office in your home that qualifies as a principal office. You drive 11 miles from your home to your downtown office, work all day in your downtown office, and then drive the 11 miles from your downtown office back home. This 22-mile round trip to and from your downtown office is deductible as business mileage.

If you would like to discuss business mileage, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 20, 2022

The tax-code-defined vacation home rules come into play when you have both rental and personal use of a home. Thus, you can have tax-code-defined vacation homes in the city, in the suburbs, and in recreation areas.

If you have no combined rental and personal use of the home, the rules are easy. The property is one of the following:

• Principal residence
• Second home
• Rental property

But when you have both rental and personal use of the home, your tax life gets more complicated because you have entered the tax code’s vacation home section. In this situation, the property in a more complicated way is one of the following:

• Principal residence
• Second home
• Rental property

If it’s a principal residence, then the $250,000/$500,000 home sale exclusion is available when you sell.

If it’s simply a second home, you can’t use the exclusion and you pay taxes at capital gains rates—and you may suffer the NIIT as well.

If it’s a rental, you face the capital gains rules, NIIT, unrecaptured Section 1250 gain taxes, and release of some (if grouped) or all (if not grouped) passive activity suspended losses.

When you have rental use after 2008 and then convert the rental to your principal residence, you must use a rental/residence fraction to determine how you will be taxed.

As you can see, the rules in this area can get complicated. If you would like to discuss the rules, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 16, 2022