This page summarizes the various tax forms that business owners should know about to ensure they can stay on top of their federal and state taxes as they grow.
Why is Real Estate Such a Great Investment?
Five Things to Know About Employing Your Spouse
Are you thinking about hiring your spouse to work as an employee in your business? This can save you big on taxes. The savings can be particularly great if you are a sole proprietor or have a single-member LLC taxed as a sole proprietorship or as a partnership (as long as your spouse is not a partner).
How to Get a Business Deduction For Your Vacation Home
Have you ever wondered if you could get a business deduction for your vacation home or condo? This post is for you!
Here’s good news: the properly used business vacation home or condo does not suffer from:
the vacation-home rules,
the passive-loss rules, or
the entertainment-facility rules.
In these days of COVID-19, you may have solid reasons to use your vacation home or condo for two purposes only:
personal pleasure, and
business lodging.
How Business Use Escapes the Dreaded Vacation-Home Rules
Do you use your business vacation home or condo solely for business lodging?
If so, you escape the vacation-home rules and may deduct your business-lodging costs. The law is very clear on this. The vacation-home section of the tax law, Section 280A(f)(4), states that nothing in the vacation-home rules shall disallow any business deduction for business travel.
Example 1. You use your beach home for overnight business lodging 37 times during the year. You have no personal or rental use of the beach home. Your beach home is a business asset and deductible as such.
One exception to this business-lodging rule. The law does not grant the business-lodging exception to landlords who rent dwelling units. If you have apartment buildings or other residential rentals, staying at your vacation home or condo to look after your rentals does not let you escape the unfavorable vacation-home rules.
Example 2. Fred uses his beach home for 70 nights of business lodging and 30 nights of personal lodging. He has a 70 percent business-use beach home and a 30 percent personal-use beach home.
Planning note. Fred has his tax home where he regularly works, in New Jersey. He travels to his South Carolina beach home location to conduct business in South Carolina. His business activity is what makes his overnight stays at the beach home business stays.
How Rental Use Changes the Landscape
If you rent the vacation home or condo, you really change the tax picture. For example, if you use the vacation home or condo for personal, business, and rental purposes, you could trigger
vacation-home rules that require a split between the rental- and personal-use deductions;
vacation-home rules that classify the rental part of your property as either a personal residence or a rental property;
loss of tax-favored hotel status for qualified rentals; and
passive-loss rules that defer current tax benefits to future years.
Looking at this list, you might ask, “How can I avoid all these additional considerations and still rent out the vacation home or condo?” Answer: rent for 14 days or less. Technically, that works.
Build Proof
In addition to keeping receipts for the business condo’s expenses and improvements, you need to prove how many nights you slept in the vacation home or condo for both business and personal purposes.
Notations on your business and personal calendars are helpful but not conclusive. For your business activities, you want proof of why you had to be at the beach home.
Example 3. Sara sells real estate at both her tax and beach home locations. She tracks her prospects and activities at each location.
Do as Sara does. Also, keep your eyes open for third-party and other corroborative evidence of use. Do you have emails, letters, and other proof of why you had to travel to the beach home? If so, print the emails and save them along with the written letters in your tax file.
Do you have evidence of being in the area, such as gas, grocery, and dining receipts?
Proving use of your business condo is easy and takes very little time. Documentation is essential. Don’t pass over this critical step.
Ownership
Do you own the vacation home or condo in your personal name?
If so, and you operate as a:
proprietorship or LLC taxed as a proprietorship, no problem. Simply treat the business percentage as business expenses on your Schedule C.
corporation, submit an expense report to the corporation to obtain reimbursement. See TCJA Creates New Reasons for Accountable Plan Expense Reimbursements for how this works.
Why not use a rental arrangement with your corporation? Because you are an employee who likely uses the vacation home or condo for more than 14 days of personal use, you want to avoid a rental arrangement that could cost you your depreciation, repairs, and similar expenses.
The reimbursement method works and creates no complications. Use it.
If the corporation owns the vacation home or condo, you should reimburse the corporation for your personal use so as to avoid the monies showing on your W-2 and increasing your taxes
Want to make rental us of your vacation home
Let’s set up a time to talk here.
~ Chad Pavel, CPA
Is The EIDL Advance Taxable?
Did you receive an EIDL advance when you applied for your SBA EIDL loan? This post is for you!
Here is a hypothetical question from an EIDL recipient…
I have an S corporation with eight employees. I applied for and got an Economic Injury Disaster Loan (EIDL) advance of $8,000 from the Small Business Administration (SBA). I didn’t get a Paycheck Protection Program (PPP) loan.
Is this taxable? Does this impact my tax deductions?
Answer
We don’t have any official guidance on these issues related to the EIDL advance payment. But we’ll give you our opinion based on what we see in the law.
EIDL Advance
The CARES Act allowed the SBA to provide up to $10,000 as an emergency advance that you don’t have to pay back to the government, regardless of whether you get or reject an EIDL. You apply for the EIDL emergency advance when you apply for an EIDL.
The SBA decided to limit the EIDL emergency advance to $1,000 per employee, up to a maximum of $10,000.1
Income
You have income for federal tax purposes if you have an undeniable accession to wealth (which you clearly realized with the EIDL emergency advance) and over which you have complete dominion (it’s your money).2
Since there is no obligation to repay your EIDL advance, it generally is taxable income to you.
But there is an administrative exception, called the general welfare exception, which allows you to exclude from your taxable income some payments made by governmental units under a social benefit program.3
The IRS usually makes determinations on specific types of general welfare payments in a revenue ruling. And here’s good news. The IRS has consistently held that payments made to taxpayers due to disasters fall under the general welfare exception and aren’t taxable.4
Because the COVID-19 pandemic is a nationally declared disaster, it’s likely the general welfare exception will come into play and make the EIDL advance not taxable to you.
Of course, we would like the IRS to put its official stamp on a general welfare exception to the EIDL advance. And we would like this specific guidance soon.
Deductions
In Q&A: Are PPP Loan Forgiveness Expenses Deductible?, we explained that the IRS concluded expenses that create PPP loan forgiveness are non-deductible for two reasons:5
The payments are allocable to tax-exempt income, making the expenses paid with the PPP money non-deductible.
Deductions for otherwise deductible payments are non-deductible if you receive a reimbursement for those payments.
If the EIDL advance is taxable, then the above wouldn’t apply, and you would deduct all your otherwise allowable business expenses.
If the EIDL advance is non-taxable (much preferred), we don’t think any of your business expenses paid with the EIDL advance money become non-deductible under the PPP loan forgiveness guidance because:
You don’t need to pay specific expenses to get an EIDL advance, unlike PPP loan forgiveness, which is tied to payment of business expenses with a specific formula.
There is no requirement to use the EIDL advance for deductible business expenses; for example, the CARES Act allows you to use the EIDL advance to repay obligations you cannot otherwise pay due to revenue losses.6
Once again, we hope the IRS will provide specific guidance on this soon.
Takeaways
Millions of small-business owners like yourself have received up to $10,000 in EIDL emergency advance funds that they don’t have to repay.
Here are our thoughts on the EIDL emergency advance tax treatment:
EIDL advances are likely non-taxable to you under the general welfare exception
You likely don’t have to reduce your deductible business expenses by the EIDL advance amount.
Just to reiterate—the IRS hasn’t given us any official guidance on the tax impacts of the EIDL advance. Let’s hope the IRS does that sooner rather than later.
Want to walk through these considerations?
Let’s set up a time to talk here.
~ Chad Pavel, CPA
Disclaimer: The bill has recently passed the Senate and we are learning more every single hour about how this bill will be implemented and the interpretations of each component. For the most up to date information and FREE Analysis based on your situation, set up a time here.