Tax issues

Plan Now, Save Later

Follow these tax planning tips to reduce this year's business taxes.

At the beginning of each year, company owners and individual practitioners should review their business practices to determine if they are making the most of their tax deduction opportunities. Knowing which travel, meal, entertainment, home office, and education expenses to deduct and what records to keep can help commercial real estate professionals save money and plan for the future.

Travel, Meals, and Entertainment

Commercial real estate professionals often travel to meet with and entertain clients. While these costs add up over the year, many of the expenses can be deducted at tax time.

Travel. Generally, taxpayers may deduct travel expenses incurred while away from home conducting business if the expenses are ordinary, necessary, and not lavish or extravagant under the circumstances. These basic expenses include air fare, lodging, meals, tips, local transportation from the lodging to the temporary work site, phone calls, faxes, cleaning, and laundry.

Taxpayers also may deduct travel expenses paid or incurred for spouses, dependents, or other individuals accompanying them on business travel if the other persons are the taxpayer's bona fide employees; the other persons' travel is for a bona fide business purpose; and the other persons' expenses are otherwise deductible.

Adequate records or corroborating evidence must provide details to substantiate the expenses. In addition, taxpayers must maintain documentary evidence, such as receipts, for lodging and expenditures of $75 or more. There are no annual limitations on how much a business owner can deduct for travel.

Meals and Entertainment. Individuals may deduct 50 percent of business meal expenses and directly related business or associated entertainment expenses.

This percentage limitation applies to meal and entertainment expenses incurred while traveling away from home for business; entertaining customers at the taxpayer's place of business, restaurants, or other locations; attending business conventions or meetings; or having business lunches at clubs. Meal tips and taxes, entertainment cover charges, and parking also are subject to the limit.

Business gifts are deductible up to $25 per recipient. Deductions are not permitted for most club dues, including those for business, social, athletic, luncheon, sports, airline, and hotel clubs.

Record Keeping. To deduct expenses for travel, entertainment, gifts, and business discussions directly preceding or following associated entertainment, taxpayers must retain adequate records and documentation to substantiate the following elements:
separate expense amounts other than incidental expenses (which may be aggregated daily if set forth in reasonable categories such as meals, travel, etc.);

  • business discussion durations;
  • dates entertainment or business discussions took place or dates gifts were given;
  • departure and return dates for trips away from home and the number of days away that are spent on business;
  • travel destinations, entertainment locations and types, and places at which business discussions are conducted;
  • business reasons or benefits derived from travel, gifts, or entertainment; and
  • descriptions of persons entertained or gift recipients, including names, titles, or other designations that establish their business relationships to the taxpayer.

To eliminate some record keeping, the Internal Revenue Service allows taxpayers to base business travel deductions on a per-diem rate; however, the rate may not exceed the destination's established IRS per-diem rate, which can be found on the IRS' Web site at .

Home Office

To avoid paying for expensive office space, many commercial real estate practitioners choose to work in a home office, which can provide some tax-saving benefits.

Taxpayers generally can deduct expenses for the business use of a personal residence if the space is used exclusively and regularly as the principal place in which the taxpayer engages in business; as a place of business for meeting clients or customers; or in connection with the taxpayer's business if he is using a structure unattached to the dwelling. Employees further must show that the home office is used for their employers' convenience.

A home office qualifies as a taxpayer's principal place of business if it is used to conduct the business's administrative or management activities and if the taxpayer doesn't conduct a substantial amount of such activities at another fixed location. This definition enables many taxpayers to deduct the cost of traveling to and from their homes to other locations where they conduct business.

Business owners whose employees perform administrative or management activities or those who conduct an inconsequential amount of those duties at other fixed locations are not automatically prohibited from taking the home-office deduction. However, employees do not have this flexibility. The fact that other space at a fixed location is available for administrative activities is relevant in determining whether an employee uses a home office for his employer's convenience.

Home office expenses only can be used to offset the business's gross income. However, any deductions this limitation does not allow may be carried forward to a succeeding year.

For example, an accountant regularly and exclusively uses one room of her home to oversee her real property investments. If only one piece of property is involved, the deduction could be denied due to lack of any systematic or continuous activity. But if she owns and manages several pieces of real property, her activity probably would be considered a distinct business, and, if all of the other requirements were met, the deduction would be allowed.

Education

Commercial real estate is an ever-evolving business; one of the best ways to stay current on technology and industry trends is to take continuing-education courses. Several federal and state tax programs can help mitigate advanced education costs, including Hope Scholarship credits, Lifetime Learning credits, tuition and fees deductions, student loan interest deductions, Internal Revenue Code Section 529 plans, and Coverdell education savings accounts.

Of these options, only the IRC Section 529 plan does not have any income limitations. It allows taxpayers to contribute $55,000 all at once and make an election to use annual gift tax exclusions for five years. Most states also have qualified plans that provide current-year tax deductions.

The Hope and Lifetime Learning programs provide tax credits of up to $1,500 and $2,000 respectively; however, they are phased out for single filers whose income exceeds $41,000 and joint filers whose income exceeds $83,000. The above-the-line student loan interest deduction (up to $2,500) is phased out for single filers whose income exceeds $50,000 and joint filers whose income exceeds $100,000. Coverdell education savings accounts (up to $2,000) allow taxpayers to put away after-tax dollars that grow tax-free; they are phased out for single filers whose income exceeds $95,000 and joint filers whose income exceeds $190,000. The above-the-line tuition and fees deduction (up to $3,000) is phased out for single filers whose income exceeds $65,000 and joint filers whose income exceeds $130,000.

Taxpayers may claim only one of the Hope credit, Lifetime Learning credit, or tuition and fees deduction in any given year. Additionally, the Hope credit is available only for the first two years of post-secondary education; the Lifetime Learning credit and tuition and fees deduction are available for an unlimited number of years.

Distributions from these plans are not taxable provided they are used for the designated beneficiary's education expenses. Distributions taken from a Coverdell education savings account to pay for education expenses do not qualify as eligible expenses for the Hope credit, Lifetime Learning credit, and tuition and fees deduction.

Retirement Plans

Saving for the future helps commercial real estate professionals realize immediate tax reductions. Following are a few options; business owners also should read the sidebar "The One-Person 401(k)" to learn about another retirement plan.

Traditional IRA. Traditional IRA contributions provide above-the-line deductions of up to the lesser of $3,000 or 100 percent of earned income. Individuals more than 50 years old can make an additional catch-up contribution of $500.

Eligibility to make traditional IRA contributions may be reduced or unallowable, based on income level, for participants in employer-sponsored retirement plans. For joint filers, eligibility is determined based on the income level of the spouse enrolled in an employer-sponsored plan.

Keogh or Simplified Employee Pension. Keogh or SEP plan contributions also qualify as above-the-line deductions. Individuals with compensations of $160,000 can put away $40,000 of tax-deferred dollars in each of these plans.

Roth IRA. Roth IRA contributions are made with after-tax dollars, so they don't offer any current tax savings. However, qualified Roth IRA contributions grow tax-free. Individuals may contribute up to $3,000 or 100 percent of earned income, less any other retirement account contributions. Individuals more than 50 years old also may make a $500 catch-up contribution. The same rules regarding traditional IRAs and employer-sponsored retirement plans apply to Roth IRA contributions.

If an individual's adjusted gross income is less than $100,000, he can roll a traditional IRA into a Roth IRA. This type of withdrawal is taxable in the year the rollover is made; however, it is not subject to the 10 percent penalty normally associated with premature distributions. These rolled-over funds can grow tax-free, and withdrawals, once qualified, are nontaxable.

With a tax adviser's guidance, commercial real estate business owners should start the planning process now to help maximize their tax savings.

Eric Feuerstein and Gerald Marsden

Eric Feuerstein is a tax manager and Gerald Marsden is a partner at Eisner & Lubin LLP in New York. Contact them at 212.751.9100 or [email protected] and [email protected] Lease or Own? Learn About Depreciation Benefits Commercial real estate professionals debating leasing or purchasing office equipment should stay current on the Internal Revenue Service's depreciation deductions. First, Internal Revenue Code Section 179 provides small business owners the opportunity to expense, rather than depreciate, up to $100,000 of eligible assets placed in service during 2003, 2004, and 2005. Certain restrictions apply to expensing assets under IRC Section 179. The business must have taxable income of at least the expense's amount. Also, if an individual places more than $400,000 of eligible assets in service during the year, the allowable IRC Section 179 amount decreases by $1 for each dollar the amount exceeds $400,000. Second, the Jobs and Growth Tax Relief Reconciliation Act of 2003 increases the bonus depreciation amount to 50 percent for eligible assets placed in service after May 5, 2003, and before Jan. 1, 2005. For example, a business owner has the option of leasing a $50,000 piece of equipment for $750 per month, which would give him a $9,000 deduction for as many years as he leases the equipment. However, if the business owner pays for the equipment outright or finances it, the expense allowable is as follows: If IRC Section 179 is available, he can expense $50,000 in the current year, reducing his taxable income by $41,000 over leasing. At a nominal tax rate of 35 percent, that's $14,350 savings. If IRC Section 179 is not available and he purchased the asset before May 6, 2003, the business owner can realize $15,000 bonus depreciation plus $7,000 ($50,000 - $15,000 x 20 percent), for a total of $22,000, a deduction of $13,000 over leasing and tax savings of $4,550. If IRC Section 179 is not available and he purchased the asset after May 6, 2003, the business owner can realize $25,000 bonus depreciation plus $5,000 ($50,000 - $25,000 x 20 percent), for a total of $30,000, a deduction of $21,000 over leasing and tax savings of $7,350.

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