Deducting a trip to the hills. It's among tax breaks for small business
Boston — Every year, Paul N. Strassels and his wife visit the Greenbrier, a posh resort in the hills of West Virginia. They are not there on vacation. Mr. Strassels, a former tax-law specialist for the Internal Revenue Service, now uses his expertise to write articles and books on personal finance and tax matters. His most recent book is ``Strassels' Tax Savers'' (Times Books, New York, $15.95). He also travels around the country giving lectures and seminars.
Mr. Strassels has set up a corporation to handle the financial and tax aspects of this full-time business. He is its chairman. His wife, who arranges lecture dates and fees, makes travel and hotel arrangements, and helps keep the company's books, is the firm's president.
The trip to the Greenbrier, then, is the company's annual meeting, and it is fully tax-deductible as a business expense. As long as he and his wife set aside enough time to discuss business, Mr. Strassels says, he has had no trouble justifying the expense to IRS auditors.
``And I get audited every year,'' he laughs.
The Strasselses' selection of an annual-meeting location is one example of ways a small or family-run business can legitimately be used to obtain some of the tax-deductible perks and pleasures enjoyed by big business. A second car that would be needed for the family anyway can be owned or leased by the corporation; a portion of the home can be depreciated and furniture can be deducted as business expenses; or medical insurance can be purchased and fully deducted by the business.
Before you get too excited about the prospect of all these deductions, though, be aware of some strict rules the IRS has about the definition of a business, what an employee is, and how the IRS distinguishes between a business and a hobby.
``There is no distinction here between the large and small business,'' Mr. Strassels says. ``What is legal for IBM, General Motors, and AT&T is also legal for the small business you own.''
Still, he says, you have to make sure the venture is a business. First, this means making a profit, or trying to make a profit.
``You have to have a profit objective,'' says Jeff A. Schnepper, a lawyer and professor of accounting and finance at the American College in Bryn Mawr, Pa., and author of ``How to Pay Zero Taxes'' (Addison-Wesley Publishing Company, Reading, Mass., $8.95). In general, he says, this means showing a profit in two out of five years, though if you don't reach this goal and can show a concerted effort to make it, the IRS may still grant you business status.
``Make it look, smell, and taste like a business,'' Mr. Schnepper says. Get stationery and business cards printed, open a separate checking account, and have bills and receipts made up with your company's name on them, he counsels.
Having done all this and making a clear effort to be a profitable operation, you can now begin to think about getting the IRS to help.
First, there's the matter of insurance. If you left a major corporation to start your own business, you may have left behind a generous package of life and health insurance, where you paid very little, if any, of the premiums.
If you were to buy this insurance yourself, the life insurance premiums would not be deductible at all and the medical premiums would be deductible only to the extent they and other medical expenses you paid exceeded 5 percent of your gross income. Having your business buy the insurance, though, means the premiums for both are fully deductible.
A car is another of those usually essential items that may be financed with Uncle Sam's help. If you worked for a corporation and needed two cars, you might have to worry about paying for both cars yourself, unless one was clearly a company-owned car. In your own business, though, the second car can belong to the company, or the firm can lease it from you.
``I own the car and lease it to the company,'' Mr. Strassels says. ``The company pays rent on it and I get the income, and I also get the depreciation.''
``But I make sure that car is used 100 percent for business,'' he cautions. ``Another car is for personal use.''
Sometimes, says Stephen J. Kesh, a tax partner and national director of small business at KMG Main Hurdman, an accounting firm, you have to use some of the company's equipment for personal use, or vice versa. The ``family'' car may be in the repair shop, or you may want to take the rest of the family to the country club. Because the club is primarily used for business, you legitimately pay the dues as a business expense.
But for these personal uses, Mr. Kesh says, make sure you reimburse the company. By the same token, if your company uses family-owned property, have the company reimburse you. All these reimbursements, he points out, will help you show the IRS you are keeping things separate.
There's another advantage to having a family business, says Donald Ercole, a tax partner at Arthur Young & Co., the accounting firm: your family. Parents who want their children to ``earn'' some of their allowance often have trouble finding meaningful chores for them to do around the house. Emptying wastebaskets can become boring even for an eight-year-old.
But if the children can do some actual work for the business -- making copies, filing records, packing boxes, or cleaning -- you can pay them a market-based wage. While some of this money can go into their pockets, much of it can also go into college savings, and all under the heading of business expense.
Then, if the children and your spouse are employees of the firm, all of you can, like Mr. and Mrs. Strassels, combine business trips and family vacations at less-than-hardship locations.