The Tax Cuts and Jobs Act (TCJA) may have interfered in some of your summer plans by scaling back or eliminating certain tax breaks. But individuals and small business owners in Maine still have lots of opportunities to save on their taxes. Check out these six ideas for this summer.
Host an Employee Outing
Under the old law, a business could, with certain exceptions, deduct 50% of the cost of its entertainment and meal expenses. For example, if you held a 4th of July barbecue or company picnic at Sebago Lake for your employees, you could write off 100% of the cost. The TCJA does not change that.
There has, however, always been a catch to use this tax break: You must invite the entire staff. You can not restrict the gathering to just higher-ups or one group of employees. The deduction won’t be jeopardized if you invite a few friends or family members, but those costs cannot be written off.
Combine Business Travel with Pleasure
Owners of small businesses can often deduct the cost of business travel — such as airfare and lodging — as long as the primary purpose of the trip is related to the business. If you add a few extra vacation days, you can usually still write off the business-related expenses, including the entire cost of a round-trip plane ticket and hotel expenses and half of the meal expenses for the business days. But to pass the primary business purpose text, the number of business days vs. personal days is critical.
If you do travel for business, you will need to remember that the TCJA eliminates deductions for most business-related entertainment expenses, including costs associated with the facilities used for these activities. For instance, tickets to sporting events, sailing or golf outings, and theater tickets for events that immediately follow or precede a substantial business meeting are no longer deductible.
50% of your meal expenses while away on business can still be deducted, but the precise rules for deducting meals with your business contacts aren’t clear yet. You can expect detailed guidance to be issued by the IRS sometime this year. Until that arrives, keep detailed records of your spending to take advantage of any deductions that are available.
Navigate a Deduction for a Boat
Under the Tax Cuts and Jobs Act, the mortgage interest deduction for 2018 through 2025 for one or two qualified residences is limited to interest paid on the first $750,000 of acquisition debt. Note, prior home acquisition debts are grandfathered under the prior law.
This limit on home acquisition debt is down from $1 million, and the deduction for interest on the first $100,000 of home equity debt is generally repeated (unless the home equity debt is used to buy, build, or substantially improve the home secured by the debt, in which case it can be treated as acquisition debt). Depending on the size of your mortgage(s), you could potentially benefit from an obscure tax break for boats.
In this situation, a “qualified residence” can be your primary residence and one other home. An IRS definition of a qualified residence includes a boat that has sleeping, cooking, and toilet facilities. Thus, your new boat should qualify if it has a galley, sleeping quarters, and a head. Remember to stay within the current home acquisition debt limit of $750,000 while you’re shopping!
Schedule Time at Your Vacation Home
If you rent out your vacation home part of the year, you can often deduct related expenses against the rental income. And if your personal use for the year doesn’t exceed the greater of 14 days or 10% of the rental time, you might even be able to claim a rental loss.
As the year progresses, be aware of these personal use tests. You might want to forego some personal vacation or rent the place out a little longer if it helps you tax-wise. And also note, spending a day cleaning the vacation home or making repairs doesn’t count as a personal use day — even if the family tags along.
Camp Out for Dependent Care Credits
You may be eligible for a dependent care credit if you pay for childcare costs when you’re working and the kids are out of school. The credit is generally equal to 20% of the first $3,000 of qualified expenses for one child or 20% of up to $6,000 for two or more children. In other words, the maximum credit is usually $600 for one child or $1,200 for two or more children.
You can’t claim credit for an overnight summer camp, but the list of qualified expenses does include the cost of day camps where your child participates in recreational activities such as swimming or hiking. The credit also includes costs related to specialty camps for academics, athletics, or other interests.
Hire Your Kids
If you have a teenager or 20-something who is off from school, consider hiring them this summer. Assuming the amount is reasonable for the services performed, you can also claim a business deduction for the wages—and they’ll have both a meaningful and financially rewarding activity.
They will probably earn less than the standard deduction for a dependent—increased in the TCJA to the greater of $1,050 or $350 plus earned income limited to $12,000. Given that situation, they probably won’t owe any federal income tax on the wages. Children can also avoid withholding by claiming an exemption when filing their W-4.
And, if you run your business as:
- A sole proprietorship,
- A limited liability company (LLC) treated as a sole proprietorship for tax purposes,
- A husband-wife partnership, or
- A husband-wife LLC treated as a partnership for tax purposes,
wages paid to an under-age-18 child or grandchild are exempt from Social Security and Medicare taxes. A similar exemption for FUTA tax applies to wages paid to a child or grandchild under age 21.
Hot Planning Strategies
Would any of these tax strategies work for you or your business? There are still some tax-saving opportunities despite any complications the new tax law may have created. Speak with your tax advisor for more information on these strategies and to discuss other ideas that may be relevant to your personal or business tax situation.