If you and your employees are traveling for business this summer, there are a number of considerations to keep in mind. Under tax law, in order to claim deductions, you must meet certain requirements for out-of-town business travel within the United States. The rules apply if the business conducted reasonably requires an overnight stay.

Note: Under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses on their own tax returns through 2025. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Navigating the Essential Rules for Business Travel Expenses

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. Although there was a temporary 100% deduction in 2021 and 2022 for business food and beverages provided by a restaurant, it was not extended to 2023. Therefore, there’s once again a 50% limit on deducting eligible business meals this year.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.

Balancing Work and Leisure: Making the Most of Business Travel

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for four days of business meetings and stay on for an additional three days of vacation. Only the costs of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is primarily business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’t the sole factor).

If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure it isn’t a vacation in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Beyond Travel Costs: Unveiling Other Deductible Expenses for Business Trips

The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, let’s say you have to board a pet while you’re away. The cost isn’t deductible. Contact us if you have questions about your small business deductions.

Your business may be able to claim big first-year depreciation tax deductions for eligible real estate expenditures rather than depreciate them over several years. But should you? It’s not as simple as it may seem.

Unlocking the Potential of Qualified Improvement Property (QIP) Depreciation

For qualifying assets placed in service in tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. Importantly, the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP), up to the maximum annual allowance.

QIP includes any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. For Sec. 179 deduction purposes, QIP also includes HVAC systems, nonresidential building roofs, fire protection and alarm systems and security systems that are placed in service after the building is first placed in service.

However, expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework don’t count as QIP and must be depreciated over several years.

Navigating Limitations: What You Need to Know about Real Estate Depreciation

A taxpayer’s Sec. 179 deduction can’t cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property is placed in service in the tax year. The Sec. 179 deduction limitation rules can get tricky if you own an interest in a pass-through business entity (partnership, LLC treated as a partnership for tax purposes, or S corporation). Finally, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face additional restrictions. We can give you full details.

Maximize Tax Savings with First-Year Bonus Depreciation for QIP

Beyond the Sec. 179 deduction, 80% first-year bonus depreciation is also available for QIP that’s placed in service in calendar year 2023. If your objective is to maximize first-year write-offs, you’d claim the Sec. 179 deduction first. If you max out on that, then you’d claim 80% first-year bonus depreciation.

Note that for first-year bonus depreciation purposes, QIP doesn’t include nonresidential building roofs, HVAC systems, fire protection and alarm systems, or security systems.

Strategic Depreciation: Considering Gradual Depreciation for QIP

Here are two reasons why you should think twice before claiming big first-year depreciation deductions for QIP.

1. Lower-Taxed Gain When Property Is Sold

First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create depreciation recapture that’s taxed at higher ordinary income rates when the QIP is sold. Under current rules, the maximum individual rate on ordinary income is 37%, but you may also owe the 3.8% net investment income tax (NIIT).

On the other hand, for QIP held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if applicable.

2. Write-Offs May Be Worth More in the Future

When you claim big first-year depreciation deductions for QIP, your depreciation deductions for future years are reduced accordingly. If federal income tax rates go up in future years, you’ll have effectively traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.

As you can see, the decision to claim first-year depreciation deductions for QIP, or not claim them, can be complicated. Consult with us before making depreciation choices.

Stock market and interest rate uncertainty may cause some investors to turn to bonds. Perhaps the most “user friendly” bond is a U.S. government savings bond. Buying one means you’re essentially lending the federal government money under certain terms, in exchange for a future return. U.S. savings bonds don’t offer as high a yield as other investment instruments, but they’re highly stable. The amount earned on U.S. government bonds is taxable on federal income tax returns when they’re redeemed, but it’s often exempt on state and local returns. However, you can make a one-time election to report the interest on these bonds each year as it accrues if this is more beneficial.

Another government investment option is a Treasury bill. These are short-term government securities with maturities ranging from a few days to 52 weeks. For a more long-term option, investigate Treasury notes. These government securities are generally issued with maturities of two, three, five, seven and 10 years and pay interest every six months.

If you’re looking to preserve capital while generating some tax-free income, consider a tax-exempt state or municipal bond. Here, you lend money to a more localized government entity in exchange for regular payments. Keep in mind that interest may be taxable on state and local returns.

Corporate bonds are another option. These generally offer a higher yield than their federal or municipal counterparts but come with a greater risk in terms of price fluctuation as markets change and sometimes, issuers default. There are also tax implications, in that interest from corporate bonds is subject to federal, state and local income tax. Plus, as with other types of bonds, you could incur capital gains if you sell the bond at a profit before it matures.

Two tax benefits are available to offset the expenses of adopting a child. In 2023, adoptive parents may be able to claim a credit against their federal tax for up to $15,950 of “qualified adoption expenses” for each child. That's a dollar-for-dollar reduction of tax.

Also in 2023, adoptive parents may be able to exclude from gross income up to $15,950 of qualified expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits.

Parents can claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expenses.

Navigating Qualified Adoption Expenses: Maximize Your Tax Break

Only “qualified adoption expenses” are eligible for the adoption credit or exclusion. These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including meals and lodging), and other expenses directly related to the legal adoption of an “eligible child.”

Not included in qualified expenses are those connected with the adoption of a child of a spouse, a surrogate parenting arrangement, a violation of state or federal law, or the use of funds received from a government program. Expenses reimbursed by an employer don’t qualify for the credit, but as explained above, benefits provided by an employer under an adoption assistance program may qualify for the exclusion. If an adoption attempt is unsuccessful, the related expenses may still qualify, if the child is a U.S. citizen or resident.

Taxpayers who adopt a special needs child can also take a credit or exclusion for $15,950. This is true whether or not they had that amount in actual expenses.  

Who Qualifies? Understanding Eligibility for Adoption Tax Benfits

To be eligible, a child must be under age 18 when the expense is paid, though partial deductions may be available if a child turns 18 during the year. Adoptees who are incapable of self-care may qualify regardless of age. 

A special needs child is one that a state determines can’t, or shouldn’t, be returned to his or her parent’s home, and due to certain factors, won’t be adoptable without assistance provided to the adoptive family. Only a child who is a citizen or U.S. resident can be included in this category.

Claiming the Full Benefit: Optimizing Tax Savings for Adoptive Parents

Contact us with questions. We can help ensure you get the full benefit of the tax savings available to adoptive parents.

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