The Committee Advising Superior Hobbies (CASH for short) has had a busy week, what with so many possible changes in the air and nothing tangible to work with from our dear congressional representatives. So, while we anxiously await the text of what was supposedly agreed to yesterday, I thought I would share some of the very best tax advise the committee can offer.
- Documentation Wins
This is far and away the most important thing to remember. Quick story (hopefully but you know how I can run on and on). A few years ago we had a client who owned several restaurants in Portland. The owners were planning on a trip to Europe. Naturally, the subject of tax deductibility came up. Can the business pay for the trip?
The answer: It depends.
If you are serious about this being a business trip then by all means I think it can be defended. But it won’t be easy because you will have to work. We had them hold a board meeting to discuss the positioning of the restaurants and how to possibly give them a more authentic European feel. While they could get some of the information from books, there is nothing better than hands-on real-world experience. The Company agreed to send 4 key employees to Europe for 2 weeks. They were to explore at least two different restaurants a day and make notes of ambiance, food, menu, etc.
When they returned, they needed to write a report for the board and present their findings. The board would then see how they could incorporate those discoveries into their restaurants. Because they wanted to make sure that the changes would not potentially put them at risk they also invited their corporate counsel to the meeting – and the accountants were invited to cover costs and investment recovery information.
They followed the rules and the company reimbursed the key employees for their trip. And 2 accountants and 2 attorneys got an excellent meal and a great presentation on how the restaurants could change to become even more authentic.
Yes, having the receipt for the new mixer is important to prove you purchased it but having the right documentation to back up a big decision like a business trip is even more important.
2. The right business structure Wins
A couple came to me wanting to take a trip around the world. They inherited over $1.0 Million from a grandparent. They wanted to be able to write-off the trip if at all possible. It is possible, but there are gotcha’s for the unwary.
It is important to realize that LLC’s and S Corporations get dragged into the Hobby Loss rules, not just sole proprietorships or rentals. What isn’t subject to IRC 183 is a plain old boring C Corporation.
We created a plan to incorporate a business structured as a C Corporation with an initial capital contribution of about $200,000. It hired two employees (yes the couple) who were hired to film a documentary about 20 somethings who inherited a bunch of money and were traveling around the world. The Company purchased all the camera equipment and even paid them a salary for doing all this work.
When they got back they edited the film and actually were able to sell it to various outlets for stock footage for about $100,000. After about 3 years, the Company was liquidated. The shareholders had a $100,000 loss and priceless memories. That $100,000 loss was a capital loss – which was used to offset a $150,000 capital gain from the sale of stock from an investment from one of their inherited investments.
3. Pigs get fat
I know, the good tax planning stories are not nearly as much fun as the horrible “no planning at all” stories. But boring is good. The goal is to grow fat, lazy and content, not be led to the slaughterhouse because you gorged. Paying some tax always beats paying no tax and getting caught – and subsequently paying penalties and interest and possibly worse.
So, the committee encourages you to seek out competent and thoughtful tax planners. Make sure they are asking lots of questions and are advising you on the hard work you have to do to reduce your taxes – because it ain’t easy and it ain’t free. And if you are looking for a solid, creative and effective tax advisor, contact me and I will be happy to refer you to one in my network.
Have a great day.
Accounting Clarity 