The fact that your personal home is not your tax home is one income tax issue.

Here’s another: business travel is different from business transportation.

Your tax deductions, tax strategies, and tax records hinge on the following federal income tax–defined terms:

1. Personal home
2. Tax home
3. Business travel
4. Business transportation

I know you don’t have an issue with your work deductions at the moment, but I want to make sure you are aware of what could happen if you moved your business location or personal home.

Meanings

Five Good Things to Know

1. Have your personal home within 50 miles of your tax home.
2. When you have your personal home within 50 miles of your tax home, claim the home-office deduction under the administrative office rules so you can eliminate commuting to your outside-the-home office.
3. Deduct overnight business travel when you travel on business outside the area of your tax home.
4. If you have more than one business, the business on which you spend the most time and make the most money is the principal business. It’s the location of your tax home. Overnight travel outside the tax-home area of the principal business to a secondary business is deductible. For example, if you have your principal office in Worcester, Massachusetts, you can deduct your overnight travel to your second business in New York City.
5. If you have one business with multiple offices in different cities, the office where you spend the most time, do the most important things, and make the most money is your tax home. When you travel away from this office overnight to a secondary office, you are in business travel status.

If you have questions regarding your tax home verse your personal home, let Lothamer Tax Resolution help you.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

You can plan your tax-deductible business life to avoid cold winters and hot summers.

Spend a moment examining the following four short paragraphs that contain the basic facts from the Andrews case.

For six months of the year, from May through October, Edward Andrews lived in Lynnfield, Massachusetts, where he owned and operated Andrews Gunite Co., Inc., a successful pool construction business.

During the other six months, Mr. Andrews lived in Lighthouse Point, Florida, where he owned and operated a sole proprietorship engaged in successful horse racing and breeding operations. In addition, he, his brother, and his son owned a successful Florida-based pool construction corporation from which Mr. Andrews took no salary, but where he did assist in its operations.

Instead of renting hotel rooms while in Florida, Mr. Andrews purchased a home, claimed 100 percent business use of the Florida home, and depreciated the house and furniture as business expenses on his Schedule C for his horse racing and breeding business.

Mr. Andrews then allocated his other travel expenses and costs of owning and operating this house in Florida on his individual in-come tax return as:

• personal deductions on his Schedule A for a portion of the mortgage interest and taxes,
• business deductions on his Schedule C for the horse racing and breeding business, and employee business expenses on IRS Form 2106 for the pool construction business.

(Tax reform under the Tax Cuts and Jobs Act eliminates employee business expense deductions for tax years 2018 through 2025— so Mr. Andrews would change his strategy to obtaining expense reimbursements from the pool business.)

Just as Mr. Andrews did, you can tax plan your life to spend your winters in one state and your summers in a different state.

In this scenario, your tax-deductible home takes the place of your staying in hotels. The other home is likely your principal residence located near your tax home.

Your travel expenses between the homes are deductible because you do business in both places. You also deduct your meals and other living costs while at the deductible travel destination.

You can have separate businesses in each state or a branch business in the second state.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

The recent tax reform, known as the Tax Cuts and Jobs Act (TCJA), added some good benefits to your real estate rentals. Both residential and commercial properties obtained a number of new tax breaks with respect to Section 179 deductions and bonus depreciation. The new breaks make it easier for you to plan your business income for the year.

Liberalized Section 179 Deduction Rules for Nonresidential Buildings and Property Used to Furnish Lodging

For qualifying property placed in service in tax years beginning in 2018, the TCJA increases the maximum Section 179 deduction to $1 million (up from $510,000 for tax years beginning in 2017).

As you probably know, the Section 179 deduction privilege allows you to deduct the entire cost of eligible property in Year 1.

For real estate owners, eligible Section 179 property includes any improvement to an interior portion of a nonresidential building if the improvement is placed in service after the date the building was placed in service.

The TCJA also expands the definition of eligible property to include expenditures for nonresidential building roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Finally, the TCJA expands the definition of Section 179 eligible property to include depreciable tangible personal property used predominantly to furnish lodging. Examples of such property include beds and other furniture, appliances, and other equipment used in the living quarters of a lodging facility such as an apartment house, dormitory, or other facility where sleeping accommodations are provided and rented out.

Warning: Section 179 deductions cannot create or increase an overall tax loss from business activities. So you may need plenty of positive business taxable income to take full advantage of the Section 179 deduction privilege.

100 Percent First-Year Bonus Depreciation for Qualified Real Property Expenditures

For qualified property placed in service between September 28, 2017, and December 31, 2022, the TCJA increases the first-year bonus depreciation percentage to 100 percent (up from 50 percent).

Unlike the old 50 percent deduction, which was for new property only, the new 100 percent deduction is allowed for both new and used qualified property.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

The tax law has mistreated hobbies for a long time. But the most recent tax reform brings the grim reaper to the party, and it’s not pleasant.

This means you need to focus on making your activity a business and not a hobby.

Under both prior law and the new law after the recent tax reform, your activity is either a business (for profit) or a hobby (not for profit). With the hobby classification, tax law makes you suffer.

Your taxable gross income includes income from any source unless there’s a specific exclusion, and there’s none for hobby income. Thus, tax law taxes your hobby income.

Don’t think that you need a hobby to have what is called hobby income. In an article in Tax Notes titled “Potential Pitfalls for Direct Sellers,” author Monika Turek states that there are 15.2 million direct sellers who fall into the tax law–defined hobby category.

Direct sellers include distributors for companies such as Amway, Herbalife, and Mary Kay. For sure, many of the 15.2 million are going to feel cheated by the recent tax reform.

At the other end of the spectrum, you find many hobby-loss tax cases that involve doctors or lawyers who like racehorses or ranching. They too will feel cheated.

Under the recent tax reform, the law taxes your hobby income and gives you a zero deduction for any business expenses of producing that income. That’s about as draconian as the law can get.

The only out is to establish your activity as a business. This may or may not be possible, but it is certainly something to look at during 2018.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

The recent tax reform contains two big changes to how much you can deduct in mortgage interest for tax years 2018 through 2025:

1. During this seven-year period, you may not deduct any interest on prior or current home equity debt, with certain exceptions.
2. Also during this seven-year period, the maximum amount you may treat as acquisition debt for homes purchased after December 15, 2017, is $750,000.

Exception alert. Your home equity loan may include acquisition or home-improvement debt, and that debt continues as deductible under the recent tax reform rules.

Example. Billy took out a $90,000 home equity loan in 2015. He used $50,000 to remodel portions of his home and used the remaining $40,000 for his daughter’s college tuition. Billy’s total home mortgages never exceeded $1.1 million. Under the new law, Billy may deduct 5/9 of his home equity loan interest in 2018.

Acquisition debt. When you buy your main home or a second home and take out mortgages secured by those homes, your mortgages are called acquisition debt. You can add acquisition debt when you improve your main or second home, and that new debt is secured by the home you improved.

Refinancing alert. Your acquisition debt does not increase when you refinance unless you use the new monies to improve the home.

Example. Tom bought a home in 2010 and took out a $250,000 mortgage that he secured with the home. In 2018, Tom has paid down his mortgage to $215,000, and his home has increased in value to $400,000. Tom refinances the home and takes out a new mortgage in the amount of $300,000, secured by the home.

If Tom uses none of the new money to improve his home, his mortgage interest deduction in 2018 is based on the $215,000 of mortgage principal that remained as of the date of his refinancing.

To put this in perspective, your original acquisition debt never increases on that original home. To increase your debt eligible for the home mortgage interest deduction, you need to use the new debt to improve the home.

Ceilings. Because of tax reform, you now have two possible 2018 ceilings on your home mortgages that are eligible for the mortgage interest deductions.

$1.1 million. For indebtedness incurred before December 15, 2017, you may not deduct interest on more than $1.1 million in mortgages ($1 million in acquisition debt and $100,000 in home equity debt used for acquisition or improvements). The original $1.1 million ceiling is grandfathered for acquisition and improvement loans in existence before December 15, 2017.

Example. Sam took out his mortgages during 2013. Sam faces the $1.1 million ceiling in 2018.

$750,000. For home mortgage indebtedness incurred on or after December 15, 2017, you may deduct interest on no more than $750,000 of home mortgages.

Example. Jim took out his mortgage in 2018. He faces the $750,000 ceiling.

Exception. If you entered into a written, binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and you complete the purchase before April 1, 2018, you fall into the $1.1 million ceiling category.

As you can see these are pretty large changes that impact how much you can deduct in mortgage interest.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

You hate IRS penalties, right? Everyone does!

There are a lot of strategies we can use on your behalf to potentially defeat an IRS penalty.

Thanks to the courts, though, we now have a brand-new way to beat an IRS penalty. It’s Section 6751(b) of the Internal Revenue Code.

This provision can get you out of a penalty – even if you are truly liable for it under the law – if the IRS didn’t follow proper legal procedures before assessing it.

Code Section 6751(b) says that the IRS cannot assess a penalty unless an IRS supervisor or higher-level official designated by the Treasury secretary personally approved the determination in writing.

If the IRS does not follow this administrative requirement, then the IRS erroneously assessed the penalty, and we can have it abated for you.

This provision does not apply to

• individual and C corporation late-filing and late-payment penalties,
• individual and C corporation estimated tax payment penalties, or

any other penalty automatically calculated through electronic means.

This abatement also does not apply to FBAR penalties. Title 31 of the United States Code authorizes FBAR penalties, and the penalty abatement provision we’re talking about covers only Title 26 penalties (i.e., penalties under the Internal Revenue Code).

Some of the penalties that Section 6751(b) applies to include:

• Accuracy-related penalties
• Civil fraud penalties
• Daily delinquency penalties (e.g., Form 990)
• Information return penalties (e.g., Form 1099, Form W-2)
• International information return penalties (e.g., Form 8938, Form 5471)
• Partnership and S corporation late-filing penalties
• Tax return preparer penalties
• Trust fund recovery penalties
• Valuation penalties

If you need us to help you with figuring out if these penalties could impact your back taxes,  give Lothamer a call.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

Are you considering accepting bitcoins as payment? If so, you should know the tax implications of accepting bitcoins in your business and the major pros and cons of doing so. I’m going to use an example to explain this.

Example. Carol is a freelance consultant. In exchange for her $1,500 invoice to a client, she receives 1.5 bitcoins. The bitcoin exchange rate at that time is $1,000 per bitcoin. Her payment processor charges 0.8 percent, up to a maximum of $8 per bitcoin transaction.

Two years later, Carol buys a $1,000 computer using 0.5 bitcoins. The exchange rate at the time is $2,000 per bitcoin.

Initial receipt. Carol receives property worth $1,500 in exchange for her services. The $1,500 value of the bitcoins is ordinary income to Carol (and subject to self-employment tax, since she received it in her trade or business).

Carol’s adjusted basis in the bitcoins received is the fair market value of $1,500 plus the $8 transaction fee, or $1,508. Because bitcoins are a capital asset (property), the transaction fee is added to its capital basis.

Computer purchase. Carol exchanged 0.5 bitcoins for the computer. Carol’s gain or loss on the transaction is the fair market value of the property received less her adjusted basis in the bitcoins.

Carol received a computer valued at $1,000 and gave up bitcoins with an adjusted basis of $503 (one-third of $1,508). Carol has a taxable gain of $497 and an adjusted basis of $1,005 in her remaining bitcoins.

The $497 gain is a tax-favored, long-term capital gain to Carol because she held the bitcoin property for more than a year.

Pros and Cons

Pro: Capital losses deductible. If you recognize a loss on a bitcoin transaction, then it is deductible from your other income, subject to the limitations applicable to capital losses. And if you are a noncorporate taxpayer, then you can carry forward any losses that you can’t use in the current year.

Pro: Taxable capital gains. Your bitcoins can appreciate in value, causing you to both gain extra income and pay taxes on that income. If you recognize a gain on a bitcoin transaction, then you have a short- or long-term capital gain on which you have to pay taxes. You may also have to pay the 3.8 percent net investment income tax on this gain. In cash transactions, you don’t have the possibility for profit or the complications of paying taxes.

Pro: Lower transaction fees. Stripe, a large third-party payment processor, processes bitcoin transactions for 0.8 percent of the gross amount, up to a maximum of $8 per transaction, compared with 2.9 percent plus $0.30 for credit card transactions (with no maximum).

If you receive a $2,000 payment for services rendered, your potential transaction costs are

• $8.00 for a bitcoin transaction, and
• $53.80 for a credit card payment.

Con: Basis tracking. Cash is cash and requires no special tracking. With bitcoin, you need to track the adjusted basis in your bitcoins and account for basis changes due to fractional sales.

Con: Liquidity. Once you get bitcoins, you may find it difficult to find others to transact with to use your bitcoins for goods and/or services.

You now have the big picture of how transacting business with bitcoins works.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution