“Federal Income Taxation” is the foundational tax class in any accounting or law school program. Contrary to what you may think, it doesn’t involve diving into thickets of dense, impenetrable tax forms or long, intimidating columns of numbers. The final exam doesn’t challenge students to fill out a 1040. Instead, the class focuses on introducing students to basic concepts that apply throughout the tax world. What, exactly, is “income”? When is it “realized” or “recognized”? What are “deductions,” and when are taxpayers entitled to them? What are “depreciation” and “amortization”? What’s the best remedy for serious tax headaches, and why is it alcohol?
Over the last month, we’ve discussed several videos circulating on social media purporting to help you save money on taxes. Today, we’re going to see how one would-be influencer mishandles the basic concept of “substance over form.”
Summer is here, and that means vacation travel. Unfortunately, vacations are pricey. Wouldn’t it be great if you could get a deduction for those beach nirvana expenses? Never fear, Anna from Instagram is here to show you the way: “Here’s how you’re actually gonna be able to write off travel with any of your family members!”
The answer, it turns out, is to put them on your company’s board of directors. “That way,” she says, “when you travel, and you want to make that a business deduction, because you’re talking about quarter one goals or you’re having a retreat to mastermind on the what the future of the business is, guess what? Your husband is on there, so now his plane tickets, the entire hotel, the meals can be written off for everybody.”
But what if you get tired of your husband’s business advice? What if he watches Anna’s video and says, “It can’t possibly be that easy”? No problem, says Anna: “You can also remove people if they make you mad!”
Here’s the problem. The IRS has very specific rules governing how much of your travel expenses you can deduct, depending on whether you’re truly traveling to make money or just casually discussing business on the beach. If you’re traveling inside the US, you have to spend more than 50% of your trip on business to deduct 100% of your transportation costs. If that number drops below 50%, your deduction drops to zero. Lodging and meals are deductible for business days but not personal days. And as for spouses and other dependents, there’s no deduction at all unless their presence has a bona fide business purpose.
Tax Court archives are full of cases where taxpayers lost deductions for bogus “business” travel. They didn’t keep adequate records. They didn’t show a profit motive for the trip. Or the scattered business discussions were merely “incidental” to the real purpose of the trip, which was fun and games.
Beyond the specific travel rules, deducting your husband’s travel because you’ve made him a “director” triggers a basic question involving “substance over form.” The IRS doesn’t just look at the legal form of a transaction. They look for actual substance. Throwing your husband on your board may look good on paper. But, serving on a board is an important legal commitment with specific responsibilities and liabilities. And if you kick your husband off your board just because he “makes you mad,” you can actually lose the legal protection you formed your corporation to secure in the first place!
I sat through (and taught!) the “Federal Income Taxation” class so you wouldn’t have to. Take advantage of it! If you’re traveling for business this summer and you want to take your spouse, call us. Some legitimate tax planning may well save you enough to pay for the trip without playing “board of director” shell games!